Insurable Interest

• Author: Denis Boivin
• Pages: 67-98

A. INTRODUCTION

Each year, Canadian municipalities condemn hundreds of buildings for

safety violations. Typically, the owners are fined and are ordered

promptly to conduct repairs. If the work is not done and if the viola-

tions pose a risk of injury to the occupants, the municipality can obtain

eviction and demolition orders. Assume that three individuals (A, B,

and C) live in a municipality that is vigilant in these matters. Assume

that C owns a building and has been cited for recurring safety infrac-

tions but has little intention of complying with the orders issued by the

municipality. Assume further that A and B have some money to invest

and that neither of them is particularly averse to risk. Can they pur-

chase insurance on C’s building given the increased risk of loss that

stems from the owner’s non-compliance?1True, the venture itself would

be risky. If nothing happens, A and B would be asked for another instal-

ment within a year. However, the payoff could be significant, as the

property in question is worth four hundred times the cost of the premi-

ums. What determines whether A and B can insure C’s building?

67

1 It is also assumed that A and B would disclose all material circumstances (see

Chapter 5), and that an insurance provider would be willing to accept the risk at

a reasonable price.

INSURABLE INTEREST

chapter 4

These hypothetical questions turn on the relationship between A

and B and the property. Insurance aside, do they have anything to lose

should the building be destroyed by fire? Insurance aside, do they have

anything to gain from preserving the status quo? If they have nothing

to lose or gain, they have nothing to insure — in insurance parlance,

they lack an insurable interest. Without some connection to the build-

ing, A and B are nothing more than gamblers; they face a risk only to

the extent that they place a bet. Now suppose that A is a tenant in the

building, and B has lent one hundred thousand dollars to the owner in

order to make repairs to the building. Here, the well-being of A and B

are linked to the condition of the property. Whether or not they pur-

chase insurance, they are better off if nothing bad happens to the build-

ing. They have something worth protecting and therefore arguably have

an insurable interest.

B. THE REQUIREMENT

1) Source

Few would argue with the need to have an insurable interest in order

to insure. The point is usually assumed by courts with little discussion.

For example, in Constitution Insurance Co. of Canada v. Kosmopoulos,2

the leading authority on the subject, the Supreme Court refers to insur-

able interest as a “requirement” and discusses the policies at play, but

says nothing about the exact source of this condition. This omission is

noteworthy, given the fact that the Court, in Kosmopoulos, thereupon

distances itself from a line of cases upholding the need for an insurable

interest.3

There is debate about the precise source of the insurable interest

requirement and its status as a fundamental principle of law.4The dis-

agreement stems from the fact that wagers, in common law, were

enforceable. Prior to the middle of the eighteenth century, there was no

principle of law stopping citizens from betting on contingencies with

68 Insurance Law

2 [1987] 1 S.C.R. 2 [Kosmopoulos].

3Ibid. at 30. The cases disapproved of by Kosmopoulos are Guaranty Co. of North

America v. Aqua-Land Exploration Ltd., [1966] S.C.R. 133 [Aqua-Land]; Wandlyn

Motels Ltd. v. Commerce General Insurance Co., [1970] S.C.R. 992 [Wandlyn

Motels].

4 See M.G. Baer and J.A. Rendall, Cases on the Canadian Law of Insurance, 6th ed.

(Toronto: Carswell, 2000) at 115–16.

respect to which they had no personal connection.5In some circles, for

example, it was common to make wagers on the life expectancy of

third parties as a means of securing premature testamentary gifts.6In

this context, it was difficult to distinguish legitimate insurance activi-

ties from gambling. Still, a line had to be drawn between the two.

Although insurance was an emerging industry, with potential for

improving welfare, gambling was increasingly disfavoured and per-

ceived as responsible for many social ills.

Matters were somewhat clarified by legislation. In order to advance

the public interest, the English Parliament adopted two statutes, the

Marine Insurance Act7in 1745 and the Life Insurance Act8in 1774. The

latter statute is also known as the Gambling Act. In essence, these

statutes outlawed wagers made under the guise of insurance. Pursuant

to both acts, persons insuring were required to have an “interest” in the

object of their insurance, whether the object was a ship, a shipment, or

a person. Any insurance purchased in the absence of an “interest” were,

from that day forward, considered to be null and void. Thus, the

requirement of an insurable interest was born by statute. However, the

statutes did not define what Parliament meant by “interest.” Was a

pecuniary interest required or was it sufficient to be emotionally

attached to the object of the contract? What about proprietary interests

and those based on contract? Were they determinative of the issue?

The statutes provided no assistance — only a general forewarning that

anything done contrary to the “true intent and meaning”9of the acts

would be invalid.

Consequently, the English judiciary inherited the task of defining

the requirement imposed by the marine and life insurance acts. As will

Insurable Interest 69

5 As late as 1746, it was uncertain whether an insurable interest was necessary to

support an insurance policy. See, for example, Depaba v. Ludlow (1720), 1

Comyns 360; Goddart v. Garett (1692), 2 Vern. 269 (Ch.).

6 See, for example, Earl of March v. Pigot (1771), 98 E.R. 471. In this famous case,

Earl and Pigot signed a contract pursuant to which Pigot agreed to transfer a

fixed sum to the Earl if Pigot’s father died before the father of a third party. In

return, the Earl agreed to transfer three times the amount to Pigot if the third

party’s father died before Pigot’s father. At the time of the agreement, Pigot’s

father was eighty years of age, whereas the other father was only fifty. Unbe-

knownst to him, Pigot’s father had died on the eve that the contract was signed.

Pigot refused to pay, arguing that the contract was void for complete lack of con-

sideration. Yet neither he nor the Court questioned the contract’s validity from

the standpoint of public policy.

7 19 Geo. 2, c. 37.

8 14 Geo. 3, c. 48.

9 This quotation is taken from the preamble of the Life Insurance Act of 1774, ibid.