Kosmopoulos v. Constitution Insurance Co.

Kosmopoulos v. Constitution Insurance Co.
Collection
Supreme Court Judgments
Date
1987-01-29
Report
[1987] 1 SCR 2
Case number
17911
Judges
Beetz, Jean; McIntyre, William Rogers; Chouinard, Julien; Lamer, Antonio; Wilson, Bertha; Le Dain, Gerald Eric; La Forest, Gérard V.
On appeal from
Ontario
Subjects
Commercial law
Insurance
Notes
SCC Case Information: 17911
Decision Content
Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2
Constitution Insurance Company of Canada, Simcoe & Erie General Insurance Company, Providence Washington Insurance Company, Security National Insurance Company, Upper Canada Insurance Company, Canadian Home Assurance Company, The Contingency Insurance Company Limited Appellants Cross‑Respondents (Defendants)
v.
Andreas Kosmopoulos and Kosmopoulos Leather Goods Limited Respondents Cross‑Appellants (Plaintiffs)
and
Aristides Roussakis and Art Roussakis Insurance Agency Limited Cross‑Respondents (Defendants)
indexed as: kosmopoulos v. constitution insurance co.
File No.: 17911.
1985: November 1, 6; 1987: January 29.
Present: Beetz, McIntyre, Chouinard* Lamer, Wilson, Le Dain and La Forest JJ.
*Chouinard J. took no part in the judgment.
on appeal from the court of appeal for ontario
Insurance ‑‑ Fire insurance ‑‑ Insurable interest ‑‑ Sole shareholder holding insurance policy on company's assets ‑‑ Whether or not insurable interest.
Company law ‑‑ Corporate personality ‑‑ Sole shareholder company ‑‑ Sole shareholder holding insurance policy on company's assets ‑‑ Whether or not insurable interest.
Respondent Kosmopoulos incorporated his leather goods business and became sole shareholder and director of the company. Virtually all documentation required in the business continued to refer to the sole proprietorship and made no reference to the company and the lease continued in respondent's name when the landlord's approval to assign the lease was not obtained. The fire insurance policies showed the insured as being the sole proprietorship even though the insurance agency was well aware of the fact that the business was being carried on by the incorporated company. A fire in the adjoining premises damaged the company's assets and the rented premises. When the appellant companies refused payment on proof of loss, the present action was commenced. At trial, Kosmopoulos was found to have an insurable interest not only in the premises but also in the assets of the company and was given judgment accordingly. The agency was found liable for undertaking to see that some assets which were destroyed were insured, and had there been a finding of no insurable interest in the company's assets, would have been found liable for that loss as well. The Ontario Court of Appeal dismissed the insurers' appeals and Kosmopoulos' cross‑appeal.
Held: The appeal and cross‑appeal should be dismissed.
Per Beetz, Lamer, Wilson, Le Dain and La Forest JJ.: The corporate veil should not be lifted here, even though it theoretically could be lifted to do justice. Those who have chosen the benefits of incorporation must bear the corresponding burdens, and if the veil is to be lifted, it should only be done in the interests of third parties who would otherwise suffer as a result of the choice. If the corporate veil were to be lifted here, an indefensible distinction might emerge between companies with one shareholder and those with more than one shareholder.
A bailment cannot exist if the bailor still has possession and control of the items alleged to be bailed. To assert that Mr. Kosmopoulos possessed and controlled the property in his personal capacity would lift the veil and regard Mr. Kosmopoulos as separate and distinct from the company rather than as its director and senior employee. Mr. Kosmopoulos was a sole shareholder with neither a legal nor equitable interest in the company's assets.
The definition restricting insurable interest to legally enforceable rights is merely "a technical objection...which has no real merit...as between the assured and the insurer". The policies said to underlie this definition‑‑the policy against wagering under guise of insurance, the policy favouring limitation of indemnity, and the policy to prevent temptation to destroy insured property‑‑do not appear to require a restrictive definition and would be as well served by the factual expectancy test. Macaura should no longer be followed. If an insured can demonstrate "some relation to, or concern in the subject of insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring", that insured should be held to have a sufficient interest. To "have a moral certainty of advantage or benefit, but for those risks or dangers", or "to be so circumstanced with respect to [the subject matter of the insurance] as to have benefit from its existence, prejudice from its destruction" is to have an insurable interest in it.
Per McIntyre J.: The Macaura rule should not be accepted to compel a holding that a sole shareholder and sole director of a company could not have an insurable interest in the assets of the company. Modern company law now permits the creation of companies with one shareholder. The identity then between the Company and that sole shareholder and director is such that an insurable interest in the Company's assets may be found in the sole shareholder.
Cases Cited
By Wilson J.
