HOUSE OF LORDS
NORTHERN ASSURANCE COMPANY LIMITED, AND OTHERS
Insurance (Fire)-Insurable Interest-One-man Company-Sole Shareholder and Creditor insuring Assets of Company.
Neither a shareholder nor a simple creditor of a company has any insurable interest in any particular asset of the company.
Paterson v. Harris (1861) 1 B. & S. 336 and Wilson v. Jones (1866) L.R. 1 Ex. 193; (1867) L.R. 2 Ex. 139 discussed.
Dictum of Walton J. in Moran, Galloway & Co. v. Uzielli  2 K.B. 555, 562 approved.
The owner of a timber estate sold the whole of the timber thereon to a timber company in consideration of fully paid up shares in the company. Subsequently by policies effected in his own name with several insurance companies he insured this timber against fire. The greater part of the timber having been destroyed by fire, he sued the insurance companies to recover the loss, but the actions were stayed and the matter was referred to arbitration in pursuance of the conditions contained in the policies. The claimant was the sole shareholder in the company and was also a creditor of the company to a large extent. The arbitrator held that the claimant had no insurable interest in the goods insured and disallowed the claim:-
Held, (1.) that the claimant had not either as shareholder or creditor any insurable interest in the goods; (2.) that the claimant having allowed the point of want of insurable interest to be raised before the arbitrator without objection, it was not open to him to call in question the authority of the arbitrator to entertain it.
APPEAL from an order of the Court of Appeal in Northern Ireland affirming an order of the King’s Bench Division upon an award of an arbitrator stated in the form of a special case.
By an indenture dated December 30, 1919, the appellant, who was the owner of the Killymoon estate in county Tyrone with the timber thereon, agreed to sell to the Irish Canadian Saw Mills, Ld., all the timber, both felled and standing, on the estate for 27,000l., to be paid in fully paid up shares of the Canadian company, and in addition the actual cost incurred by the appellant in felling the timber already felled, to be paid in cash or shares at the option of the appellant. By a further indenture of the same date the appellant granted to the Canadian company leave and licence for the period of one year to enter upon the estate and to use all mills on the estate for the purpose of sawing the timber thereon. In pursuance of the first indenture of December 30, 42,000 fully paid 1l shares in the Canadian company were allotted to the appellant or his nominees, 27,000 shares in respect of the purchase price and 15,000 shares in respect of the cost of felling the timber. These were the only shares issued by the company, and they had always been held by the appellant or by his nominees for his benefit. Except some chattels of small value, the only assets of the Canadian company were the said timber and the licence granted by the second indenture of December 30, 1919.
In August, 1921, the Canadian company had completely felled and sawn all the timber on the estate, and the saw mills were partially dismantled.
At the time of the policies of insurance hereinafter mentioned the title deeds of the Killymoon estate were deposited with the Bank of Ireland to secure an overdraft by the appellant.
By a policy of insurance dated February 6, 1922, made in the names of the appellant and the bank for their respective rights and interests the respondents, the Northern Assurance Company, insured against fire all timber on the Killymoon demesne not within 100 yards of any saw mill for ten-sixtieths of 30,000l. Similar insurances were effected with four other offices, who were also respondents to this appeal.
At the respective dates of the issue of these policies the appellant was a creditor of the Canadian company to the extent of 19,000l.
On February 22,1922, the greater part of the timber on the estate was destroyed by fire.
In June, 1922, the appellant and the bank instituted five actions in the King’s Bench Division in Northern Ireland against the several offices for the recovery of moneys alleged to be due under the policies. But at the instance of the defendants the Court ordered that all proceedings in the actions should be stayed and that the matters in dispute should be referred to arbitration in pursuance of the several conditions in that behalf contained in the policies, and an arbitrator was appointed.
The arbitrator, by an award stated in the form of a special case, awarded (1.) that the appellant had not at any time during the currency of the policies any insurable interest in the timber the subject matter of the policies; (2.) that the timber was not at the time of burning within 100 yards of a saw mill within the meaning of the policies.
