[1] This is an appeal from the judgment of Langley J given on 17 May 2002 ([2002] EWHC 868 (Comm)). That judgment is now reported at [2002] 2 All ER (Comm) 492. Only certain points are live on the appeal. By his judgment Langley J decided that Steamship Mutual Underwriting Association (Bermuda) Ltd (Steamship) had an insurable interest in relation to a contract of insurance made between it and Syndicate 957. He further found that in relation to the reinsurance of Syndicate 957 by Sun Life Assurance Co of Canada (Sun Life) and Phoenix Home Life Mutual Insurance Co (Phoenix) there was no non-disclosure or misrepresentation entitling Sun Life and Phoenix to avoid the reinsurance policy. He further found, however, that in relation to one period of the reinsurance Centaur Underwriting Management Ltd (Centaur) had purported to write the same for Sun Life and Phoenix 50:50 when they had no authority to write for Phoenix. Syndicate 957 argued that Centaur had written the same 100% for Sun Life but the judge ruled against Syndicate 957 on that issue.
[2] The non-disclosure and misrepresentation aspects have been abandoned on the appeal. The point which has taken up the greatest proportion of time on the appeal is the insurable interest point. A much shorter time was spent dealing with the authority point. That point is dealt with in the judgment of Dyson LJ with which I agree. I will deal with the insurable interest point.
HOW DOES THE INSURABLE INTEREST POINT ARISE?
[3] Steamship insured the liabilities of their members for personal injury or death. In about June 1995, rather than entering into a conventional reinsurance with Syndicate 957, Steamship and Syndicate 957 entered into a personal accident and illness master lineslip policy. The aim was to cover the liability of Steamship to its members. Under the master lineslip the syndicate agreed to pay fixed benefits to Steamship in respect of bodily injury and/or illness sustained by a person (an 'original person') who was engaged in any capacity on board a vessel or offshore rig entered by a member with Steamship. That master lineslip was renewed from time to time. In particular, in about May 1998, it was renewed in respect of losses occurring on declarations attaching during three consecutive periods of 12 months from 20 February 1997 and, later, in respect of losses occurring on declarations attaching during the period 20 February 2000/20 February 2001.
[4] Syndicate 957 reinsured its liability under the master lineslip. That reinsurance, for the years February 1998–February 2000, was 50% with Sun Life and 50% with Phoenix. That reinsurance was negotiated by brokers acting for Syndicate 957 and Centaur who were authorised at this stage to write for those two companies in the above proportions. On 1 October 1998 Centaur's authority to write new business for Phoenix ceased. The brokers negotiated an extension of reinsurance with Centaur for a further year on 29 October 1998. It is that negotiation which gives rise to the authority point and the question whether Centaur was agreeing to take 100% for Sun Life.
[5] It is Sun Life who have taken the point that Steamship had no 'insurable interest' in the lives and well-being of the original persons, when entering into the master lineslip for the three years from February 1997 and after. They contend that the insurance is illegal by virtue of s 1 of the Life Assurance Act 1774. In the alternative Sun Life assert that Steamship are seeking to claim more than the value of any insurable interests they had, and are not entitled to do so by virtue of s 3 of the same Act.
[6] It is not attractive to contemplate that where insurers have carefully crafted a policy which was intended to be enforceable by Steamship, a point on insurable interest could arise. As quoted in The Law of Insurance Contracts (4th edn, 2002) para 4-2C by Professor Malcolm Clarke there is an observation of Mance J in Cepheus Shipping Corp v Guardian Royal Exchange Assurance plc, The Capricorn [1995] 1 Lloyd's Rep 622 at 641 that if insurers—
'make a contract in deliberate terms which covers their assured in respect of a specific situation, a Court is likely to hesitate before accepting a defence of lack of insurable interest.'
[7] Mr Kendrick QC, who argued the appeal with great skill on behalf of Sun Life, accepts that the court's attitude is as stated by Brett MR in Stock v Inglis [1884] 12 QBD 564 at 571 where he said:
'In my opinion it is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer. Of course we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, I think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.'
[8] Be all that as it may, there is no doubt that the argument on behalf of Sun Life is a formidable one and cannot by any means simply be brushed aside.
THE FACTS
[9] The facts are set out in detail in Langley J's judgment and there is no appeal therefrom. The important matters of background I summarise from that judgment as follows. In 1994 Syndicate 957 had reinsured Steamship (and other clubs) on a bodily injury 'carve out' and mixed indemnity and fixed benefit basis. It seems that in September 1994 Lloyd's announced changes to its risk codes for the 1995 year of accounts. From January 1995 accident and health policies could only be classified as personal accident insurance if payments were on a fixed-benefit basis. Liability or contingent cover was
treated as long-tail business for reserving purposes. Personal accident cover was treated as short-tail and so did not require provision of substantial reserves to be held for long periods.
[10] Mr Cackett, the underwriter for Syndicate 957, wanted to preserve the substantial 1994 premium income received by the syndicate from Steamship if he properly could, but also to maintain the PA (personal accident) classification. The PA concept was Mr Cackett's creation. The basic idea was to provide a fixed level of benefit payable on proof of the fact of death, PTD (permanent total disability) or TTD (temporary total disability) of an original person with medical expenses payable in addition. The level of benefits could not and would not track with any precision the amount of the actual liability of the member of Steamship or Steamship in respect of the death, PTD or TTD relating to the individual original person. But, it was intended that overall Steamship's recovery under the master lineslip should track as closely as possible Steamship's overall exposure.
[11] Langley J demonstrated that in the drafting of the original wording there was a tension between attempting to keep the master lineslip within the relevant Lloyd's code, and providing the cover which Steamship desired. It is doubtful to what extent those drafting points can be relevant to the actual construction of the policy but, as Langley J pointed out, it was in that context that the word 'liability' in respect of claims as against Steamship became 'obligations' of Steamship, wording to which I will have to return. In addition, there was evidently in the draft at one time a provision which provided for 'adjustment' and expressly for Steamship to make repayment where it transpired that fixed benefits exceeded the club's liability to a member, but that provision was not maintained.
[12] There was a dispute at the trial whether Steamship were intending to cover legal expenses incurred by virtue of the fixed benefits received. The judge found that the setting of the benefit levels was intended to contribute to Steamship's exposure including legal costs.
[13] The first lineslip providing this new form of cover was effected for the period 20 February 1995–20 February 1996. The terms and wording were finally agreed between Syndicate 957 and Steamship in June 1995. The master lineslip had been signed earlier for 100% by Mr Cackett on behalf of Syndicate 957 naming Lloyd Thompson as the lineslip holder.
[14] The first declaration under the master lineslip was accepted on 16 June 1995. It named Steamship as the insured. It was to pay Steamship benefits 'calculated in accordance with the schedule of compensation' contained in the wording for death, PTD or TTD (and medical expenses in relation to TTD only) as defined in the wording. The policy limits were as specified in the schedule of compensation but also subject to a maximum of $US1m for any one event and 'in a maximum amount recoverable in all equivalent to 250% of the finally adjusted gross premium payable'. There was an aggregate deductible of 6á6% of Steamship's net premium income or $US1á5m whichever was the greater. A deposit premium of $US5á5m was payable in six equal quarterly instalments starting on 20 May 1995 and was adjustable quarterly at 32á5% of Steamship's net premium income received in respect of member entries during the policy period.
THE WORDING
[15] The policy wording was scratched in June 1995 by Syndicate 957 and Steamship. Essentially the same wording was used in all years. I will indicate variations. The insuring clause was expressed in terms that—
'if an Original Person sustains Bodily Injury and/or Illness we will pay to the Insured in accordance with the terms and conditions of this Insurance and according to the Schedule of Compensation after the claim has been substantiated under this Insurance.'
[16] Clause 1 contained a number of relevant definitions. 'The Insured' was Steamship.
[17] 'Entered Vessel' was defined as 'a vessel, offshore rig and/or similar interest to be agreed which has been entered by a Member … for any of the risks enumerated herein'.
[18] 'Member' was defined as—
'an owner and/or … other person interested in any Entered Vessel to whom the Insured has obligations under its Rules and/or terms of entry in respect of the Bodily Injury and/or illness suffered by an Original Person.'
[19] 'Original Person' was defined as—
'(i) any person … while engaged during the Policy Period in any capacity on board or in relation to an Entered Vessel as part of her complement, but shall include any person who is engaged by a Member during the Policy Period at the time of the Accident … and is seconded to another vessel … pursuant to a contract entered into by a Member and/or (ii) other persons while engaged during the Policy Period in any capacity on board or in relation to any Entered Vessel.'
'Bodily Injury and/or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or the manifestation of the Illness and which lasts twelve months and at the expiry of that period appears to be such that the Original Person will not thereafter be able to resume attending to such usual business or occupation and/or assume such same work activities.'
