Insurance Contracts CP - Law Reform Commission

socially beneficial to encourage widespread insurance than to restrict it. There seems, therefore, no
convincing reason in this context for interfering with freedom of contract and, in particular, for not
requiring insurers to meet liabilities under contracts which they have freely entered into and for which they
have received premiums.
2.31 In Australia Lord Eldon's approach has also been discarded. The Australian Law Reform
Commission (ALRC), in its Report Insurance Contracts 51 concluded that Lawrence J's formulation ―would
allow more flexibility to insurers and to the insuring public, without in any way promoting gaming and
wagering in the form of insurance or adding to the risk of destruction of the property insured.‖ 52 In its
opinion, technical rules had prevented the insured in Macaura from recovering the loss actually suffered
by him. The ALRC considered that the strict legal interest test gave rise to results that were socially
undesirable. For example, a named beneficiary under the will of a living testator stands to lose much of
his projected inheritance if the testator‘s property is destroyed by fire. Yet, if the beneficiary takes out a
fire policy on the property, the legal interest test will prevent recovery notwithstanding actual loss. The
ALRC also thought that the restrictive test produced commercially undesirable results. By way of
example, it cited Truran Earthmovers Pty Ltd v Norwich Union Fire Insurance Society Ltd 53 , in which a
purchaser of a bulldozer was held to have no insurable interest in the vehicle even though he had lent the
owner money which was to be deducted from the purchase price: 'Once again, technical rules prevented
recovery of an actual loss.' 54 The ALRC therefore proposed legislative reform to provide that 'where an
insured is economically disadvantaged by damage to or destruction of the insured property, the insurer
should not be relieved of liability by reason only that the insured did not have a legal or equitable interest
in the property.' 55 This was given statutory effect by the Insurance Contracts Act 1984, section 17. 56
Thus, an insurable interest is not required in Australia.
2.32 Although early US case law followed Lord Eldon's narrow formulation, 57 the view that most
states have now adopted is that economic interest is the determinative test. 58 . Some 30 years before the
decision in Macaura, the New York courts recognised that shareholders did have an insurable interest in
corporate assets: Riggs v Commercial Mutual Insurance Co. 59 Statute law in the USA reflects this
pattern. Two statutory examples will suffice. The California Insurance Code, s 281 provides that '[e]very
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Report No 20 (1982), ch 5. See also the ALRC Discussion Paper No 63, Review of the Marine Insurance Act
1909 (2000), ch 7.
ALRC Report No 20, at para 120.
(1976) 17 SASR 1.
Report No 20, at para 119.
In reaching its recommendation for the adoption of economic interest as the determining question, the ALRC
noted that several American States had adopted this test, citing, by way of example, the New York Insurance
Law s.158, which defines insurable interest as including 'any lawful and substantial economic interest in the
safety or preservation of property from loss, destruction or pecuniary damage.'
See also s.7(1) of the New Zealand Insurance Law Reform Act 1985, which abolishes the requirement of
insurable interest in the case of life insurance and all contracts of indemnity insurance.
See, for example, Farmers' Mutual Insurance Co v New Holland Turnpike Road 122 Pa 37 (1888).
See, for example, the decision of the Supreme Court of Massachusetts in Hayes Milford Mutual Fire Ins Co 49
NE 754 (1898). For Californian case law see Smith v Royal Insurance Co. 5 F.Supp. 436 (1933) (later
reversed on other grounds); Burns v California Fair Plan 152 Cal App. (4 th ) 646 (2007). For New York case
law see Scarola v Insurance Corp of North America 31 NY (2d) 411 (1972) and Lane v Sec. Mut.Ins. Co. 96
NY (2d) 1 (2001). On the related issue of ownership, Appleman, Insurance Law and Practice sect. 2122
states, ―the excessive technical construction which sole and unconditional ownership policy [behind property
insurance] has outlived its usefulness in the insurance field and therefore no more should be required in these
times of modern industrial development and business expansion than an insurable interest in the property”
(emphasis added). These comments first appeared in Appleman in 1949.
125 NY 7 (1890).
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