The common law requirement that an insured must have an insurable interest in the subject matter of the insurance policy was abolished under the Insurance Contracts Act 1984 (Cth) for general insurance contracts, so that an insured need only have suffered a pecuniary or economic loss to be claimed under a policy which has been evidenced in the case of Barroora Pty Ltd v. Provincial insurance (Aust) Ltd (1992) 26 NSWLR 170.
Before Insurance Contracts Act 1984 (Cth) (I CA), Australian common law required an insured to have an “insurable interest” in the subject matter of the insurance. This requirement was aimed at gambling and betting to prevent insurance from being used as a form of gambling. Life Insurance Act 1774 (Imp.) Banned in England from insuring the life of third parties in the hope of profiting from their death. (Historically, it is interesting to note that such conduct obviously occurred regularly enough to require a law to make it illegal.) The insured must have a real legal or fair interest in the object of the policy. insurance, for example, by owning the insured’s personal property. A mere economic interest in the subject matter of the policy which is created by the insurance contract itself was not sufficient for an insured to make a claim.
However, with the introduction of the ICA, the requirement for an insured under a general insurance contract to have an insurable interest was abolished. Pursuant to Articles 16 and 17 of the LSA, it is sufficient that the insured has suffered pecuniary or economic damage as a result of the object being damaged or destroyed, as excerpted below:
“16 (1). A general insurance contract is not null simply because the insured did not have, at the time of conclusion of the contract, an interest in the subject of the contract.“
17.When the insured under a general insurance contract has suffered pecuniary or economic loss due to that the goods covered by the contract have been damaged or destroyed, the insurer is not exempt from its liability by virtue of the contract solely because at the time of the loss, the insured had no legal or equity interest in the property“
As a result, the category of persons who can be insured under a general insurance contract has been broadened. For example, depending on the wording of the insurance policy, a person could insure property that they do not own, to the extent that damage to that property would cause them economic loss.
The case of Barroora Pty Ltd v. Provincial insurance (Aust) Ltd (1992) 26 NSWLR 170 points out how the abolition of the insurable interest requirement in the ICA allowed entities without a legal or equitable interest in insured property to sue under a general insurance contract.
Barroora Pty Ltd v. Provincial insurance (Aust) Ltd (1992) 26 NSWLR 170
In this case, Barroora Pty Ltd was the first complainant and BLE Capital was the second complainant. BLE Capital financed a company bought by Barroora by providing financing to Barroora’s parent company, Hanipe Pty Ltd, which Barroora secured by deed. In the deed, Capital obtained a floating charge on some of Barroora’s assets and Barroora undertook to keep the affected property insured against the risk of fire on behalf of Barroora and Capital. The act also included a provision for the application of the proceeds of any claim under the insurance policy for the benefit of Capital. Subsequently, Barroora took out an insurance policy with Provincial Insurance. However, the insurance certificate only named Barroora as “the insured” and named Capital under the heading “Extensions” without explanation. Part of the stock insured in the trade was then destroyed by fire. Provincial Insurance denied a claim by Capital, saying it was not the “insured” under the policy and had no insurable interest because Capital only had a floating charge. on the destroyed property of Barroora.
The Court held that Capital did not have a sufficient fair or legal interest in the destroyed property to have an insurable interest which was required under the Life Insurance Act 1774 (Imp) for fire insurance contracts prior to the promulgation of the ICA. However, as this law was repealed under the ICA, the floating charge of Capital was deemed sufficient for it to have a claim under Articles 16 and 17 of the ICA. This was even if the floating charge of Capital had not yet crystallized into a fixed charge. Further, even though Capital was not explicitly named “the insured” in the insurance policy, the Court concluded that naming Capital under the heading “Extensions” was sufficient to infer that Provincial Insurance had the intends to hedge Capital. At 180, Justice Brownie held:
“The insurance contract currently pursued falls under the Insurance Contracts Act 1984 (Cth) … It does not matter therefore whether or not Capital is one of the “insured” for the purposes of Articles 16 and 17: because there is no rule of law, whether common law or statute, which prevents someone like Capital, having what I suppose to be a floating charge on Barroora’s actions from insuring those actions ; or in the present circumstances, to rely on the contract concluded by Barroora with the defendant for the insurance of this stock. “
Barroora states that the threshold for a party to make a claim under a general insurance contract has dropped significantly since the elimination of the insurable interest requirement under the ICA. Therefore, it is important that insurers clearly formulate insurance policies to ensure that affected parties are insured.
Separately, the ICA does not apply to insurance contracts listed in section 9, which include reinsurance, certain health insurance contracts and marine insurance. In reality, however, the insured must still have suffered a loss to recover under an insurance policy.