'Bodily Injury or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or manifestation of the Illness.'
[22] The wording contained (cl 2) a limited number of exclusions such as death or disablement arising out of war (and the like) and mental or psychiatric illness.
[23] Clause 3 provided for claims notification and settlement of benefits. Notification of claims by Steamship had to be accompanied by 'reasonable documentary proof' of the death or disablement of the original person, the date of the accident and inward claim, details of the circumstances of the accident
and injury and, if the claim was for TTD, an estimate of the period during which the disablement appeared likely to continue and details of any medical expenses paid by Steamship, or, if the claim was for PTD, confirmation that disablement appeared likely to continue for not less than 12 months. In the event of death or PTD Syndicate 957 agreed on receipt of such notification to pay Steamship the capital sum specified in the schedule of compensation. In the case of TTD, also on receipt of such notification, Syndicate 957 agreed to—
'pay the weekly benefit as specified in the Schedule of Compensation for the period of Disablement together with any Medical Expenses. Should the period of Temporary Total Disablement (either as estimated by the Insured or as actually suffered by the Original Person) exceed 152 weeks and should the Insured confirm to Underwriters that it appears that the Original Person will not thereafter be able to resume attending to his or her usual business or occupation and/or to assume the same work activities … Underwriters … will pay to the Insured the Capital Sum Insured as if the Original Person had suffered Permanent Total Disablement less any benefit (including Medical Expenses) already paid …'
[24] Payment of the benefits was to be made no later than 30 days after submission of bordereaux (cl 4); claims notified 24 months after expiry of the policy period were not covered (cl 5).
[25] In place of the 'adjustment' clause referred to in [10], above, was cl 6, entitled 'Alteration in Circumstances', reading:
'Should the Insured at any time become aware that any confirmation or information provided to Underwriters in connection with a claim hereunder is not, or is no longer, accurate or applicable, the Insured shall immediately inform Underwriters and at the same time return to Underwriters any amount by which all payments made by Underwriters hereunder exceed the amount (if any) which would actually be payable hereunder in accordance with the accurate or applicable confirmation or information.'
[26] The schedule of compensation (cl 9) in the original wording provided for different levels of compensation for three geographical areas: the highest level where the entered vessel or member was registered or had a place of business or conducted operations in North America, half those levels for Europe, Japan or the ASEAN group of trading nations, and half again for anywhere else. The North American levels were $US1m for death and PTD and $US4,000 a week for a maximum of 152 weeks for TTD. The maximum limits (also set out in cl 9) were $US1m in respect of any one original person and $US1m in all for any claim or claims caused by the same occurrence or series of occurrences arising out of the same event. In subsequent wordings (where appropriate) the schedule of compensation referred to 'as declared' or was otherwise changed to reflect the terms agreed for the relevant period of cover.
[27] Langley J ([2002] 2 All ER (Comm) 492 at [57]) made the following comments. There is challenge to only one of those comments and I will set them out in full:
'(i) As I have already said, I find that Mr Cackett was responsible for setting the benefit levels.
(ii) Although Ince & Co (and Mr Cackett) were concerned (because of the audit codes) to avoid references to Steamship's own liability to the club's members and specifically removed the adjustment provisions which would have resulted in repayment of “over-recoveries”, it is I think clear that both Steamship and Syndicate 957 intended that claims would only be sustainable under the cover in cases in which Steamship was itself liable to indemnify the member concerned in respect of the accident and injury to the original person in question. Mr Boswood [QC] submits that on analysis the wording in any event requires as much; Mr Kendrick submits it does not. On any view Mr Kendrick is right in submitting that such a requirement (if any) can only be found in the depths of the definitions: see (iii).
(iii) Mr Boswood's submission is as follows. Syndicate 957 agreed to make the fixed benefit payments if an “Original Person” suffered injury. Original persons are persons engaged on an “Entered Vessel”. An entered vessel is one entered by a “Member” of the club with Steamship during the relevant period in respect of any of the risks “enumerated” in the wording itself. A member has to be a person interested in any entered vessel and a person to whom Steamship “has obligations under its Rules … in respect of the Bodily Injury … suffered by an Original Person”. That, submits Mr Boswood, has the effect that unless there is a liability on Steamship to the member for the injury (which there would not be if, for example, any damages payable to the original person was less than the member's deductible) no recovery could be made or, if made, retained under the policy wording. Mr Kendrick submits that Mr Boswood's submission places more weight on the word “obligations” than it can bear. He submits that Steamship owed “obligations” under the club's rules to investigate claims. But I agree with Mr Boswood that the relevant rule (rule 28) does not in ordinary language impose an obligation on Steamship to investigate claims on members but bestows a right on Steamship to do so. In my judgment Mr Boswood's submission on the construction of the wording is also right and, however obscurely, reflects what both Mr Cackett and Mr Martin said and I find was intended.
(iv) The definition of “PTD” was one of some width. It did not, for example depend on earning capacity. In the case of rig workers there might be a particular risk that an otherwise not very serious injury would prevent an original person from resuming arduous duties, leading to a PTD payment within the definition. Mr Cackett was alive to the possibility of a “TTD” becoming a “PTD” and indeed the wording expressly addressed it in cl 3 … The possibility, however, might well not be manifest for a considerable time as the clause itself contemplates the elapse of 152 weeks before a determination might be made. That is of significance because on the evidence in the event the major if not the only source of alleged “overpayments” to Steamship is the number of claims which started as TTDs but came later to be classified as PTDs.
(v) Mr Cackett had a close involvement in drafting the wording yet nothing in it or otherwise required Steamship to include or provide figures for paid or incurred claims by members on Steamship. The trigger for payment of the benefit was simply proof of the death or disablement of an original person: cl 3.
(vi) “Original Persons” were not necessarily identifiable at inception. They included those who came to work on an entered vessel at any time during the period of the cover.
(vii) There was an aggregate excess and limit (in the event $1á5m and $17á25m respectively).'
[28] Mr Kendrick challenges Langley J's conclusion at (iii). Mr Boswood QC, albeit seeking to uphold Langley J's construction, submits that it makes no material difference if his submission is not accepted. My view is that the judge was right in construing the policy wording as he has.
[29] It is important to emphasise that he is not construing the wording in a way which means that claims are only payable once liability is established. He is construing the policy as cover for Steamship for the losses that it may incur where some liability is established. It is right to emphasise that there is no precise relationship between the payments of benefit and the liabilities of Steamship. Mr Boswood's argument only suggests that if there is no liability of Steamship ie where the member has no liability to the original person or if the liability falls below the deductible in relation to any claim from an original person, fixed benefits would have to be returned. He does not suggest that in relation to a claim which exceeds the deductible but falls below the fixed payment there should be any return of the money paid to Steamship.
[30] I do not think that it is critical whether Mr Boswood is right in the above submission. On any view the wording makes clear that it is intended that there should be a close relationship between the amount of fixed benefits and Steamship's liability to its members.
[31] When the first claims came in there followed considerable debate between Syndicate 957 and Steamship as to whether the fixed benefits were not 'too generous'. The details are set out in the judgment of Langley J ([2002] 2 All ER (Comm) 492 at [63]–[69]). The outcome was that on renewal in February 1996 agreement was reached that the benefit levels should be $US1m and $US2,250 from the inception of the 1995/1996 cover.
[32] On 4 March 1996 the lineslip was again renewed for 1996/1997 but for individual declarations. Falcon was 'renewed' with limits of $US500,000 for death and PTD, and $US1,750 for TTD. Marine drilling was renewed with limits of $US400,000 and $US1,750. The details appear from Langley J's judgment (at [70]).
EXCESS OF LOSS
[33] Reduction in the maximum death and PTD benefit level from $US1m to $US500,000 led to Steamship taking out excess of loss insurance for losses on members' claims which exceeded the relevant limit. The effect of this excess of loss insurance was that if the relevant limit in the master lineslip was $US500,000, Steamship would recover that sum from Syndicate 957 even where the claim by the member was less than $US500,000, but where a claim exceeded $US500,000 Steamship obtained 100% of recovery from the combination of the master lineslip and the excess of loss cover. Langley J records finding that Mr Johnston of Steamship was genuinely surprised when it was put to him in cross-examination that on this basis Steamship could not make a loss but only a profit on such claims. The judge found that it was not seen in those terms when the excess loss insurance was taken out.
[34] In March 1996 Mr Cackett gave notice of his intention to leave Syndicate 957 and Mr Feasey took over the reins from then onwards. Mr Cackett established Centaur in Bermuda shortly thereafter.
[35] The lineslip was further renewed in 1996/1997, Mr Feasey dealing with the renewal. Mr Feasey, according to the judge, said in evidence that by that time he was comfortable that Syndicate 957 was not paying out more to Steamship than Steamship was paying its members. That belief was based on the exercise carried out with Mr Cackett in January and February 1996 which had resulted in the agreed reductions referred to above.
