Insurable interest under South African law revisited
Introduction and background
Insurable interest continues to evolve under English and South African law and should be front of mind for parties involved in the logistics sector who want to manage their risk. The general approach taken by the courts in both countries is to ask whether the insured stands to suffer a commercial or financial loss as a result of an insured peril. As long as the contract is not a wager or contrary to public policy, the insured will be entitled to the indemnity even if it has not suffered a direct financial loss such as where the insured claims for loss of cargo as bailee where it does not own the cargo. Although the case discussed here is ten years old, it contains useful guidance on the factors courts will consider when deciding whether an insured has sufficient interest in an asset to entitle it to claim an indemnity under a marine insurance policy.
The decision in Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd arises out of a claim by Lorcom Thirteen (Pty) Ltd (Lorcom) against Zurich Insurance Company South Africa Ltd (Zurich) for R3 million under an insurance policy. The policy was issued for a fishing vessel named Buccaneer, which was lost at sea on 8 January 2008. The primary issues at trial were whether Lorcom had an insurable interest in the vessel and whether the loss fell within the policy coverage.
Facts of the Case
Mr. Theart, Lorcom’s controlling interest, negotiated with Mr. JI Crous to acquire the vessel by purchasing the members’ interest in Millivent Thirty Four (Pty) Ltd (Millivent), which owned shares in Lorcom. The purchase agreement was signed on 20 February 2007, and Theart paid a deposit, gaining control over Lorcom and the vessel. Although the vessel was owned by Gansbaai Fishing Wholesalers (Pty) Ltd (GFW), Lorcom held the fishing permit and was entitled to catch and sell fish using the vessel.
The insurance policy was issued by Zurich on 23 February 2007, with Lorcom as the insured party. The policy covered the hull, machinery, and equipment of the Buccaneer for R3 million. The policy was subject to the Institute Fishing Vessel Clauses, which included coverage for total loss and liability.
Insurable Interest
The court examined whether Lorcom had an insurable interest in the vessel. Lorcom argued that Lorcom had an insurable interest due to its shareholding in GFW, its right to use the vessel, and its expectation of becoming the owner of the vessel. Zurich contended that Lorcom did not have an insurable interest as it was not the owner of the vessel.
The court applied South African law, specifically Roman-Dutch law, to determine the requirement of an insurable interest. The concept of insurable interest in South African law is not explicitly defined by statute but is derived from common law principles. The court noted that an insurable interest is necessary to distinguish an enforceable insurance contract from a wagering transaction.
The court provided an extensive analysis of the concept of insurable interest under South African law. The court emphasized that an insurable interest exists when the insured party has a relationship to the insured property that gives them a financial or other interest in its preservation. This interest must be sufficient to prevent the insurance contract from being considered a wager.
Key Points on Insurable Interest
- Ownership and Control: The court recognized that ownership of insured property naturally confers an insurable interest. However, non-owners can also have an insurable interest if they have a financial stake in the property’s preservation.
- Financial Loss: The insured party must demonstrate that they would suffer financial harm if the insured property is lost or damaged. This harm can extend beyond direct patrimonial loss to include other forms of financial prejudice.
- Liberal Interpretation: The court adopted a liberal approach to insurable interest, allowing for various relationships to the insured property to qualify as insurable interests. This approach aligns with the principle that insurance contracts should be enforceable if they serve a legitimate purpose and are not mere wagers.
- Shareholding: The court held that a 100% shareholder in a company has an insurable interest in the company’s assets. This interest is sufficient to sustain insurance cover measured by reference to the value of the insured asset.
The court found that Lorcom had an insurable interest in the vessel and was entitled to be indemnified for the insured value of the vessel under the policy based on the following factors:
- Right of Use: Lorcom had the right to use the vessel and exploit the fishing permit, which gave it a financial interest in the vessel’s preservation;
- Expectation of Ownership: Lorcom had a well-founded expectation of becoming the owner of the vessel, which further supported its insurable interest; and
- Shareholding: Lorcom’s 100% shareholding in GFW provided an insurable interest in the vessel, as the company’s financial welfare directly impacted Lorcom’s financial welfare.
Conclusion
The judgment highlights the flexible and liberal approach to insurable interest under South African law, ensuring that insurance contracts serve their intended purpose of providing financial protection against genuine risks. We anticipate that this liberal and commercial approach to insurable interest will continue to evolve and that the courts will continue to extend the ambit of parties entitled to claim under both marine and non-marine insurance policies.
The court held that the insured was entitled to payment of the full insured value of the vessel on the basis of the factors set out above. The judgment has been criticised because it seems to ignore the fundamental requirement of insurance, namely that an insured is entitled to be indemnified only to the extent of its loss. The problem did not arise in this case because the parties had agreed the value of the claim. They accordingly did not have to deal with the question as to whether, for example, if Lorcom was a 50% shareholder, they would only be entitled to 50% of the insured value. It also does not deal with the question as to what would happen if the vessel was also insured in full under another policy by her actual owner. If the latter had in fact happened, this would mean that insurers may have to pay twice for the same loss which may change the nature of the contract into a wager.
It may be that the second insurer would be entitled to take into account the payment to the first insured, but there does not appear to be a basis for that in law, particularly if two different insurers under two different polices are involved. A court faced with such a problem in the future may take this into account when trying to determine whether the first or second insured in fact has an insurable interest.
Those involved in insuring assets and risks under insurance policies subject to South African law are reminded by this judgement that parties other than the owner and/or party who bears risk of loss in property may have an insurable interest in that property. This is particularly true in the marine sector where international trade practice includes complex contracts where more than one party may have an insurable interest in the insured property at various stages in its transport.