No question arose upon the second limb of the award. The Divisional Court upheld the award and their decision was affirmed by the Court of Appeal in Northern Ireland (Andrews and Moore L.JJ.).
1925. March 6, 9. Serjeant Sullivan K.C. (of the Irish and also of the English Bar) and M. F. Healy, (of the Irish Bar) (with them Ivor Grantham (of the English Bar)) for the appellant. By obtaining a stay of the actions in order to have the appellant’s claims referred to arbitration in pursuance of the terms of the policies the respondents precluded themselves from putting forward any defence which avoided the policies, for the avoidance of a policy involves the avoidance of the arbitration clause which is part of the policy. They were estopped from denying that the policies were valid indemnities against the actual loss sustained: Jureidini v. National British and Irish Millers Insurance Co.(1); Ballasty v. Army, Navy and General Assurance Association(2); Johannesburg Municipal Council v. Stewart & Co.(3); Yorkshire Insurance Co. v. Craine(4) and see Stebbing v. Liverpool and London and Globe Insurance Co.(5) Inasmuch as the want of insurable interest is a question going to the root of the contract the arbitrator had no jurisdiction to entertain it.
[LORD BUCKMASTER. No question of estoppel was before the Court of Appeal in North Ireland. The appeal was upon the award, not against the arbitration. There was no appeal on the ground that the arbitrator had no power to make the award. Therefore this point is not open to the appellant.]
Assuming that the arbitrator had power to deal with this question, he was wrong in holding that the appellant had no insurable interest in this timber. Legal ownership is not necessary for insurable interest. So to confine it would be adding a restriction to a contract of insurance which does not arise out of its nature. To be interested in the preservation of a thing is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. If there is a legal certainty of loss arising from the destruction of the property insured then there is an insurable interest: Lucena v. Craufurd(6); M’Swiney v. Royal Exchange Assurance(7); Lloyd v. Fleming(8); Ebsworth v. Alliance Marine Insurance Co.(9); Inglis v. Stock.(10) This is a case of a sole shareholder dealing with property created by his money, and there can be no question that he has a serious interest in fact in this property; the only question is whether he has an insurable interest in it. A shareholder in a company is entitled to insure the goods of the company to the extent of his holding in order to protect the value of his shares: Paterson v. Harris(11); Wilson v. Jones.(12) Further, in the special circumstances of this case, the appellant had an insurable interest in this timber as creditor of the company, for he was the only substantial creditor and the company had no other assets out of which the debt could be paid. It is settled that a creditor may insure his debtor’s life to the extent of his debt, because of the probability that if the debtor continues to live he will earn the money to pay the debt: Godsall v. Boldero.(13) To succeed, the creditor must prove that the loss was at all material times inevitable, but the appellant has discharged that onus. The dictum of Walton J. in Moran, Galloway Co. v. Uzielli(14), which may appear to be opposed to the appellant’s claim qua creditor, proceeds on the view that the creditor in that case had failed to prove that his debtor, a shipowner, was unable to pay the debt unless he recovered the ship. The appellant was bound to benefit by the preservation of the subject matter of the insurance and bound to suffer loss by its destruction, and the actual loss both of the amount of his debt and of the value of his shares was the direct and inevitable result of the happening of the peril. He is therefore entitled to recover on the policies.
[Counsel also referred to Barclay v. Cousins(15); Crowley v. Cohen(16); Marks v. Hamilton(17); Waters v. Monarch Life Assurance Co.(18); London and North Western Ry. Co. v. Glyn(19); Anderson v. Morice(20); Colonial Insurance Company of New Zealand v. Adelaide Marine Insurance Co.(21
Sir John Simon K.C., S. L. Brown K.C., E. S. Murphy K.C. and W. Lowry (the last three of the Irish Bar) for the respondents were not called upon.
The House took time for consideration.