SUN LIFE AND PHOENIX
[36] On 26 August 1996 Sun Life entered into an underwriting management agreement with Centaur providing Mr Cackett on behalf of Centaur with underwriting authority for reinsurance business. On 12 September 1996 Phoenix entered into an underwriting management agreement on substantially the same terms with Centaur.
[37] The master lineslip was again renewed for 1997/1998. It seems some limits were changed, further aggregate excesses were introduced but individual aggregate limits were substantially increased with an overall limit of $US33á56m which was less than the total of the individual limits. The 'qualifying period' for a TTD was reduced from 152 weeks to 104 weeks. Mr Feasey also introduced 'franchises', the effect of which was to exclude from the cover losses which did not exceed the franchise figure until exhaustion of the franchise retention figure and to delay presentation of claims which did exceed the figure. For example, in the case of a TTD loss, the loss had to exceed the franchise level before it could be claimed, so that if the weekly benefit level was $US1,000 and the franchise $US25,000 the claim could only be made if the TTD lasted for 25 weeks for more.
REINSURANCE OF SYNDICATE 957 BY SUN LIFE AND PHOENIX 1997/1998 YEAR
[38] Syndicate 957 had itself been reinsured in respect of its liabilities to Steamship under the master lineslip (and for other covers) by a reinsurance programme underwritten by a number of other syndicates at Lloyd's. In February 1997 the syndicate sought a quotation from Mr Cackett at Centaur for the 1997/1998 year. Ultimately, in May 1997, Mr Cackett using American Phoenix as a front for Sun Life and Phoenix for 50% each entered into a number of reinsurances with Syndicate 957 in respect of the syndicate's liabilities under the master lineslip in respect of losses occurring between 20 February 1997 and 20 February 1998. The first reinsurance was to pay $US95,000 excess of $US5,000 on each and every claim. The other three reinsurances were to protect Syndicate 957 in respect of claims-related premium adjustment payable by the syndicate on various layers of excess of loss reinsurances protecting the account (described as 'burning costs' reinsurances). The details are set out in Langley J's judgment (at [80]–[85]). At the beginning of 1998 Syndicate 957 sought further legal advice in relation to the validity of the insurance with Steamship. The details are set out in Langley J's judgment (at [93]–[96]).
THE THREE-YEAR MASTER LINESLIP 1997/2000 (THE DISPUTED POLICY)
[39] The judge's description is not in issue and I adopt the material parts.
[40] On 14 April 1998 Mr Absalom scratched, by way of a declaration off the 1997/1998 master lineslip, insurance for Steamship for the three 12-month
periods 20 February 1997/1998, 1998/1999 and 1999/2000. By April 1998 the 1997/1998 cover had of course expired but the member declarations off the 1997/1998 master lineslip were cancelled and rewritten to become member entries to this three-year declaration. Also on 14 April 1998 a further master lineslip was agreed to accept declarations from 20 February 1998 to 20 February 2000.
[41] The declaration described the type of insurance as 'Personal Accident and/or Illness' and the insured as Steamship. A wording was attached in the same terms as the original policy wording (see [14]–[24], above) save that the schedule of compensation was 'as declared' each declaration. The maximum amount recoverable was limited in respect of each individual member to 150% of original gross annual premium. Figures providing further limits were as set out in the schedule to the judge's judgment. There was an overall limit of $US100,560,000 for the whole period. The 'Information' was described as 'as presented and noted by the Underwriter at the inception of the Original Member Entries'. The weekly TTD benefit was limited to a maximum of 104 weeks in all. The list of member entries for each year recorded for 1997/1998 in the case of Falcon alone that the cover was in respect of 'losses occurring or first notified' to Steamship in that period. In all other member entries it was in respect only of 'losses occurring'. The effect was that the original 1997/1998 cover for Falcon was enlarged to cover claims notified in 1997/1998 but arising in earlier years. Those claims were of course, already known at April 1998. The figures (at August 1998) in fact show estimates for such claims of some $US4á5m.
[42] For the years 1998/2000 the weekly TTD benefit was reduced from $US1750 to $US1000 for all member entries and the death/PTD benefit was 'equalised' at $US400,000 for all member entries which involved an increase in the limits in 1997/1998 in two cases and a decrease (from $US500,000) in three cases. Mr Feasey assessed the benefit levels on the basis of 'as if' figures between Steamship and the syndicate. He had no figures to assess the comparative position between Steamship and its members.
[43] Mr Feasey said that after the dispute which had led to the retrospective reduction in the TTD figure in 1996 the business had gone forward largely on the basis of an assumption that the level of benefits was such that Steamship would not be over-compensated 'in the round' and the issue was what was the syndicate prepared to offer and whether Steamship thought it worthwhile to buy what was offered at the price proposed. Mr Feasey also agreed that because Steamship should not be over-compensated it was prudent to 'continue monitoring and adjusting' to minimise any mismatch. But that did not (Langley J found despite Mr Kendrick's submissions), involve a detailed exercise on Steamship's estimated reserves. Mr Feasey did not undertake and never suggested he had undertaken such an exercise. He said he relied on the 1996 exercise, the Falcon figures, Mr Johnston's letter, his knowledge and experience of PA business and the size of awards to justify his confidence that Steamship was not being over-compensated and would not be over-compensated by the benefit levels he was offering. He had of course reduced the levels further, particularly the TTD figure.
[44] No witness called for Syndicate 957 could recall why the covers had been written for three years. There is no doubt that the master lineslip provided a significant part of the syndicate's premium income. Those called for
Syndicate 957 believed the terms were now such that there was no question of over-compensating Steamship and that it was valuable to secure the income for a period of time when the syndicate was under pressure from outside competition.
[45] For Steamship the evidence was that the enlargement came about because Steamship asked for it. Mr Johnston, head of underwriting at Steamship, said Syndicate 957 had requested a three-year contract:
'It became very obvious to us that they were extremely anxious to place this contract. We therefore took the position that we might as well see what we can negotiate out of this to our advantage, and one of the things that occurred to me was that we might as well ask them whether they would be prepared to consider losses that were going to arise during the course of the year that had not as yet arisen.'
[46] Mr Johnston added that the Falcon cover had not burnt through by that time. Mr Johnston also said that he did not think it was for Steamship to calculate any appropriate benefit level and the club did not do so. They were offered a cover and had to decide if it was worth buying. Mr Martin, the claims partner of Steamship, said the same. Steamship did not expect the protection to be the equivalent of a full reinsurance of Steamship's first retained layer and the question was would it provide a substantial protection. Mr Martin said his evaluation in 1998 would have been that a death claim would certainly cost more than $US500,000, a PTD would cost more than $US500,000 and a TTD more than $US1,000 a week.
THE SUN LIFE AND PHOENIX REINSURANCE 1998/2000
[47] In May 1998 Mr Cackett for Centaur agreed on behalf of Phoenix and Sun Life 50:50 to renew the four reinsurances of Syndicate 957. The contracts covered losses on declarations attaching in the period 20 February 1998– 20 February 2000.
[48] In March 1998 Mr Cackett for Centaur gave six months' notice to Phoenix to terminate the underwriting management agreement between Centaur and Phoenix. The effect of that termination was that Centaur could write no new business for Phoenix after 1 October 1998 but would continue to deal with existing business with the authority of Phoenix. It is the writing of an extension to this policy by Mr Cackett on 29 October which is the subject of the authority point.
THE RELIANCE 'TOP-UP'
[49] On 29 June 1998 Mr Cackett provided Mr James with a non-binding indication for what has been referred to as the 'top-up' or 'sideways' cover of Steamship. The cover was to protect Steamship for the three years at 20 February 1997 in the event that the master lineslip (the disputed policy) total limits (overall or for individual members) were exhausted.
[50] On 17 July 1998 Lloyd Thompson wrote to Mr Johnston with an indication for the top-up cover with a maximum limit of $US40m. The indication came from Reliance National (Reliance) but as a front for Centaur and Mr Cackett. The premium quoted was $US15m. It was Reliance that ultimately signed the slip on 30 September 1998. The details appear in Langley J's judgment (at [115]–[120]).
[51] In February and March 1999 Steamship notified substantial claims on the top-up policy with Reliance essentially arising from the deterioration of the Falcon declaration under the master lineslip. Mr Cackett instructed that an audit be carried out and it was this audit which led indirectly to the proceedings.
