Insurance Contracts CP - Law Reform Commission

drawings themselves, Auld LJ and Sir lain Glidewell both expressed the view that the drawings could
have been insured on the basis of Lawrence J's 'factual expectation' test.
2.39 As Lowry and Rawlings argue, this line of authority can, therefore, be seen as amounting to
some recognition of the broader conception of an interest as adopted in Canada and elsewhere.
However, a limit was placed upon this trend by the Court of Appeal in Deepak Fertilisers & Petrochemical
Corporation v Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd. 73 The Court did accept
the broad conception of insurable interest. It agreed that a sub-contractor in a building contract
possessed an insurable interest in the entire works during construction. This was because of the
economic disadvantage which would be suffered if, in the event of the structure being damaged or
destroyed, they lost the opportunity to complete the work and receive remuneration. However, once the
work had been completed the court stressed that such an interest came to an end. Deepak itself has
been criticised by a later Court of Appeal Decision in which that Court was anxious to carve out an even
broader notion of insurable interest for sound commercial reasons. 74
2.40 It is noteworthy that the broad conception of insurable interest has been utilised beyond the
confines of construction insurance. In Mark Rowlands Ltd v Berni Inns, 75 the issue arose because of a
tenancy agreement that required the lessor to insure premises against fire and to use any proceeds of
insurance to rebuild. The tenant contributed to the premium and was relieved of the duty to repair in the
event of fire damage. The Court of Appeal held that the insurers, who had paid out on the policy following
a fire, could not recover against the tenant. The tenant was not mentioned in the policy, but it was clear
from the terms of the lease that the insurance was effected on his behalf. The court took into account the
fact that the tenant was required to contribute to the premium and that the lease excluded his liability for
fire. Although the insurers were unaware of the arrangement in the lease, the court held that it must have
been the intention of the lessor and lessee that in the event of a fire the lessor's loss would be recouped
from the insurance policy. This meant there would be no other claim against the tenant by the lessor, or,
therefore, by the lessor's insurer. In his judgment, Kerr LJ ignored Lord Eldon's definition and explicitly
adopted what he termed the 'classic' definition of insurable interest given by Lawrence J. 76
2.41 Clearly, where the lessor and the tenant jointly take out an insurance policy, the insurer cannot
use the covenant to keep the house in good repair as a means to sue the tenant for damage to the house
because the tenant would be entitled to claim against the policy; unless, of course, the tenant has
deliberately damaged the property, in which case he or she could not claim against the policy. The tenant
will not be able to claim immunity from a subrogated claim by the lessor's insurers in respect of damage
to any parts of the building which are not covered by the lease, as, for instance, where the tenant
negligently sets fire to his or his part of the premises and that fire also damages premises occupied by
another tenant of the same lessor in the same building. 77
(3) Conclusions on the Bitish debate
2.42 The anxieties over moral hazard and wagering that prompted Lord Eldon to reach his view of
insurable interest seem less relevant in the context of modern commercial practice. Lord Eldon‘s test
does not seem to achieve the objectives he believed it would. It does not necessarily provide any better
deterrent against the moral hazard that the insured might destroy the property than the factual
73
74
75
76
77
[1999] 1 Lloyd‘s Rep. 387.
Feasey v Sun Life Assurance Corp of Canada [2003] 2 Lloyd‘s Rep IR 637: see Templeman in Soyer,
Reforming Marine and Commercial Insurance Law (Informa Law 2008) p.207.
[1986] QB 211. Berni Inns was distinguished by Lord Bingham in Co-operative Retail Services v Taylor Young
Partnership [2002] UKHL 17, (2002) 74 Con LR 12, at paragraph 4 of his judgment.
See above at para 2.20.
See Barras v Hamilton 1994 SLT 949.
40