Insurable Interest
Prof. Bill Long 2/6/05
The History of an Idea
By now you should know that an insurable interest in property law is a financial interest that a person has in the preservation of property that is insured. About thirty states, including WA (as we see in the Gossett case), have defined the concept statutorily as "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage" (e.g., Wash. Rev. Code sec 48.18.040(2)). The two evils meant to be avoided by the insurable interest doctrine are: (1) that insurance policies not become gambling devices, (2) nor should they become tools in the hands of those who would seek to profit by deliberately destroying the property of others. That is, if I took out $100,000 insurance on your home for a premium of $300 a year, and I had no ownership or financial interest in your home, I would be "betting" $300 on the house being destroyed that year. Thus, the insurable interest doctrine goes hand in hand with the idea of moral hazard--insurance policies should not create incentives for people to destroy the subject matter of the policy.
In this regard, the insurable interest doctrine ought to reinforce the indemnity principle of insurance. Property insurance is meant to indemnify--to compensate a person or reimburse them for a loss suffered. It is not meant to enrich a person beyond the interest he/she has in the property. Thus, whenever a person's insurable interest in a property is being considered, the courts will ask whether the person had incentives to destroy the property by virtue of the policy they believe covers them.
A Word From History
Two English statutes from the 18th century created the requirement that the insured have an interest in the insured property (or life). These two laws, from 1746 and 1774, did not define an insurable interest, and so the King's Bench was left to articulate what an insurable interest was. Its debates in cases more than 200 years ago defined the contours of the debate that are still with us today. The basic disagreement came down to whether an insurable interest had to include a legal interest in the property or simply what one might call a factual expectation of possession of the property. Two cases help to clarify the problem.
In Le Cras v. Hughes (99 Eng.Rep. 549 (KB 1782)),a Spanish ship was taken by a British captain and crew in the war with Spain. Under English law (the "Prize Act"), the crew of a ship, under certain circumstances, actually could be vested with title to the ship and its goods after return to England. With this hope the crew insured the ship and sailed it back from Spain to England. As fortune would have it, the ship was destroyed in a storm. The captain tried to collect on the insurance policy but his claim was denied by the insurance company because he did not yet have a legal right to the ship--i.e., it was only an expectancy. When the case got to the King's Bench, Judge Mansfield (whom we met previously in the warranty cases) agreed that there was no legal expectancy here, because the Royal Navy might also be awarded title to the ship.
However, his analysis didn't stop at that point. He found what he called a "factual expectancy" that was grounded in the past experience of the English people that "whenever a capture has been made, since the Revolution (1688), by sea or land, the Crown has made a grant: there is no instance to the contrary." This expectation was sufficient, for Mansfield, to support an insurable interest. His relevant words are:
"An interest is necessary, but no particular kind of interest is required. Master Holfold's insurance [different case]...though not a vested interest, were held insurable. An agent of prizes may insure his profits though they are in contingency..."
As is often the case in American law, as every law student knows, legal conclusions sometimes seem to be tailored to the facts of a situation, so it appears to be here. Though the captain and crew had no recognized legal interest as of yet, it had happened in every case for nearly a century that such an interest would accrue when Parliament acted. But this simply had not happened yet because the ship was in transit. Thus, the "doctrine" of factual expectancy was no doubt created to handle this situation where justice would have been denied if the strict legal test were required. But what is that strict legal test? An 1805 case defines it most clearly.
The Legal Interest Test
Twenty years later, in Lucena v. Crawford (127 Eng.Rep. 630 (1805)), Lord Eldon articulated a narrow conception of insurable interest that depended on the existence of a legal right. The facts of the case are similar enough to Le Cras so that detailed exposition is unnecessary. Lord Eldon would have held that there was no insurable interest in the ship until it reached an English port. His point was as follows. If the Commissioners (the Royal Commissioners who insured the captured ship this time) had an ability to insure a ship, when they had yet no recognized property interest in it, then anyone could have insured the ship, and the situation would be open to the problems of wagering once again. He said:
"..If they (the Commissioners) have a right so to insure, it seems to me that any person who is directed to take goods into his warehouse may insure...If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First the dock company, then the dock-master, then the warehouse-keeper, then the porter, then every other person who to a moral certainty would have anything to do with the property, and of course get something by it."
For Eldon it was the technical legal interest that created an insurable interest, even if it was virtually certain that the legal right would never have value. He gave the following famous hypothetical to illustrate his position:
"Suppose A be possessed of a ship limited to B in case A dies without issue; that A has 20 children, the eldest of whom is 20 years of age; and B is 90 years of age. It is a moral certainty that B will never come into possession, yet this is a clear interest. On the other hand, suppose the case of the heir at law of a man who has an estate worth 20,000 a year, who is 90 years of age; upon his death-bed intestate, and incapable from incurable lunacy from making a will, there is no many who will deny that such an heir at law has a moral certainty of succeeding to the estate; yet the law will not allow that he has any interest, or any thing more than a mere expectation."
The former, with no "moral expectation" at all, would have an insurable interest, for Eldon, while the latter would not.
Conclusion
The history of American law on the insurable interest in property veers between these two tests. On the one hand the factual expectancy test appears more "pragmatic" and ought to be more attuned to American pragmatism and, indeed, it is the test that is most often applied today. Yet, the legal expectancy test was probably more popular for the first 150 or so years of our country's history. The statute quoted above is a factual expectancy statute, even though some statutes are ambiguous (CA) and allow the courts to parse the issue based on the facts before them. Though WA has a "factual expectations" test, in Gossett the plaintiffs were found not to have an insurable interest in the property.
The next mini-essay gives more factual information about the Gossett case.
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