[52] The debate which ensued on what sums Steamship were entitled to recover under the disputed policy, and the debate on figures which was continuing right up until judgment in the trial below, is set out from Langley J's judgment (at [132]–[143]). The conclusion of the judge by reference to the figures and the evidence is to a large measure not challenged and it is right to set it out in full:
'[144] As I have said, the figures and the evidence and submissions about them leave considerable uncertainties but I will summarise the conclusions which I have drawn about them as a matter of probability. [Only the second and third sentences of (vi) are the subject of challenge by Sun Life's notice of appeal. The answer to that challenge is provided by Steamship in their supplementary note on the figures dated 27 February 2003.] (i) In so far as it is suggested that at any material time Steamship deliberately set out to make or appreciated it was making “a profit” I am entirely satisfied the suggestion would be wrong. Steamship saw the covers as providing a worthwhile contribution towards its overall exposures to members and did not expect to profit or to be “over-compensated”, rather the opposite. (ii) There is no evidence to suggest that the TTD figure of $1000 a week was greater than the cost of the same claims by members. The probability is that it was less. (iii) The only basis on which the figures now show that Steamship has made a profit or been over-compensated is the inclusion of the recoveries from the excess of loss and Reliance top-up covers. (iv) The death benefit figure has generally been ignored in evidence, possibly because there were only about five death claims in each year. (v) The numbers of PTD claims which have arisen was unexpected and unforeseen by Steamship in 1998 when the relevant covers were agreed and for some time thereafter. It is the numbers of PTD claims (and the existence of the excess of loss and top-up reinsurances which covered them) which has led to any over-compensation. (vi) Both Steamship and Syndicate 957 honestly believed when the relevant covers were agreed in 1998 that the level of benefits had been set so as to eliminate any possibility of over-compensation for Steamship. Neither had any information to suggest the contrary and each could justify its belief on the information available and the history of reducing levels of benefit. In the case of Steamship that is so even with the knowledge of the excess of loss and Reliance top-up insurance it acquired. As stated I accept Syndicate 957 was unaware of those contracts. (vii) Even allowing for recoveries under the excess of loss and top-up contracts the estimated level of “over-recovery” in 1997 and 1998 and 1999 whilst substantial … cannot, I think, be characterised as of a size such as to change the character of the transaction from insurance to gaming or a wager. Moreover there is probably some unknown balancing factor resulting from under-recovery on TTD claims.'
DOES S 1 OF THE 1774 ACT RENDER THE DISPUTED POLICY ILLEGAL AND VOID?
[53] The 1774 Act is entitled:
'An Act for regulating Insurances upon Lives, and for prohibiting all such Insurances, except in cases where the Persons insuring shall have an Interest in the Life or Death of the Persons insured.'
'Whereas it hath been found by experience that the making insurances on lives or other events wherein the assured shall have no interest hath introduced a mischievous kind of gaming.'
'From and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.'
'And … it shall not be lawful to make any policy or policies on the life or lives of any person or persons, or other event or events, without inserting in such policy or policies the person or persons name or names interested therein, or for whose use, benefit, or on whose account such policy is so made or underwrote.'
'And … in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the assured in such life or lives, or other event or events.'
[54] I should deal at the outset with a point argued by Mr Boswood on the construction of s 1. He took us back to the eighteenth and nineteenth centuries and the context in which the 1774 Act was passed. Two things were of importance in that context. First, gaming and wagering outside the insurance context was lawful and enforced by the courts. That was so until the passing of the Gaming Act 1845. Second, throughout the eighteenth and first half of the nineteenth century it was believed that all insurance contracts, including contracts of life assurance, were by their nature contracts of indemnity. Godsall v Boldero (1807) 9 East 72, 103 ER 500 was decided on that basis and was only overruled by the Court of Exchequer Chamber in Dalby v India and London Life-Assurance Co (1854) 15 CB 365, 139 ER 465. Mr Boswood relied on the Marine Insurance Act 1745 and its preamble. He said that it was clear from the preamble that the mischief being aimed at by the Act was the verbal formulations used to create a wager policy. The 1745 Act, he submitted, was not concerned with saying that an assurance could not be enforced where the insured had no interest in the ship or goods the subject matter of insurance; that was self-evident anyway. Rather, its object was to prohibit wager policies, by specifying the various forms of words that could be used to create such policies and saying that the use of such words invalidated the contract.
[55] Mr Boswood suggested that the same form of reasoning ought to apply to s 1 of the 1774 Act. Since life insurance was believed to be a contract of indemnity it went without saying that an interest in the subject matter was necessary to support such a policy, and the section was concerned with the form of policy ie that there should be no form of policy dispensing with proof of interest and no form of policy in the form of a gaming or wagering contract.
[56] Mr Boswood submitted that 'interest' meant simply 'interest sufficient to prevent the policy being a wagering contract'. This submission enabled Mr Boswood to say that since Mr Kendrick, for Sun Life, made no case that the disputed policy was 'gaming or wagering', that was in effect the end of the case.
[57] In his written submissions Mr Boswood relied on a dictum of Anthony Colman QC, as he then was, in Sharp v Sphere Drake Insurance plc, The Moonacre [1992] 2 Lloyd's Rep 501 at 510 where he said:
'Neither the words of any statute since 1845 nor any judicial pronouncement suggest that there should be a category of contracts of insurance which were not wagering contracts but which on account of the absence of an “insurable interest” should not be enforceable.'
Mr Boswood in his oral submissions felt unable to support that dictum appreciating that there were a number of authorities which concentrated on the question whether there was 'an insurable interest' apart from any concept of wagering.
[58] I reject Mr Boswood's submission that because no one in this case suggests that the policy was a wagering contract, a sufficiency of interest is demonstrated. The question whether the contract of insurance can be correctly described as 'gaming or wagering' is a material factor. But as Mr Boswood in reality has to accept, once contracts of life insurance were held not to be contracts of 'indemnity' that did not abolish the need for an interest in the life. Indeed the whole concern of the court in Dalby's case was as to whether the Anchor Life-Assurance Co had 'an interest' in the life of the Duke of Cambridge within s 1 of the 1774 Act, albeit the court concluded that the contract was not one of indemnity. There are furthermore dicta in the authorities which support the view that the starting point is the question whether there is interest, not whether the contract is one of gaming or wagering (see Macaura v Northern Assurance Co Ltd [1925] AC 619 at 631 per Lord Sumner and Lowry v Bourdieu (1780) 2 Doug KB 468 at 470, 99 ER 299 at 300 per Lord Mansfield).
[59] The critical question is not whether the policy is a wagering contract but whether the disputed policy is an insurance made 'on the life or lives of any person or persons or on any other event or events whatsoever' wherein Steamship has no interest.
[60] It is convenient to deal at this stage with a second point on construction of the 1774 Act which arises from the amendment to s 2 by s 50 of the Insurance Companies Amendment Act 1973. Section 50 provided:
'(1) Section 2 of the Life Assurance Act 1774 (policy on life or lives or other event or events not valid unless name or names of assured etc. inserted when policy is made) shall not invalidate a policy for the benefit of unnamed persons from time to time falling within a specified class or description if the class or description is stated in the policy with sufficient particularity to make it possible to establish the identity of all persons who at any given time are entitled to benefit under the policy.
(2) This section applies to policies effected before the passing of this Act as well as to policies effected thereafter.'
[61] Section 2 of the 1774 Act has no direct application to the disputed policy since the person to benefit is Steamship and they are named. But the effect of s 2 in situations where the persons to benefit are 'within a specified class or description' has an impact on the true construction of s 1. Section 2 as amended would appear to have no impact at all if the proper construction of s 1 was to render null and void policies on the lives of persons who were unidentified as at the date of the policy but would fall 'within a specified class or description' of 'sufficient particularity to make it possible to establish the identity of all persons who at any given time are entitled to benefit under the policy'.
[62] The words 'within a specified class or description' are very wide words. Mr Kendrick would suggest that they must be confined to an identifiable group such as employees. I do not see why that should be so. The definition of 'original person' in the disputed policy is very wide, but if one poses the question whether the 'description' is of sufficient particularity to make it possible to establish the identity of all persons who at any given time would be entitled to benefit under the policy if the policy had been for the benefit of original persons, the answer seems to me to be that it would.
[63] It follows, as it seems to me, that Parliament must be taken at least, following the amendment to s 2, not to have intended that s 1 would make null and void an insurance on lives of persons unidentified as at the date of the policy, but within a description such as that given for 'Original Persons'.
[64] I now turn to the key issue—Steamship's insurable interest. 'Interest' in the 1774 Act is undefined. Both in that context and in others it has been a concept which has proved difficult of precise definition. Thus MacGillivray on Insurance Law (10th edn, 2003), when considering insurable interest generally, says this (p 7 (para 1-11)):
'Nature of insurable interest. Insurable interest may be described loosely as the assured's pecuniary interest in the subject-matter of the insurance arising from a relationship with it recognised in law.'
The footnote to that definition says: 'See para. 1-74, post, and the definitions attempted in paras. 1-49 and 1-120, post.'
[65] Page 25 (para 1-49) says:
'Working definition. All previous editions of this work have provided the following “good working definition” applicable to all risks under the Life Assurance Act 1774: Where the assured is so situated that the happening of the event on which the insurance money is to become payable would, as a proximate cause, involve the assured in the loss or diminution of any right recognised by law or in any legal liability there is an insurable interest in the happening of that event to the extent of the possible loss or liability.'
