Insurable Interest

• Author: Denis Boivin
• Pages: 87-128

87

CHA PTER 4

INSUR ABLE INTEREST

A. INTRODUCTION

Each year, Canadian municipalities condemn hundreds of buildings

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

to promptly conduct repairs. In addition, the municipality can obtain

eviction and demolition orders when this remedial work is not done

and the violations pose a r isk of injury to the occupants. As sume that

three individuals (Andrée, Bruno, and Claude) live in a municipality

that is vigi lant in these matters. A ssume that Claude owns a building

and has been cited for recurr ing safety infractions, but has little inten-

tion of complying with the orders issued by the municipality. Assume

further that Andrée and Bruno have some money to invest and that nei-

ther of them is part icularly averse to risk. Can they purchase in surance

on Claude’s building given the increased r isk of loss that stems from

the owner’s noncompli ance?1 True, the venture itself would be ri sky.

If nothing happens, Andrée and Bruno would lose their premiums and

would be asked for another instalment within a year, provided they

wanted to renew the insurance. However, the payoff could be signif‌i-

cant, as the property i n question is worth signif‌icantly more than the

1 It is also as sumed that Andrée and Br uno would disclose all mater ial circum-

stances (see Cha pter 5) and that an insurance prov ider would be willing to

accept the risk at a re asonable price.

INSURANCE LAW88

cost of the premiums. What determine s whether Andrée and Bruno can

insure Claude’s building?

These hypothetical questions turn on the relationship between

Andrée and Bruno and the property. Insurance aside, do they have any-

thing to lose should the building be destroyed by f‌ire? Insurance aside,

do they have anything to gain from preserving t he status quo? If they

have nothing to lose or gain, they have nothing to insure — in insur-

ance parlance, they lack an in surable interest. Without some connection

to the building, Andrée and Br uno are nothing more than gamblers;

they face a risk only to the extent that they take out insurance. Now

suppose that Andrée is a te nant in Claude’s building and that Bruno has

lent money to the owner in order to f‌inance major repairs to the bui lding.

Here, the well-being of Andrée and Bruno are linked to the condition of

the property. Whether or not they purchase insura nce, they are better

off if nothing bad happens to the building. They have something worth

protecting and therefore arguably have an in surable interest in Claude’s

pr oper ty.

B. THE R EQUIREMENT

1) S our ce

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

to insure. Courts w ith little discussion usually assume the point. 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 discu sses the policies at play, but

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

noteworthy, given 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 a s an independent principle of law.4 The

disagreement stems from t he fact that wagers, in common law, were

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

principle of law stopping citizens from bett ing on contingencies with

2 [1987] 1 SCR 2 [Kosmopoulos].

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

America v Aqu a-Land Exploration Ltd, [1966] SCR 133 [Aqua-Land]; Wandl yn

Motels Ltd v Commerce Gene ral Insurance Co, [1970] SCR 992 [Wandlyn Motels].

4 See Marv in G Baer & James A Rendall, Ca ses on the Canadian Law of Insurance,

6th ed (Toronto: Carswell, 200 0) at 115–16.

Insurable Inte rest 89

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

for example, it was common to make wagers on the life expect ancy of

third part ies as a means of securing premature testamentar y gifts, and

to make wagers on whether a ship or cargo would reach its destina-

tion wit hout incident.6 In t hese settings, it was diff‌icult to distinguish

legitimate insur ance activities from gambling. Stil l, according to the

lawmakers of the time, a line had to be drawn between the two. Al-

though insurance was an emerging industry, with great potential for

improving public welfare, gambling was increasingly disfavoured and

perceived as responsible for many socia l ills.

Matters were somewhat clarif‌ied by leg islation. In order to advance

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

Marine Insurance Act7 in 1745 and the Life Assurance Act 1774.8 The lat-

ter statute is also know n 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 “intere st” in the object

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

son. Any insurance purcha sed in the absence of an “interest” were, from

that day forward, considered to be nul l 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 i nter-

est required or was it suff‌icient to be emotional ly 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 forewar ning that anyth ing done con-

trary to the “true intent and meaning”9 of the Acts would henceforth

be invalid.

5 As late as 1746, it was uncertai n whether an insurable intere st was necessary

to support an in surance policy. See, for example, Depa ba v Ludlow (1720), 1

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

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

Earl and Pigot sig ned a contract pursuant to which P igot agreed to transfer a

f‌ixed sum to the E arl if Pigot’s father died before the fat her of a third party. In

return, the E arl agreed to transfer t hree times the amount to Pigot i f the third

party’s fat her died before Pigot’s father. At the time of the a greement, Pigot’s

father was eight y years of age, whereas the othe r father was only f‌ifty. Unbe-

knownst to h im, Pigot’s father had died on the eve th at the contract was signed.

Pigot refused to p ay, arguing th at the contract was void for complete lack of

consideration. Yet neither he nor t he court questioned the contract ’s validity

from the standp oint of public policy.

7 19 Geo 2, c 37.

8 14 Geo 3, c 48.

9 This quotation is take n from the preamble of the Life Assurance Act 1774, ibid.