A recent decision by the English Court of Appeal rejects that an insurable interest should be ascertained in the same sense as required for determining whether or not a buyer has a proprietary interest in goods, and that an insurable interest is not to be dependent upon the goods being ascertained or part of a sufficiently identified bulk.

This case, Quadra Commodities S.A. and XL Insurance Company SE and Others: Decision of the Court of Appeal in England, 21 April 2023 (Quadra case) raised the question as to whether the Claimant had an insurable interest in certain cargoes of grain in circumstances in which it had been defrauded by the sellers, and therefore had made a claim under its marine cargo policy. It has been a few years since the legal requirement of an insured to have an insurable interest in the goods when they are insured under a marine policy has been discussed in the Courts. 

Before considering this case, a brief recapitulation of this area of the law might assist.

The Australian Marine Insurance Act 1909 (MIA 1909) deals with "Insurable Interest" in sections 10-21. Section 10 says that unless the assured has an insurable interest, or no expectation of acquiring one the contract is deemed to be one of gaming or wagering. Section 11 (1) says that everyone who is interested in a marine adventure has an insurable interest. Section 11(2) mirrors section 5(2) of the Marine Insurance Act 1906 (MIA 1906). They provide as follows:

"In particular, a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or maybe prejudiced by its loss, or by damage thereto or by the detention thereof, or may incur liability in respect thereof." 

For non marine policies the Insurance Contracts Act 1984 (ICA) introduced reforms in 1984 in sections 16-18 severely limiting the relevance of this legal concept. Sections 16 and 17 provide that:

16 "A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into; an interest in the subject matter of the contract."

And;

17 "Where the insured under a contract of general insurance has suffered a pecuniary or economic loss by reason that property, the subject-matter of the contract has been damaged or destroyed, the insurer is not relieved of liability under the contract by reason only that, at the time of the loss, the insured did not have an interest at law or in equity in the property."

The Australian Law Reform Commission (ALRC) in its review of the Marine Insurance Act 1909 in Report 91 of April 2001 suggested that the MIA 1909 in sections 10 to 12 should be the subject of similar reform to the ICA, by incorporating the same language but changing the words "general insurance" to "marine insurance" (Recommendation 28 of its Report.) These reforms were strongly opposed by the insurance industry. The ALRC Recommendations have never been enacted. 

The Maritime Law Association of Australia and New Zealand, which made recommendations for reform of the Marine Insurance Act to the Australian government in 2017, did not seek to achieve reform in relation to insurable interest. It is also of note that when the UK reformed its MIA 1906 in the Insurance Act 2015 it made no change to the Insurable Interest provisions. In light of the decision of this latest United Kingdom Court of Appeal decision it may be appropriate to reconsider, together with industry, whether the time has now come for amendments to the Australian Act, taking into account the commercial good sense contained in this decision and the ALRC's recommendations by modifying the insurable interest provisions in MIA 1909. 

The ALRC in its Report discussed extensively the case of NSW Leather Co Pty Ltd v Vanguard Insurance Co Ltd [1991] 25 NSWLR 699 (Chapter 11 of the Report at paragraphs 11.28 to 11.43). It involved the shipment of two containers of leather which had been purchased on free on board (FOB) terms from Brazilian suppliers, to be shipped in containers from Rio Grande to Sydney. It was common ground in the proceedings that the containers had been broken into prior to loading and the bulk of the leather stolen. Fresh seals had been fraudulently attached. The trial judge had held in the claim made against the underwriters under the open cargo policy that as the sale contracts were FOB contracts the risk had not passed to the claimant until shipment and since the goods were stolen prior to shipment the buyer was not at risk and suffered no loss at that stage. The judge had also concluded that the buyer had no insurable interest in the goods prior to loading and so could not rely on the warehouse to warehouse clause under the open cargo policy. It was also held that the "lost or not lost" clause did not entitle it to recover. 