[66] It is said (p 37 (para 1-74)):
“'Pecuniary” really means no more than that the interest must be capable of valuation by a court, and this is necessary inasmuch as section 3 of the Act provides that the assured shall not recover more than the value of his interest at the time the contract was made.'
It is said (p 37 (para 1-75)):
'Besides being capable of valuation, the interest must be of such a nature that the law will take cognisance of it. The assured must show that he will or may lose some legal or equitable right or be placed under the burden of some legal liability in consequence of the death of the person whose life is insured. A mere expectancy or hope of future pecuniary benefit from the prolongation of the life insured or of the fulfilment by him of moral obligations owed to the assured, are insufficient to sustain an insurable interest. If, however, the death of the life insured will involve the assured in a liability, it is no answer for the insurers to show that he will also derive some compensating benefit, since the contract is not one of indemnity and the insurers may not set off the assured's gain against his loss.'
[67] Section 5 of the Marine Insurance Act 1906, which codified the common law so far as marine insurance was concerned, defined an insurable interest in the following way:
'1. Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.
2. In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.'
[68] The notes in the tenth edition of Chalmers' Marine Insurance Act 1906 (1993) under s 5 include a reference to the famous dictum of Lawrence J when providing advice to the House of Lords in Lucena v Craufurd (1806) 2 Bos & PNR 269 at 302, 127 ER 630 at 643, where he said:
'… interest does not necessarily imply a right to the whole, or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring … To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from [its] destruction.'
[69] Lucena v Craufurd was concerned with insurance on certain ships and the advice of Lawrence J was to the effect that there was no insurable interest in the ships in that case. In the decision of the House of Lords in the speech of Lord Eldon ((1806) 2 Bos & PNR 269 at 321, 127 ER 630 at 650) he also dealt with insurable interest in these terms:
'“I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party.'
[70] There has been some debate as to whether Lord Eldon's test is narrower than Lawrence J's, and as to whether Lawrence J's test, being contained only in an advice, should be rejected in favour of Lord Eldon's, which was contained in a speech pronouncing the decision. Since Lucena v Craufurd was concerned with the insurance of property it is unnecessary to resolve that debate, but I do note that Lawrence J's test has been approved many times in later decisions (see for example Blackburn J in Wilson v Jones (1867) LR 2 Exch 139 in a passage quoted later in this judgment (see [88], below) and, more recently, Kerr LJ in Rowlands (Mark) Ltd v Berni Inns Ltd [1985] 3 All ER 473 at 481, [1986] QB 211 at 228).
[71] The above demonstrate, I would suggest, that it is difficult to define insurable interest in words which will apply in all situations. The context and the terms of a policy with which the court is concerned will be all-important. The words used to define insurable interest in, for example, a property context, should not be slavishly followed in different contexts, and words used in a life insurance context where one identified life is the subject of the insurance may not be totally apposite where the subject is many lives and many events.
DATE FOR INSURABLE INTEREST AND VALUATION
[72] One other general point to make at this stage relates to the date at which an insurable interest must exist, and (where relevant) the date at which it must be valued. In an indemnity policy the relevant date is the date of loss. If the policy is not a valued policy, liability will also be assessed at the date of loss. Where the policy is a valued policy, that value will have been assessed at the date of the policy, and in the absence of fraud the value fixed by the policy will as between the insurer and the assured be conclusive of the insurable value of the subject intended to be insured whether the loss be total or partial (see s 27(3) of the 1906 Act).
[73] In a life policy the date at which the insurable interest must exist is the date of the taking out of the policy. Furthermore, that is the date for valuing the insurable interest (see Dalby v India and London Life-Assurance Co (1854) 15 CB 365, 139 ER 465). In Godsall v Boldero (1807) 9 East 72, 103 ER 500 a policy for the sum of £500 had been taken out on the life of the late Mr Pitt by the plaintiffs who were creditors of Mr Pitt. Lord Ellenborough CJ in the judgment of the court said ((1807) 9 East 72 at 81, 103 ER 500 at 504):
'The event, against which the indemnity was sought by this assurance, was substantially the expected consequence of his death as affecting the interests of these individuals assured in the loss of their debt.'
In the result, as the personal representatives of Mr Pitt had paid off the debt, the court held that the sum of £500 was not recoverable under the policy.
[74] Godsall's case was overruled by Dalby's case. In Dalby's case the Anchor Life-Assurance Co (Anchor) had insured the life of the Duke of Cambridge in four separate policies—two for £1,000 and two for £500 each granted by that company to the Reverend John Wright. Anchor wished to limit their liability on the duke's life and took out a policy with the defendants for £1,000 by way of 'counter insurance'. Under an arrangement between Anchor and Wright, Anchor's liability under the policies they had issued on the duke's life was subsequently extinguished or severely limited. The court held that a life assurance was a contract to pay a certain sum of money and not an indemnity; that the date at which an insurable interest should exist was the date when the policy was taken out so far as s 1 of the 1774 Act was concerned; that the date of valuation of that
interest was the date when the policy was taken out; and, in the circumstances, even if liability under the original policies had been extinguished, Anchor were entitled to recover £1,000 on the 'counter insurance'.
[75] It is convenient in this context to refer to Hebdon v West (1863) 3 B & S 579, 122 ER 218 which the judge in his judgment thought possibly inconsistent with Dalby's case. In that case a bank clerk had insured his employer's life with two insurance companies. The first policy was for £5,000 and the second for £2,500. The bank clerk had borrowed £4,700 which the employer had subsequently said would not be called in during his lifetime. In 1856 the bank clerk took out a policy on his employer's life with an insurance company for £5,000. In 1857, the debt having increased to £6,000, the employee effected a further policy of insurance for £2,500 with another insurance company. The employer died in 1861. The bank clerk recovered £5,000 under the first policy and paid that sum to the bank. The court decided that the bank clerk did not have an insurable interest by reference to the unenforceable promise not to call in the sum during the employer's lifetime. The court decided that the bank clerk's insurable interest in the life of his employer was simply by reference to the engagement to employ the bank clerk for seven years at a salary of £600 a year to the extent that such period remained at the time when the policy was effected. The court assessed the value of the insurable interest at £3,000, ie five years times £600, as at the date of the taking out of the first policy. The court held ((1863) 3 B & S 579 at 592, 122 ER 218) that the bank clerk could—
'only recover or receive upon the whole the amount of his insurable interest, and if he has received the whole amount from one insurer he is precluded by the terms of the 3d section of the statute from recovering or receiving any more from the others.'
[76] Langley J thought that Hebdon's case was inconsistent with the reasoning in Dalby's case. In MacGillivray on Insurance Law (10th edn, 2003) p 19 (para 1-34) it is suggested that the judge's criticism of Hebdon's case may be unjustified in that it says:
'The assured in Hebdon failed to recover on the second policy not because he no longer possessed an interest worth £2,500 when the life dropped, but because he had already recovered more than his interest was worth when he took out the second policy. The question of multiple insurances did not arise in Dalby.'
[77] I think that by that sentence the authors mean that he had already 'covered' more than his interest when he took out the second policy. It may be on this basis that the judge's criticism of the decision is not justified. Dalby's case and Hebdon's case are consistent on the following basis. The value of an interest at the time of taking out the policy is assessed on the maximum pecuniary loss that the assured could suffer on the death of the life assured. In Dalby's case that was £3,000; in Hebdon's case that was £3,000. Nothing in excess of those values could be recovered. In Dalby's case that led to recovery of £1,000, and in Hebdon's case that led to a result that since more than £3,000 had been covered by the first policy, there was no interest in taking out a second policy.
[78] But, in the above decisions, one can see already a tension between: (1) an insurance being intended to be an indemnity against loss; (2) an anxiety that insurance should not be used as a means of gambling or wagering on an event in
which an insured may have no interest; and (3) an anxiety to see that insurers who receive premiums and make bargains in respect of those premiums pay on the bargains that they have made.
[79] What is also clear from the above authorities, and from the authorities to which I am about to turn, are the principles which one sees reflected in s 26 of the 1906 Act as applied to all forms of policy. Section 26 provides:
'(1) The subject-matter insured must be designated in a marine policy with reasonable certainty.
(2) The nature and extent of the interest of the assured in the subject-matter insured need not be specified in the policy.
(3) Where the policy designates the subject-matter insured in general terms, it shall be construed to apply to the interest intended by the assured to be covered.'