1925. April 3. LORD BUCKMASTER. My Lords, the appellant is the owner of the Killymoon estate in the county of Tyrone. The respondents are five insurance companies with whom at various dates in January and February of 1922, the appellant effected insurance against fire on timber and wood goods in the open situate on the Killymoon domain not within a hundred yards of any saw mill or any building in which wood working by power other than wind or water was carried on. Neither the amounts nor the exact language of the policies are material for the purposes of the present appeal, nor is the fact that the policies were really effected in the name of the appellant and the Governor and the Company of the Bank of Ireland, for the real questions that arise for determination are these:
1. Whether the appellant had any insurable interest in the goods the subject of the policies, and
2. Whether the respondents were, in the circumstances, at liberty to raise the contention that he had no such interest in the manner in which it was raised in the course of these proceedings.
The history of the matter can be stated in a few sentences. The appellant upon whose estate the timber in question was originally standing on December 30, 1919, assigned the whole of it to a company known as the Irish Canadian Saw Mills, Ld., the amount to be paid for the timber felled and unfelled being 27,000l., while a further 15,000l. was to be paid for the cost incurred by the appellant in felling the timber that was then down. The total price paid was therefore 42,000l., satisfied by the allotment to the appellant or his nominees of 42,000l. fully paid 1l. shares in the company; no further shares than these were ever issued. The company proceeded with the operations of cutting the timber, and by the end of August, 1921, it had all been felled and sawn up in the saw mills. In the course of these operations the appellant had become the creditor of the company for 19,000l., and beyond this it is stated that the debts of the company were trifling in amount. The timber when cut remained lying on the appellant’s land, and on February 22, 1922, the greater part of it was destroyed by fire. The appellant accordingly claimed against the companies upon the policies and, on May 30, 1922, in an answer sent on behalf of all the companies, it was stated that the companies must decline to accept liability for the loss of any timber within a hundred yards of the saw mill. The appellant and the Bank of Ireland accordingly instituted proceedings by issuing writs against each of the respondent companies, and each of the statements of claim delivered contained the following allegation: “3. The plaintiffs were at the date of the effecting of the said policy of insurance and at the time the loss and damage hereinafter mentioned, interested in the said timber to the amount so insured thereon as aforesaid.”
On productions of the policies all these actions must have been dismissed, since each policy contained a clause referring all disputes to arbitration and making the award of the arbitrator a condition precedent to any liability on the part of the companies. Instead of pleading this as a defence the companies applied to stay the actions and refer the matters in dispute to arbitration, and on July 21, 1922, an order was made to that effect. Upon the hearing of. the arbitration several charges of fraud and dishonesty were made against the appellant, all of which failed, and upon the point initially raised in the letter to which reference has been made the arbitrator decided in the appellant’s favour, but he held that in the circumstances the appellant had no insurable interest in the timber, and this view has been supported in the Court of King’s Bench and .in the Court of Appeal.
The question as to the competency of the arbitrator to determine the dispute as to the insurable interest of the plaintiff only arises if no such insurable interest can be recognized by the law, and it is this point therefore that first requires consideration. It must, in my opinion, be admitted that at first sight the facts suggest that there really was no person other than the plaintiff who was interested in the preservation of. the timber. It is true that the timber was owned by the company, but practically the whole interest in the company was owned buy the appellant. He would receive the benefit owned of any profit and on him would fall, the burden of any loss. But the principles on which the decision of this case rests must be independent of the extent of the interest held. The appellant could only insure either as a creditor or as a shareholder in the company. And if he was not entitled in virtue of either of these rights he can acquire no better position by reason of the fact that he held both characters. As a creditor his position appears to me quite incapable of supporting the claim. If his contention were right it would follow that any person would be at liberty to insure the furniture of his debtor, and no such claim has ever been recognized by the Courts. It is true that since the case of Godsall v. Boldero(22), where a creditor of Mr. Pitt was held entitled to effect an insurance upon his life, this interest of a creditor has always been recognized as sufficient to support a life policy, but this depends, as was said by Lord Ellenborough, upon the means and probability of payment which the continuance of a debtor’s life affords to his creditors and the probability of loss which would result from his death. In the case of Moran, Galloway & Co. v. Uzielli(23), where a creditor for ships’ necessaries was held entitled to insure the ship, the decision rested upon the fact that the creditor had a right in rem against the vessel, and the learned judge said that “in so far as the plaintiffs’ claim depends upon the fact that they were ordinary unsecured creditors of the shipowners for an ordinary unsecured debt, I am satisfied that it must fail. The probability that if the debtor’s ship should be lost he would be less able to pay his debts does not, in my judgment, give to the creditor any interest, legal or equitable, which is dependent upon the safe arrival of the ship.” This is, in my opinion, an accurate statement of the law, and the appellant therefore cannot establish his claim as creditor.