The appeal from that decision was however successful, it being held that a buyer of goods on FOB terms insured under a marine policy on goods containing a "lost or not clause" was entitled to recover for the loss of the goods stolen from sealed containers before they were loaded on board. However, the Court of Appeal also held that such a buyer, by reason of the profits it expects to derive from the safe arrival of the goods and the risk that it would pay for the shipping documents relating to goods which had been stolen prior to loading or loss it would otherwise suffer because the documents were forged or fraudulent does not have an insurable interest in the goods prior to the passing of risk. That aspect of the decision is now at odds with the Quadra case.

The Facts

The grain had been purchased in late 2018 from Agri Finance SA and other companies in the group in Ukraine. In purported performance of the sale contracts warehouse receipts had been issued to the Claimant by a warehouse operator in the group. It turned out multiple warehouse receipts were issued in respect of the same goods to different buyers, thereby committing the fraud. On 24 September the warehouse receipt in question in relation to one of the cargoes was issued and an invoice sought payment against the presentation of the warehouse receipt. The next day the Claimant paid 80% of the price of the cargo. Under the contract the balance was then payable when shipping documents were issued, and title was to be transferred at the Place of Delivery at the sea trade port. Nearly 4 months later the Claimant sold 800 mt of the 5000 mt of corn it had bought; and 799.1 mt of corn was transported to a grain terminal. The balance of the 4,200 mt of corn was one of the claims made in the proceedings. All the cargoes the subject of the claims had been declared by the Claimant under the Open Cargo Policy.

The Decision
Judgment had been entered at first instance in favour of the Claimant insured and the insurers were also unsuccessful on this appeal. 

The Legal Issues
The legal issues addressed in the High Court in London included the question of insurable interest and in particular section 5(2) of the Marine Insurance Act 1906, the identical provision to section 11(2) of MIA 1909.

The policy contained the following provisions:

"Interest 

On goods and/or merchandise and/or cargo and/or interest of every description incidental to the business of the Assured, or otherwise,…, the property of the Assured or for which the Assured have or assume a responsibility to insure…consisting principally of but not limited to cereals, grain…in container, bulk and/or break bulk.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipt(s) and/or warehouse receipts and/or shipping document(s)…

Misappropriation

This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

By misappropriation is exclusively understood:

1. The use or disposal of the insured goods, in bad faith, by a contracting party (either suppliers and/or customers) of the assured and/or the policy holder or by the servant of a contracting party, with or without the involvement of the storage manager, contrary to the purpose for which he has received the insured goods, or in disregard of the instructions given to him by the assured/policy holder and/or by any other natural and/or legal person authorised to give such instructions;

2. The physical or legal delivery, in bad faith, of the insured goods to any natural and/ or legal person by a contracting party of the assured and/or the policy holder or by the servant of the contracting party, when this contracting party or this servant was aware or reasonably should have been aware that this natural and/or legal person was not entitled to the delivery of the insured goods.

The risks covered under this clause will start at the time the Policy holder and/or affiliated companies assume an interest in the cargo and/or are in possession of a document of title and shall end when this interest finally ceases. The present clause shall benefit exclusively to the Policy holder and affiliated companies and shall prevail notwithstanding other provisions agreed in the Policy." 

The first instance judgment had then referred to the judgment of Waller LJ in Feasey v Sun Life Assurance Corporation of Canada [2003] EWCA Civ 885; (2003) Lloyds Rep IR 637 where it was elucidated that the requirements of insurable interest interrelate with the definition of the subject matter of the interest. The first of four groups being where the subject matter is defined as an item of property.

It was agreed in the proceedings that the policy wording to which reference has been made above did not cover a situation where no property had existed and thus, has not been lost or damaged. There was no appeal from that part of his decision. 

The way the argument was put, and accepted by the Judge at first instance and the Court of Appeal, on behalf of the Claimant was on the basis that the subject matter of the insurance was property and the case was distinguishable from the cases in which there had been no physical loss of the goods because in this case there had been goods in which the Claimant had an insurable interest and they were lost. That was based on the physical presence at the elevators at the time the warehouse receipts were issued, and the documentary evidence produced to support that finding. The argument put forward in support of the contention that the Claimant had an insurable interest was that it had paid the price under the purchase contracts. It contended that it had entered contracts to purchase the goods which were to be transferred or delivered upon presentation of the warehouse receipts and had agreed to pay or had paid the purchase price in full in the case of some and as to 80% in the case of others and therefore had a right in relation to the goods derivable from "a contract about the property" in the words of Lord Eldon in Lucena v Crauford [1806] 2 Bos and PNR 269, and that was irrespective of whether it had obtained a proprietary or possessory title to the goods or whether there were other potential conflicting interest in the goods. 