[80] When one examines the authorities therefore one sees that the court is concerned to analyse by reference to the terms of the policy what is the subject of the insurance; to analyse what insurable interest a person has in the subject of the policy; and to consider whether the subject embraces 'that [insurable] interest' in the words of Blackburn J in Anderson v Morice (1875) LR 10 CP 609 at 622. Where on the wording of the policy the subject is not absolutely clear-cut, it sometimes assists to identify the subject to ask what insurable interest the person has, but essentially the subject is defined by the words of the policy. It follows that in some cases the subject is so clear that even when the insured can identify some insurable interest that it might have had, it will be held that the insured has failed to cover that interest by the policy. In other cases what is 'embraced' within the subject of the policy is less clear-cut, and in those circumstances the court may be able to say that the insurable interest is embraced within the subject of the insurance. The different elements of subject, insurable interest and value are separate but impact one on the other.
[81] With the above in mind, one can place cases in groups. Group (1) are those cases where the court has defined the subject matter as an item of property; where the insurance is to recover the value of that property; and where thus there must be an interest in the property—real or equitable—for the insured to suffer loss which he can recover under the policy. Within this group are Lucena v Craufurd (1806) 2 Bos & PNR 269, 127 ER 630 to which I have already referred. The subject was certain identified ships; the perils insured against were the loss of the ships; the Commissioners had no interest legal or equitable in the ships but a mere expectation. That expectation could not be insured, therefore the subject did not embrace the insurable interest. Also within this group is Anderson v Morice (1875) LR 10 CP 609; affirmed (1876) 1 App Cas 713. Rice was the subject matter of the policy; if uninsured the plaintiff would have suffered no loss from any destruction of the rice since they were never at the plaintiff's risk; the loss of profits might have been insured but were not. Therefore the plaintiff could not recover. In Macaura v Northern Assurance Co Ltd [1925] AC 619, [1925] All ER Rep 51 the subject matter of the insurance was identified timber owned by a company; a shareholder in the company had no interest in the timber whatever in that even without insurance the shareholder would suffer no pecuniary loss from destruction of the timber as such. Any loss suffered would have been as shareholder and his profits as shareholder were not the subject of the insurance. It was, however, recognised in Macaura's case that it would have been possible to
so describe the subject of the insurance as to embrace the insurable interest in profits, and approval was given to Wilson v Jones (1867) LR 2 Exch 139, to which I will return.
[82] Group (2). These are cases where the court has defined the subject matter as a particular life of a particular person; and where the insurance is to recover a sum on the death of that person. In these cases the court has recognised an insurable interest in that life where a pecuniary loss flowing from a legal obligation will or might be suffered on the death of that particular person. In Godsall v Boldero (1807) 9 East 72, 103 ER 500, the limit recoverable was the actual loss suffered but post-Dalby's case the fixed sum became recoverable provided that it did not exceed the maximum which might have flowed from the legal obligation measured as at the date of entry into the policy. Hebdon's case is also within this group.
[83] Halford v Kymer (1830) 10 B & C 724, 109 ER 619 is a case which relates to a policy taken out on the life of a son. What was argued was that the father had a pecuniary interest in the life of his son having regard to the chance of the father being maintained in his old age. Bayley J is recorded as saying ((1830) 10 B & C 724 at 728, 109 ER 619 at 620): 'The parish is bound to maintain him, and it is indifferent to him (the father) whether he be maintained by the parish or his son.' One wonders whether the same decision would be reached in the modern era but the decision is to the effect that there was no pecuniary interest in the life of the son in that there was no legal right to be maintained by a son.
[84] Law v London Indisputable Life Policy Co (1855) 1 K & J 223, 69 ER 439 was a case in which the plaintiff had purchased from his son a contingent legacy of £3,000, bequeathed to him if he should attain 30 years of age. The plaintiff applied to the defendant to insure the event of his son attaining the age of 30, some 20 months before the son's thirtieth birthday. The agent for the company said that the insurance would have to be for two years. The son did attain 30 but died before the expiration of the two years. Following Dalby v India and London Life-Assurance Co (1854) 15 CB 365, 139 ER 465, [1843-60] All ER Rep 1040 it was held that the father had a pecuniary interest in the life of his son when he took out the policy and that the value of the same was the £3,000 and thus the father was entitled to recover the £3,000 as well as having received the legacy bequeathed to the son.
[85] Simcock v Scottish Imperial Insurance Co (1902) 10 SLT 286. Lord Pearson followed Hebdon v West (1863) 3 B & S 579, 122 ER 218, holding that the value in the life of an employee was limited to the one-week period of notice. He therefore held that where the employer had taken out insurance with two different entities for the sum of £250, the employer was only entitled to recover one of them.
[86] Harse v Pearl Life Assurance Co [1903] 2 KB 92. Insurance was taken out on the life of a mother by a son to cover funeral expenses. It was accepted by the son that the policy was illegal and void for want of insurable interest and the only question was whether the son could recover the premium. In that context the court held that the son did not have insurable interest in that there was no legal obligation to pay funeral expenses but as he was not in pari delicto he could recover the premium.
[87] Group (3). There are then cases where even though the subject matter may appear to be a particular item of property, properly construed the policy extends beyond the item and embraces such insurable interest as the insured has.
Wilson v Jones (1867) LR 2 Exch 139 exemplifies this group and is I suggest an important decision. The plaintiff was a shareholder in the Atlantic Telegraph Co. He insured himself with the defendant under a form of marine policy in common form but filled up with marginal additions. Those marginal additions contained the following words:
'At and from Ireland to Newfoundland, the risk to commence at the lading of the cable on board the Great Eastern, and to continue until it be laid in one continuous length between Ireland and Newfoundland, and until 100 words shall have been transmitted each way … the ship, &c., goods, &c., are and shall be valued at 200l. on the Atlantic cable, value, say on 20 shares, at 10l. per share …'
And also, written opposite to the clause 'touching the adventures … &c.,' the words—
'it is hereby understood and agreed that the policy, in addition to all perils and casualties herein specified, shall cover every risk and contingency attending the conveyance and successful laying of the cable, from and including its loading on board the Great Eastern, until 100 words be transmitted from Ireland to Newfoundland, and vice versa; and it is distinctly declared and agreed that the transmission of the said 100 words from Ireland to Newfoundland, and vice versa shall be an essential condition of the policy.'
The attempt to lay the cable failed, through the cable breaking. The argument of the insurers included an argument that the subject matter of the insurance was the cable and that the plaintiff as a shareholder in the company had no pecuniary interest in the cable.
[88] It was recognised by the court that the plaintiff as shareholder had no direct interest in the cable (see (1867) LR 2 Exch 139 at 144-145 per Willes J, with which on this aspect all members of the court agreed). Willes J then said (at 145):
'The first question therefore is, what was the subject matter insured? Is this, as has been contended, an insurance on the cable, or is it an insurance of the plaintiff's interest in a share of the profits to be derived from the cable which was to be laid down? In one sense, indeed, it is an insurance on the cable; that is, it affects the cable, as an insurance on freight affects the ship. The state of the ship and freight are so connected that it is impossible that they should be dissevered, except in cases where the loss of freight is effected by the loss of the goods only, in which case it might equally be said that the insurance on freight is an insurance on the goods. But except in that sense, it will appear, when the language of the policy is examined, that the insurance is an insurance, not on the cable, but on the interest which the plaintiff had in the success of the adventure.'
He then quoted the words already referred to and said (at 146):
'… it is impossible to avoid arriving at the conclusion stated by Martin, B., as the opinion of the Court below, that this was an insurance on the plaintiff's interest in the adventure.'
[89] In the judgment of Blackburn J he said (at 150–151):
'I know no better definition of an interest in an event than that indicated by Lawrence, J., in Barclay v. Cousins ((1802) 2 East 544, 102 ER 478), and more fully stated by him in Lucena v. Craufurd ((1806) 2 Bos & PNR 269, 127 ER 630), that if the event happens the party will gain an advantage, if it is frustrated he will suffer a loss. Now we must see whether the plaintiff was in this position. He was interested in a company which was about to lay down a cable across the Atlantic. If that event happened, there can be no doubt the owner of shares in the company would be better off; if it did not happen, there can be no doubt his position would be worse. It follows, then, equally without doubt, that if by proper words the parties have entered into a contract of insurance for that interest, the policy is good. Now, if they had stopped at the word cable, the plaintiff's interest would not have been correctly or sufficiently described, according to the principle of the case of [M'Swiney v Royal Exchange Assurance Co (1849) 14 QB 634 at 646]. Neither if they had said that it was the cable as shipped on board the Great Eastern, would it have been a sufficient description. But here they have used words as to which I will only say, that no one who looks at them fairly, and reads them in connection with the circumstances, can fail to see that the intention of the parties would be frustrated by such a construction as is contended for by the defendant.'
