Story Case

Mr. J. L. Ward, an old man in feeble health, owned extensive property, much of which consisted in houses. He had no confidence in fire insurance, and all of his buildings were uninsured. He had only one son, William, who would inherit all of this property on his father's death. William was fearful lest some of the houses might burn and thus a great loss would be sustained, since they were not insured. He went to an agent of the Phoenix Fire Insurance Company and related all the circumstances. The agent advised him to insure all the property in his own name. William questioned the legality of such a transaction. The agent reassured him on the basis that the property virtually belonged to him. So a policy for each of the buildings was taken out in the name of William. He paid the premiums thereon. About two months later, Mr. J. L. Ward died and all the property was left to his son William. The policies were not changed or reissued. About a week later one of the buildings burned. William presented proof of the loss and his claim for damages. The company refused to pay it. Suit was begun.

The company contended that it was not liable, because William had no insurable interest at the time the policies were taken out. And, furthermore, it was not within the power of its agent or of the company to waive the necessity of insurable interest. What should be the decision of the court in this case?

Ruling Court Case. Montague Vs. Agricultural Insurance Company, Volume 38 Michigan Reports, Page 548

The Agricultural Insurance Company was engaged in the business of insuring property against loss by fire. Montague, desiring to insure his house and household goods, visited an agent of the Agricultural Insurance Company. He informed the agent that he wished to take out a policy in his name, covering not only his own property, but also covering certain silverware which belonged to his wife. The agent approved the plan and insured the policy. The policy covered, as requested by Montague, the house and furniture and silverware, owned by his wife. After several months, the house and all the contents were destroyed by fire. Montague presented his claim. The company refused to settle. He, therefore, brought an action to recover.

The company contended that in no event was it liable for the loss of the silverware, since he had no insurable interest in it. Montague contended, on the other hand, that the agent of the company knew that the silverware was owned by his wife and waived this objection.

Decision: The theory of fire insurance is that a man pays premiums to be indemnified against loss. If he has no interest in the property insured, he can sustain no loss by its destruction. The result is that such a contract as the one above becomes merely a wagering contract. These are against public policy and void. Since the contract is void, because it lacks insurable interest, neither the company nor the agent can render it valid by consenting to waive this requirement. Therefore, since the silverware belonged to his wife, and not to Montague, no recovery can be had for loss.

Mr. Justice Cooley, who delivered the opinion of the court said in part: "The argument was made that, as the company through its agent, had knowledge of all the facts, and still granted the policy, an issuing of the policy was a waiver of all objections on that score. This view was accepted by the lower court, and the jury instructed accordingly. If the instruction was correct, it is manifest that any person may obtain insurance upon property without right whatsoever; he has but to disclose the facts and the policy, though only a wager policy, will be as legal as any other. But such a doctrine is at war with the fundamental principles of insurance, which require that a person shall have an insurable interest before he can insure; and it is immaterial that it is taken in good faith and with full knowledge. The policy of the law does not admit of such insurance, however willing the parties may be to enter it."

It was decided that Montague could not recover for the loss of the silverware belonging to his wife.

Ruling Law. Story Case Answer

Insurance is a method of indemnity whereby one person or corporation agrees, for a consideration, to make good any loss which may be sustained by the person insured. It is evident that if a person has no interest in property he cannot be prejudiced by its destruction, nor benefited by its preservation. The law demands that every person shall have an insurable interest in property before he can insure it. If it were otherwise it is apparent that any person might obtain insurance upon any property. In such a case there would be a great incentive to have property destroyed. Furthermore, such a contract is purely a wagering contract. The insured virtually boasts that he is willing to bet the amount of the premium against the face value of the policy that the property will burn within a certain length of time. The policy of the law is so absolutely against such policies and contracts that they are universally held to be void. Neither an agent of the company, nor the company itself may waive this requirement. The law is not solicitous about the welfare of the company, but about the public good, in requiring that every person shall have an insurable interest in the property insured.

It is not necessary, however, that a person be the owner of the property in order to have an insurable interest. Thus, common carriers have an insurable interest in the property which they are transporting, because they are charged with the duty of preserving the property, and are themselves insurers against its loss. A tenant has an insurable interest in the property in his possession.