A Person is entitled to take out insurance only if he has an "insurable interest" in the property or the life being insured.
An insurance policy is invalid unless the person taking out the insurance had an "insurable interest" in the property in question.
It is notorious that, if one takes out an insurance policy, the insurer will happily accept your premiums for years and then, when you make a claim, will start looking for legal excuses for not paying.
One of the reasons why an insurer may deny liability under the policy is that the person who took out the insurance cover had no insurable interest in the insured property. For example, I have no insurable interest in the life of a complete stranger, who has no connection to me or my business interests. If I take out a policy on such a person's life, the insurer will be entitled to refuse to payout the proceeds of the policy to me. But I do have an insurable interest in the life of my spouse or my business partner.
Similarly, I have no insurable interest in your house. But if I am a bank from whom you borrowed money to buy the house and I have a mortgage bond over the house as security, then I have an insurable interest in the house.
What exactly is the criterion for determining whether or not a person has an insurable interest in property? It is not only the owner who has an insurable interest, as is illustrated by the example, above, of the bank having an insurable interest in the house over which it holds a mortgage.
The most controversial judgement in regard to insurable interest is that of Macaura v Northern Assurance Co. Ltd decided by the House of Lords in 1925.
Macaura was the owner of a timber plantation. He insured it against fire in his name. He then sold the plantation to a company in which he held all the shares, but did not change the insurance policy. The plantation burned down. Macaura claimed on the policy. The insurer refused to pay on the grounds that Macaura had no insurable interest in the plantation.
Macaura argued that, although he did not own the plantation, he held all the shares in the company that was the owner, and therefore that he did have an insurable interest in the plantation.
When the matter came before the House of Lords, it held that Macaura had no insurable interest in the plantation and that the insurer therefore did not have to payout under the policy, The company was the owner of the plantation, said the court. Macaura was merely a shareholder in the company; what he owned were shares, and had no legal right in the plantation itself.
The weakness in the House of Lord's reasoning is clear. It is true that all that Macaura held were shares in the company that owned the plantation, But he was the sole shareholder. and when the plantation burned down, the value of his shares was drastically reduced, and he therefore suffered financially as a result of the fire. But the House of Lords held that this kind of interest was too remote to be considered an insurable interest.
In Lynco Plant Hire & Sales Bk v Univem Versekeringsmakelaars Bk 2002 (5) SA 85 (T) the Transvaal High Court refused to follow the decision in Macaura's case, and held that a person has an insurable interest in property if he would lose something of significant commercial value if the insured property were to be destroyed, and that it was irrelevant what kind of legal right he had in the property.
On the basis of this reasoning, Macaura would have had an insurable interest in the plantation, even though he was not the owner of the plantation, merely the sole shareholder of the company that was its owner.
South African law has thus deviated from principles laid down by the English courts in Macaura's case and takes a less legalistic approach to what constitutes an "insurable interest".