[90] Group 4 are policies in which the court has recognised interests which are not even strictly pecuniary. In relation to life policies there are policies on own life; policies on husband's life and policies on the life of the wife, see eg Griffiths v Fleming [1909] 1 KB 805, [1908-10] All ER Rep 760. But even in the case of property something less than a legal or equitable or even simply a pecuniary interest has been thought to be sufficient. In Sharp v Sphere Drake Insurance plc, The Moonacre [1992] 2 Lloyd's Rep 501 Anthony Colman QC (sitting as a deputy judge of the High Court) ruled that the insured, Mr Sharp, had an insurable interest in the boat the subject of the insurance. The boat was owned by a company which was 100% owned by Mr Sharp, but it was the two powers of attorney granted by the company to Mr Sharp giving him wide authority to enjoy and use the vessel exclusively for his own purposes that provided the insurable interest. The judge said (at 512):
'That was a valuable benefit which would be lost if the vessel were lost. The legal relation in which he stood to the vessel was that for as long as the powers of attorney remained he was entitled to use it for his own purposes and to exercise over it such control as he saw fit. His powers were such that he could even abandon it to the insurers in the event of a constructive total loss; a relation to the goods sometimes considered decisive on the issue of title to sue …'
[91] In Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd [1996] 2 All ER 487, the judgment of Neill LJ described the judgment of Mr Colman QC in The Moonacre as a 'valuable judgment'. Auld LJ was clearly less sure that the ruling was right, and what he said (at 502) was:
'Nevertheless, [counsel for the plaintiff]'s reservations about enlarging the notion of insurable interest in relation to material damage cover made good sense to me, and they appear to reflect the present state of English law. But where the insurance cover in issue is against some loss consequential on
damage to property, there is no reason why there should be so close a legal relationship between the insured and the property damaged. The insurable interest is in the event insured against rather than in the property the damage to which causes that event. See MacGillivray and Parkington on Insurance Law 8th edn, 1988) p 54, para 129 and Anderson v Morice (1875) LR 10 CP 609 at 722, 723 per Lord Chelmsford.'
[92] I have so far not referred to Deepak Fertilisers & Petrochemicals Ltd v Davy McKee (London) Ltd [1999] 1 All ER (Comm) 69 on which Mr Kendrick placed great reliance. In that case there had been posed for the court certain questions all relating to whether ICI and/or Davy McKee (London) Ltd (Davy) were on certain assumed facts relieved from liability for the destruction of a methanol plant in India. One point taken by Davy, who were sub-contractors, was that they were co-insured under a policy taken out in relation to the period of construction of the work. Furthermore, Davy asserted that Deepak were obliged to make them co-insured in all policies of insurance effected in respect of the plant and that thus Davy should have been made co-insured under a fire policy which was taken out after the execution of the work finished.
[93] Rix J ([1998] 2 Lloyd's Rep 139 at 158) had held that Davy had an insurable interest in the plant:
'… as long as they are arguably responsible … for damage to it. Since it is Deepak's case … that Davy and ICI were responsible for the explosion even though it occurred after a time which Deepak accept saw completion of the plant, I see no reason in principle why Davy and ICI should not be entitled to insure against their potential liability.'
The Court of Appeal ([1999] 1 All ER (Comm) 69 at 85-86) dealt with this aspect in the following way:
'65. In our judgment Davy undoubtedly had an insurable interest in the plant under construction and on which they were working because they might lose the opportunity to do the work and to be remunerated for it if the property or structure were damaged or destroyed by any of the “all risks”, such as fire or flood. Thereafter Davy would only suffer disadvantage if the damage to or destruction of the property or structure was the result of their breach of contract or duty of care. In order to protect the contractor and sub-contractors against the risk of disadvantage by reason of damage or destruction of the property or structure resulting from their breach of contract or duty they would, in accordance with normal practice, take out liability insurance, or, in the case of architects, professional indemnity insurance. We consider Mr Havelock-Allan's submission is well-founded: what they cannot do is persist in maintaining an insurance of the property or structure itself. Two dates are critical. The commissioning of Deepak's plant was completed on 31 January 1992. Davy continued to work on the plant thereafter to rectify construction defects but, by 10 August 1992, all known construction defects had been rectified and rectification work had been inspected. At the latest the construction of the plant was complete by 11 August. Thereafter, with effect from 11 August 1992, Deepak transferred the insurance of the plant from the marine-cum-erection policy (under which Davy and “other Contractors and Sub-contractors appointed from time to time” had been named as co-assured) to the conventional property
insurance policy under which the existing ammonia plant was already insured (ie the fire policy). Davy was not named as a co-insured under this policy. Thus by the time the insurance of the plant was switched to the fire policy, Davy were no longer bound to be prejudiced if the plant was damaged or destroyed by an insured peril.
66. Accordingly, we must differ from the approach adopted by the judge. He held that he could see no reason why Davy (and ICI) should not have an insurable interest in the plant so long as they were arguably responsible in some way for damage to it. He posed the question ([1998] 2 Lloyd's Rep 139 at 158–159): “Why should not an architect or any technical designer or constructor be able to insure himself against his liability for damage to a structure due to his fault, even though the structure fails after its completion?”
67. They could, of course, do so. This would be by means of liability insurance. Even if Davy (and ICI) or any of the sub-contractors had been named in the subsequent fire policy they would not have been covered in respect of their breach of contract or duty under that policy. We therefore reverse the judge's findings on this issue and hold that Davy had no insurable interest in the plant on 30 October 1992, the date of the explosion, giving rise to Deepak's claims.'
[94] There are various points to make on the Deepak case. First, so far as the all-risks policy during the currency of the contract period was concerned, an insurable interest even on property seems to go beyond a 'legal or equitable' interest in the property. A sub-contractor's insurable interest on the judgments in the Deepak case flows from the pecuniary loss that he will suffer from the loss of the opportunity to do work if the plant was destroyed by fire. Second, the Deepak case recognises unsurprisingly that a sub-contractor has an insurable interest in his own liability for negligence which he can also insure. But third, in the Deepak case it was common ground that if Davy were co-insureds they would have a complete answer to the subrogated claim even if damage was due to their negligence. It was thus unnecessary for the Court of Appeal to analyse or deal with how if Davy as sub-contractor was a co-insured it had an insurable interest in the whole plant and thus how as a co-insured Davy would have an answer to any subrogated claim if the explosion had occurred during the period of construction, unless Davy's insurable interest during this period included Davy's liability in negligence or in contract. In the judgment reference is made to Petrofina (UK) Ltd v Magnaload Ltd [1983] 3 All ER 35, [1984] QB 127, Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd [1991] 2 Lloyd's Rep 288 and National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd's Rep 582. No disapproval is expressed of those decisions; it is simply said ([1999] 1 All ER (Comm) 69 at 85 (para 64)) that '[i]n each case the insurable interest subsisted during construction and commissioning'. Those decisions were themselves at first instance being respectively of Lloyd J, Mr Anthony Colman QC sitting as a deputy judge of the High Court and Colman J as he then became. The Petrofina case, was however, also approved in the Court of Appeal (save in one immaterial respect) in Mark Rowlands Ltd v Berni Inns Ltd [1985] 3 All ER 473, [1986] QB 211. They have been followed in Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] 1 Lloyd's Rep 448, a decision of Mr Recorder Jackson QC (as he then was). The Petrofina case, the Stone Vickers case, and the National Oilwell case were also extensively analysed and approved so far as material in the judgment of
Brooke LJ in Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2000] 2 All ER (Comm) 865. That judgment was itself approved when the case went to the House of Lords ([2002] UKHL 17, [2002] 1 All ER (Comm) 918, [2002] 1 WLR 1419). These decisions hold that persons in the position of sub-contractors have an insurable interest in the work or plant as a whole; the definition of that interest relied on in those authorities comes originally from a judgment in the Canadian Supreme Court, Commonwealth Construction Co Ltd v Imperial Oil Ltd (1976) 69 DLR (3d) 558 at 563 which in terms recognised the insurable interest of sub-contractors—
'having its source in the very real possibility (“may”) of liability, considering the close interrelationship of the labour performed by the various trades under their respective agreements.'
They held further that sub-contractors can recover from insurers the full value of the works holding (where appropriate) the balance beyond their interest in trust for the owner. They further held most relevantly that sub-contractors can defeat a subrogated claim based on the sub-contractor's liability in negligence to the owner because the insurers were pursuing a claim in relation to the loss covered by the policy.
[95] MacGillivray on Insurance Law (10th edn, 2003) pp 72–75 (paras 1-155 to 1-157) is critical of these decisions and indeed suggests Deepak Fertilisers & Petrochemicals Ltd v Davy McKee (London) Ltd [1999] 1 All ER (Comm) 69 has added force to the criticism. It may be as reflected in MacGillivray (para 1-159) that the true answer is that the risk of being held liable for causing damage to property, will not by itself create an insurable interest in the property, but if there is a further legal link that interest may also be embraced within the subject of the insurance. I suggest that the question truly is one of construction. It may be more usual to cover liability with liability insurance. But there is no hard and fast rule and where the subject of insurance is intended to be and can properly be construed as embracing the insurable interest in relation to liability, there is no reason not to so construe it. The point is exemplified by the fourth point I make on the Deepak case by reference to the views of Stuart-Smith LJ on the 'fire policy'. The fact that you may have an insurable interest relating to liability does not necessarily mean that that interest will be covered by a policy identified by reference to a specific subject matter. If the insurance policy is simply taken out on the plant, as one would expect from a 'fire policy', post-construction period, such a 'fire policy' may not be construed to embrace the only insurable interest which Davy has. But that should be contrasted with the position where it is intended during the construction period that liability will be embraced.