Turning now to his position as shareholder, this must be independent of the extent of his share interest. If he were entitled to insure holding all the shares in the company, each shareholder would be equally entitled, if the shares were all in separate hands. Now, no shareholder has right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the. company is wound up. If he were at liberty to effect an insurance against loss by fire of any item of the company’s property, the extent of his insurable interest could only be measured by determining the extent to which his share in the ultimate distribution would be diminished by the loss of the asset-a calculation almost impossible to make. There is no means by which such an interest can be definitely measured and no standard which can be fixed of the loss against which the contract of insurance could be regarded as an indemnity. This difficulty was realized by counsel for the appellant, who really based his case upon the contention that such a claim was recognized by authority and depended upon the proper application of the definition of insurable interest given by Lawrence J. in Lucena v. Craufurd.(24) I agree with the comment of Andrews L.J. upon this case. I find equally with him a difficulty in understanding how a moral certainty can be so defined as to render it an essential part of a definite legal proposition. In the present case, though it might be regarded as a moral certainty that the appellant would suffer loss if the timber which constituted the sole asset of the company were destroyed by fire, this moral certainty becomes dissipated and lost if the asset be regarded as only one in an innumerable number of items in a company’s assets and the shareholding interest be spread over a large number of individual shareholders. The authorities which have the closest relation to the present are those of Paterson v. Harris(25) and Wilson v. Jones.(26) In the first of these cases a shareholder in a company that was established for the purpose of laying down a submarine cable between the United Kingdom and America, effected an insurance upon his interest in the cable. The share holder’s insurable interest in the cable does not appear to have been disputed and the real question, therefore, was never argued. In the case of Wilson v. Jones(27), where another policy was effected by a shareholder in the same company, it was distinctly held that the policy was not upon the cable but upon the shareholder’s interest in the adventure the cable being successfully laid. It was attempted by the underwriters to limit the insurance to an interest in the cable itself, which would have lessened the risk, but it was held that this was not the true construction of the policy. It was not argued that, if it were, the shareholder had no interest to insure, but both Martin B. in the Court of Exchequer and Willes J. in the Exchequer Chamber, stated that the plaintiff had no direct interest in the cable as a shareholder in the company, and, so far as I can see, this consideration it was that assisted the Court in determining that the insurance was upon the adventure in which the shareholder had an interest, and not upon the cable in which he had none. There are no other cases that even approximately approach the present case, and, properly regarded, I think the case of Wilson v. Jones(27) is against and not in favour of the appellant’s contention. Upon the merits of this dispute, therefore, the appellant must fail. Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which the company holds.
Nor can his claim to insure be supported on the ground that he was a bailee of the timber, for in fact he owed no duty whatever to the company in respect of the safe custody of the goods; he had merely permitted their remaining upon his land.
The remaining contentions can be briefly dealt with. The letter of May 30 certainly created no estoppel, nor did the application to refer to arbitration. Whether the arbitrator had power without consent to determine that the policy was void because of lack of insurable interest does not appear to me to arise. The time for the appellant to take this objection was when the order for reference was made, for one of the allegations in issue was the statement that he possessed an insurable interest; nor is there any substance in the contention that he was led by the defendants to believe the only question to be referred was the construction of the policy.