The judge at first instance found support in this argument in the decision of the Supreme Judicial Court of Maine in Cumberland Bone Company v Andes Insurance Co 64 Me 466 [1874] in which it had been held that the insured had an insurable interest in goods which it had purchased but had been left in storage with the seller unsegregated from other stock belonging to the seller and which had been destroyed by fire. The interest was described as an equitable interest albeit that the risk and property in the goods remained with the seller. 

The judge at first instance had also found that the Claimant had an insurable interest by reason of its entitlement to an immediate right to possession of the goods by reason of the storage agreement and the warehouse receipts. The judge rejected the Claimant's argument that it had, in addition, a proprietary interest in the goods because of the Sale of Goods Act 1923 provisions dealing with the sale of unascertained goods. The judge had also concluded that the insurers had been correct in arguing that the purchase contracts had also provided that title would only pass at the seaport. 

He found that the goods had been lost by reason of misappropriation but had rejected the Claimant's alternative case under the fraudulent documents clause on the basis that the physical loss of the goods was not caused by acceptance of fraudulent warehouse receipts. 

In seeking to support the judgment at first instance in the Court of Appeal counsel for the Claimant relied upon what had been said by Sir William Brett M.R.(later Lord Esher) in the Court of Appeal in Inglis v Stock [1884] 12 QBD 564 at 571:

"In my opinion it is the duty of a court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer." 

Reliance was also placed, in a more modern context, of a statement by Ward LJ in the Feasey v Sun Life Assurance Corporation of Canada [2003] case in which Lord Justice Ward said: 

"Insurance business is no longer conducted in the coffee shop. It is now a massive market and, for contracts between commercial men to be respected, the law should march with the times. I wish, therefore, to go as far as I possibly can to find for Steamship". 

In support of the appeal counsel for the insurers had identified practical consequences of the judge's decision to the effect that it had effectively converted the policy from a physical loss one to a financial loss one. A case relied upon in that regard was Engelhart CTP (US) LLC v Lloyds Syndicate 1121 [2018] EWHC 900 in which a cargo claimant had been unsuccessful against insurers under its open cargo policy when, having purchased copper ingots from a supplier which had been on sold to a consignee in China and one of the two consignments acquired had never been shipped and it had been held that there had been no physical loss or damage to the cargo and therefore recovery was not possible. In that case the cover was in accordance with the Institute Cargo Clauses A and contained two further provisions identified as "container clause" and "fraudulent documents clause".  The Court of Appeal distinguished that case, on the basis that, unlike that case, the Claimant's claim did not involve "non existent goods". 

The decision of the Court of Appeal in dismissing the appeal also found that there was ample evidence before the judge from which he was entitled to reach the conclusion that he had reached to the effect that multiple warehouse receipts for the same grain had been issued and it had never been contended that the fraud involved there being no goods at all, and that the warehouse receipts although they could not be relied upon as evidence that the Claimant owned the grain in question, they were evidence of the existence in the elevators, at the time of their issue, of grain of the quantity and description set out in those documents. 

The Court of Appeal was also satisfied that the Claimant has an insurable interest, it being ascertained from:

"the terms of the contract of insurance, the nature of the insurable interest being discerned from all the surrounding circumstances and whether the contract of insurance embraces the insurable interest intended to be covered being a question of construction. In the present case the Policy contained the Declarations clause and a wide definition of interest in the Interest Clause". 

The Court of Appeal rejected the argument by the insurers that the question of an insurable interest should be ascertained in the same sense as required for determining whether or not a buyer has a proprietary interest in goods for the purposes of the Sale of Goods Act. The Court of Appeal also expressly confirmed that the principle established in Cumberland Bone should now be recognised as a principle in English law and the availability of an insurable interest was not to be dependent upon the goods being ascertained or part of a sufficiently identified bulk.