[96] The final point to make on the Deepak case is that I would suggest that the circumstances in the Deepak case were such that the court may have been more reluctant than in many cases to hold that such insurable interest as Davy had was embraced by the subject of the policy. The decision is not authority for any broader proposition such as it being impossible to cover the insurable interest of liability by virtue of a policy on property if the terms of the policy embrace the insurable interest.
SUMMARY OF THE PRINCIPLES
[97] The principles which I would suggest one gets from the authorities are as follows. (1) It is from the terms of the policy that the subject of the insurance must be ascertained. (2) It is from all the surrounding circumstances that the
nature of an insured's insurable interest must be discovered. (3) There is no hard and fast rule that because the nature of an insurable interest relates to a liability to compensate for loss, that insurable interest could only be covered by a liability policy rather than a policy insuring property or life or indeed properties or lives. (4) The question whether a policy embraces the insurable interest intended to be recovered is a question of construction. The subject or terms of the policy may be so specific as to force a court to hold that the policy has failed to cover the insurable interest, but a court will be reluctant so to hold. (5) It is not a requirement of property insurance that the insured must have a 'legal or equitable' interest in the property as those terms might normally be understood. It is sufficient for a sub-contractor to have a contract that relates to the property and a potential liability for damage to the property to have an insurable interest in the property. It is sufficient under s 5 of the Marine Insurance Act 1906 for a person interested in a marine adventure to stand in a 'legal or equitable relation to the adventure'. That is intended to be a broad concept. (6) In a policy on life or lives the court should be searching for the same broad concept. It may be that on an insurance of a specific identified life, it will be difficult to establish a 'legal or equitable' relation without a pecuniary liability recognised by law arising on the death of that particular person. There is, however, no authority which deals with a policy on many lives and over a substantial period and where it can be seen that a pecuniary liability will arise by reference to those lives and the intention is to cover that legal liability. (7) The interest in policies falling within s 1 of the 1774 Act must exist at the time of entry into the policy, and be capable of pecuniary evaluation at that time.
THE TERMS OF THE DISPUTED POLICY
[98] It is common ground, and clearly right, that the policy in the instant case is a policy to pay fixed sums on the happening of certain events. It therefore falls within s 1 of the 1774 Act. But the fact that sums are payable on certain events does not in my view end the inquiry as to what the subject matter of the insurance is or the inquiry in particular as to whether the subject matter of the insurance embraces the insurable interest. Furthermore, it is not in my view a legitimate starting point to say that because normally such and such a type of risk would be insured in a certain way, therefore a different form of policy must be unlawful. Each case must depend on the precise terms of the policy under consideration. The questions are: what on the true construction of the policy is the subject matter of the insurance? Is there an insurable interest which is embraced within that subject matter? Is the insurable interest capable of valuation in money terms at the date of the contract? The question that will then arise under s 3 is whether the sum payable under the policy is greater than the value of the pecuniary interest valued as of the date of the policy.
[99] In argument there was much concentration by Mr Kendrick on the fact that on the death of an original person a sum became payable to Steamship; much concentration on the fact that the identity of that original person might not even be known at the date when the policy was entered into; much concentration on the question of the interest that Steamship had in the life or health of any original person. What interest (it was argued) was there in the life of any original person in relation to whom liability of the rigger and a member was never established, for example? I have come to the view that that is to look at this policy through too narrow a perspective.
[100] The disputed policy is not on any view simply a 'life' policy which pays Steamship on the death of a particular identified individual. The terms of the declaration, and the wording agreed, demonstrate that this was insurance covering a three-year period. It was agreeing to pay fixed sums by reference to bodily injury and/or illness sustained by original persons but in respect of losses occurring in respect of member entries. Members are defined as owners and/or other persons interested in any entered vessel to whom the insured has obligations under its rules. One can see from the wording of the policy that the object of the policy was to cover Steamship for the losses it would suffer as insurer of its members under its rules. I emphasise this is not seeking to place a construction on the policy to the effect that sums were only payable once liability was established against a member and as against Steamship, but the policy was devised by its terms to compensate for those losses which over a three-year period were bound to occur. The policy did so by reference to fixed sums payable on certain of the events, those events being within the general ambit of events for which members and thus Steamship would have to pay. Furthermore, by virtue of the construction which the judge put on the policy, with which I have said I agree (see [28], above), Steamship would only be entitled to keep those sums paid as fixed sums where liability as between the member and the original person was in fact established.
[101] If one asked the question whether Steamship had a pecuniary interest in covering losses over the three-year period for which it may be liable, it seems clear that it would have and indeed that is not disputed. Did that interest exist at the time the policy was taken out? The answer is, as in Dalby v India and London Life-Assurance Co (1854) 15 CB 365, 139 ER 465, Steamship had a legal obligation which might lead to substantial sums being payable. Was it capable of pecuniary evaluation? The answer is that it was, or at the least it was possible to say that the overall limit did not exceed the potential liability. Is the subject so specific that it does not embrace the interest? The answer in my view is No. I emphasise again the wording. The wording provides that 'Original Persons' by reference to whom a fixed benefit must be paid must be persons engaged on an 'entered vessel'. An entered vessel is one entered by a 'member' of the club with Steamship during the relevant period in respect of any of the risks 'enumerated' in the wording itself. A member has to be a person interested in any entered vessel and the person to whom Steamship 'has obligations under its rules … in respect of the bodily injury … suffered by an Original Person'. It does not seem to me to be an abuse of language to say that Steamship has an insurable interest in the lives and well-being of original persons as defined by the policy. There is thus no reason not to construe the subject of the disputed policy as embracing that insurable interest.
[102] In my judgment, in agreement with Langley J, I see no reason why the disputed policy should be held to be in violation of s 1 of the 1774 Act.
SECTION 3
[103] Having identified the insurable interest embraced by this policy I find it difficult to see quite what argument Mr Kendrick can maintain on behalf of Sun Life.
[104] The interest in persons and events the subject of this insurance which Steamship had, so far as I can see from the cases, has to be assessed on the worst- case basis. In Dalby's case the value of Anchor's interest in the life of the Duke of Cambridge was assessed on the basis that Anchor might have had to pay the full
sums due under the policies that they had issued. There was no suggestion that any discount to that value should be applied by reference to facts which could easily have been assumed as at the date of the taking out of the relevant policy ie that the policies might have been surrendered, as they were. Furthermore, in cases in which the court has held that a creditor has an insurable interest in the life of the debtor, the value of the interest is again assessed on the worst-case basis without any discount being given for the possibility that the insured may be repaid the debt and thereby obtain double recovery.
[105] If that be the correct approach then what Sun Life have to show is that there was no possibility of Steamship's liability to its members reaching the limits under the disputed policy, those limits being $US1m from any one event and a total limit of $US100,560,000 in respect of losses over the whole period.
[106] What Sun Life appear to be attempting to do is, with the benefit of hindsight, to examine whether Steamship is in fact recovering more than that for which it is liable under its policy with its members. In particular they seem to be indulging in an exercise which looks at that question not just by reference to the policy which is disputed, but by reference to the excess loss and top-up policies which Steamship also took out.
[107] If this were a valued policy then, in the absence of fraud, the value fixed by the policy would, as between the insurer and the insured, be conclusive of the insurable value of the subject intended to be insured (see s 27(3) of the 1906 Act). Once appreciated that value must be assessed at the time that the policy is entered into, and once appreciated that the assured is entitled to place such value on his interests as reflects the worst-case scenario, I do not think that Sun Life have even begun to demonstrate that Steamship are seeking to recover an amount in excess of the value of the interest as at the date of the policy.
[108] I should also add that even performing the calculations they do, it is only the existence of the excess of loss or top-up reinsurance that provides a factual case that Steamship are recovering in excess of their liabilities. In my view Hebdon v West (1863) 3 B & S 579, 122 ER 218 shows that if that provided an argument for anyone that Steamship could not recover more than the value of their insurable interest, it provided it to the excess of loss or top-up insurers and not Syndicate 957.
[109] Thus, again in agreement with Langley J, Sun Life gain no advantage from s 3.
[110] I would accordingly dismiss the appeal on the insurable interest issue for the above reasons, and on the authority issue for the reasons given by Dyson LJ.