In any event a further opportunity was offered to him upon the question being raised before the arbitrator, for he could then have raised his contention on an application to stay the arbitration; but, in fact, the point was fully argued before the arbitrator, who was asked by appellant’s counsel to state a case upon it. On December 13, 1922, the appellant served a notice of motion seeking to have the award set aside, and on January 8 a further notice of motion was served adding as an additional ground for relief that the arbitrator’s jurisdiction was terminated by repudiation of the policy on the grounds of fraud put forward by the defendants. The notice of motion is not in the documents before the House, but it would appear from this statement that neither notice of motion raised the particular point that is now relied upon. The Court of the King’s Bench Division decided against the appellant, and his notice of appeal to the Court of Appeal asked only the following relief, namely: that question No. 1 in the award should be answered in the affirmative and question No. 2 in the negative and the judgment of the King’s Bench should be reversed. Now, question No. 1 was the question as to whether the appellant had any insurable interest in the timber, and it was this question which the appellant himself invited the Court of Appeal to decide in his favour. After this it is impossible for him to say that there is no proper decision upon the matter and that the whole proceedings are void. Nor did he raise again by his notice to the Court of Appeal the question that the arbitrator’s jurisdiction was terminated by the charges of fraud. It would, indeed, have been foolish to do so, for those questions were all decided in his favour. The question therefore as to the authority of the arbitrator to decide the point as to insurable interest is no longer open to the appellant, but if it were, I agree with the views expressed upon it by Moore L.J. in the Court of Appeal. For these reasons I am of opinion that this appeal must fail and should be dismissed with costs.
LORD ATKINSON. My Lords, I have had the pleasure and advantage of reading the judgment which has just been delivered by my noble and learned friend on the Woolsack. I approve of it and have nothing to add.
LORD SUMNER. My Lords, this appeal relates to an insurance on goods against loss by fire. It is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish Canadian Sawmills, Ltd., of Skibbereen, co. Cork. He had no lien or security over it and, though it lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it there under any contract that enabled him to hold it for his debt. He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company’s assets. The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company’s only creditor, while the timber was its only asset, seems to me to make no difference. He stood in no “legal or equitable relation to” the timber at all. He had no “concern in” the subject insured. His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company’s assets, not by the fire.
No authority has been produced for the proposition that the appellant had any insurable interest in the timber in any capacity, and the books are full of decisions and dicta that he had none. Paterson v. Harris(28) and Wilson v. Jones(29) are very special cases, and neither is in point here. In the former there was no plea traversing the allegation that the plaintiff had an insurable interest. The Court, construing the policy as one really expressed to be on the cable, dealt with the case as one in which interest was admitted therein, but its decision of the case after this admission of interest is not a decision that a shareholder as such has an insurable, interest in a company’s assets themselves. In the latter, where the policy described the subject-matter of the insurance in a very obscure manner, it was held that the shareholder insured had an interest that he could insure in the profits of the adventure so described, but it was expressly stated that he had no such interest in his shares in the company.
There remains the contention that the respondents were incompetent to raise the absence of insurable interest upon the arbitration. This seems to me to be a pure misapprehension. It is said that the defendants could not have got the order, which stayed the action and referred the matter in dispute to arbitration, if they had stated that they meant to rely on this point or, rather, if they had not actually intimated that they would not. The argument rests on the contention that to put the plaintiff to proof of an insurable interest is the same thing as pleading the Gaming Act, and saying that the policy is null and void and that there is no contract for arbitration or anything else, but in truth the defendants have said no such thing. The letters written before the order was made did not, either affirmatively or negatively, show anything of the kind. The plaintiff had averred an insurable interest in his pleading. The defendants, who moved for a stay before putting in a defence, simply denied liability, and the issue so raised was the matter in dispute. The case of Jureidini(30) is not in point. There persons, who had repudiated the whole contract of insurance, afterwards relied on a limited arbitration clause contained in it, which required the amount payable to be determined by arbitration, and said that, until he had obtained such an award, the plaintiff could not complete his case. It was held that the defendants could not both repudiate the contract in toto and require the performance of a part of it, which only became performable when liability was admitted or established. The present case is. the converse. Here an arbitration and award are conditions precedent to any action to enforce the policy. The defendants do not repudiate the policy or dispute its validity as a contract; on the contrary, they rely on it and say that, according to its terms, express and implied, they are relieved from liability: see Stebbing’s case(31); Woodall v. Pearl Assurance Co.(32) It is a fallacy to say that they assert the policy to be null and void. They do not plead or mention the Gaming Act and have no need to rely on it. The contract made in the policy was that, if the plaintiff could prove, among other things, that he had, at the time of loss, such an insurable interest in the timber as the law recognizes, the insurers would pay, and not otherwise. No gaming contract was ever made, nor any agreement to pay, interest or no interest. It is we who would make the contract a gaming contract, if we were to accept the appellant’s contention. The respondents say, and truly say, that a fire insurance policy is not an aleatory contract, but is a contract of indemnity, under which the assured must aver and prove interest at the time of the loss. This is a part of the law of insurance, quite independently of the Gaming Act, though the consequence of failure to prove interest is the same- namely, that the policy is unenforceable by an uninterested assured. It was open to. the defendants to raise this case at any time. Under the policy arbitration was the only. legal proceeding open, and the order was made as a matter of course. The insurers gave up nothing in consideration of getting the order, and all the defences remained open to them. Estoppel has been mentioned, but there was none. The defendants did not make any representation, and the plaintiff did not change his position on the faith of one. The case of Yorkshire Insurance Co. v. Craine(33) is distinguishable. It is a case in which, under very special circumstances, the appellants were held to have estopped themselves by their conduct from claiming to rely on one of the conditions in a policy (p. 553). Here I can find no conduct which disentitles the defendants to raise any defence, of which the case admits. I also agree with the Courts below that the appellant allowed the point of absence of interest to be taken before the arbitrator and, without moving to discharge the order of reference, went on and took his chance of success, and, further, that there is nothing now before your Lordships except the determination of the questions stated by the learned arbitrator in his award. A motion to set the award aside failed, and has not been appealed. My Lords, I think this appeal fails.
LORD WRENBURY. My Lords, this appeal may be disposed of by saying that the corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation. Further, I have read and concur in the judgment delivered by my noble and learned friend, Lord Sumner. I think the appeal should be dismissed.
LORD PHILLIMORE. My Lords, I concur.
Order of the Court of Appeal in Northern Ireland affirmed, and appeal dismissed with costs.
Lords’ Journals, April 3, 1925.
Solicitors for the appellant: Herbert Z. Deane & Co.
Solicitors for the respondents: Bircham & Co., for Hoey & Denning, Dublin.
(1)  A.C. 499,505.
(2) (1916) 50 Ir. L.T. 114, 110.
(3) (1909) 478 L.R. 20, 23.
(4)  2 A.C. 541, 647.
(5)  2 K.B. 433,430,438.
(6) (1806) 2 Boo. P.N.B. 269, 302.
(7) (1849) 14 Q.B. 634, 645, 646, 659.
(8) (1872) L.R. 7 Q.B. 299, 302.
(9) (1873) L.R. 8 C.P. 596, 609.
(10) (1885) 10 App.Cas. 263, 270.
(11) 1 B.& S. 336.
(12) L.R. 1 Ex. 193, 198 L.R. 2 Ex. 139, 146, 150.
(13) (1807) 9 But. 72
(14)  2 L.R. 555, 562.
(15) (1802) 2 East, 544.
(16) (1832) 3 B. & Ad. 478, 485.
(17) (1852) 7 Er. 323.
(18) (1856) 5 E. & B. 870.
(19) (1869) E. & E. 652.
(20) (1876) 1 App.Cas. 713
(21) (1886) 12 App.Cas. 128.
(22) 9 East, 72.
(23)  2 K.B. 555, 562.
(24) 2 Bos & P.N.B. 269, 302.
(25) 1 B. & 8. 336.
(26) L.R. 1 Fin 193; L.R. 2 Ex. 139.
(27) L.R. 1 Ex. 193; L.R. 2 Ex. 139.
(28) 1 B. & 8. 336.
(29) L.R. 2 Ex. 139.
(30)  A.C. 499.
(31) [191712 K.B. 433.
(32)  1 K.B. 593.
(33)  2 A.C. 541.