Not followed: Macaura v. Northern Assurance Co., [1925] A.C. 619; Guarantee Co. of North America v. Aqua‑Land Exploration Ltd., [1966] S.C.R. 133, reversing (1964), 44 D.L.R. (2d) 645; Wandlyn Motels Ltd. v. Commerce General Insurance Co., [1970] S.C.R. 992; Clark v. Scottish Imperial Insurance Co. (1879), 4 S.C.R. 192; considered: Lucena v. Craufurd (1806), 2 Bos. & Pul. (N.R.) 269, 127 E.R. 630; referred to: American Indemnity Co. v. Southern Missionary College, 260 S.W.2d 269 (1953); Salomon v. Salomon & Co., [1897] A.C. 22; Associated Portland Cement Manufacturers (1910), Ltd. v. Ashton, [1915] 2 K.B. 1; Patterson v. Harris (1861), 1 B. & S. 336, 121 E.R. 740; Wilson v. Jones (1867), L.R. 2 Ex. 139; Blascheck v. Bussell (1916), 33 T.L.R. 51; Stock v. Inglis (1884), 12 Q.B.D. 564; Zimmerman v. St. Paul Fire & Marine Insurance Co. (1968), 1 D.L.R. (3d) 277; Norwich Union Fire Insurance Society Ltd. v. Traynor, [1972] N.Z.L.R. 504; Keefer v. Phoenix Insurance Co. (1901), 31 S.C.R. 144; Van Cure v. Hartford Fire Insurance Co., 253 A.2d 663 (1969); Pacific National Fire Insurance Co. v. Watts, 97 So.2d 797 (1957); Royal Insurance Co. v. Sisters of the Presentation, 430 F.2d 759 (1970).
By McIntyre J.
Referred to: Macaura v. Northern Assurance Co., [1925] A.C. 619; Lucena v. Craufurd (1806), 2 Bos. & Pul. (N.R.) 269, 127 E.R. 630.
Statutes and Regulations Cited
Business Corporations Act, 1982, S.O. 1982, c. 4, s. 134(1)(b), 184, 186, 187, 188, 189, 244(b)(iii), 245, 247(1), (2).
California Insurance Code, para. 281.
Insurance Act, R.S.O. 1980, c. 218, s. 125, stat. con. 1, stat. con. 2.
Life Insurance Act, 14 Geo. 3, c. 48.
Louisiana Insurance Code, R.S. 22:614, para. 614(B).
Marine Insurance Act, 19 Geo. 2, c. 37.
New York Insurance Law, art. 34, para. 3401.
Utah Insurance Code, s. 31A‑21‑104(2)(b).
Wisconsin Insurance Code, s. 631.07.
Authors Cited
Baer, Marvin G. "Annotation" (1983), 1 C.C.L.I. 83.
Baer, Marvin G. "Recent Developments in Canadian Law: Insurance Law" (1985), 17 Ottawa Law Rev. 631.
Brown, Craig and Julio Menezes. Insurance Law in Canada. Toronto: Carswells, 1982.
Campbell, A. J. "Some Aspects of Insurable Interest" (1949), 27 Can. Bar Rev. 1.
Colinvaux, Raoul. The Law of Insurance, 5th ed. London: Sweet & Maxwell, 1984.
Couch, George James. Cyclopedia of Insurance Law, vol. 3, 2nd ed. By Ronald A. Anderson. Revised volume by Mark S. Rhodes. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1984.
Gower, L. C. B. Modern Company Law, 4th ed. London: Stevens & Sons, 1979.
Harnett, Bertram and John V. Thornton. "Insurable Interest in Property: A Socio‑Economic Reevaluation of a Legal Concept", 48 Columbia Law Rev. 1162 (1948).
Hasson, Reuben A. "Reform of the Law Relating to Insurable Interest in Property‑‑Some Thoughts on Chadwick v. Gibraltar General Insurance" (1983‑84), 8 Can. Bus. L. J. 114.
Kahn‑Freund, O. "Some Reflections on Company Law Reform" (1944), 7 M.L.R. 54.
Keeton, Robert. Basic Text on Insurance Law. St. Paul, Minn.: West Publishing Co., 1971.
McLeod, Rod M. "Aqua‑Land Exploration Ltd. v. Guarantee Co. of North America et al.: Insurable Interest in an Indemnity Policy" (1966), 24 U. of T. Fac. Law Rev. 154.
Ninth Decennial Digest, vol. 21. Part 1, American Digest System 1976‑81. "Insurance". St. Paul, Minn.: West Publishing Co., 1983.
Sutton, K. C. T. Insurance Law in Australia and New Zealand. Sydney: Law Book Co., 1980.
Ziegel, Jacob S. "Shareholder's Insurable Interest‑‑Another Attempt to Scuttle the Macaura v. Northern Assurance Co. Doctrine: Kosmopoulos v. Constitution Insurance Co." (1984), 62 Can. Bar Rev. 95.
APPEAL AND CROSS‑APPEAL from a judgment of the Ontario Court of Appeal (1983), 149 D.L.R. (3d) 77, 42 O.R. (2d) 428, [1983] I.L.R. para. 1‑1660 dismissing the insurers' appeal and Kosmopoulos' cross‑appeal (against the insurance agency) from a judgment of R. E. Holland J., [1981] I.L.R. para. 1‑1449, in favour of Kosmopoulos in an action on a fire insurance policy. Appeal and cross‑appeal dismissed.
Ronald J. Rolls, Q.C., for the appellants.
W. P. Somers, Q.C., and Christine Mauro, for the respondents.
V. R. P. Bersenas, for the cross‑respondents.
The judgment of Beetz, Lamer, Wilson, Le Dain and La Forest JJ. was delivered by
1. Wilson J.‑‑The issue in this appeal is whether a sole shareholder of a corporation has an insurable interest in the assets of that corporation. The traditional view is that a sole shareholder has neither the legal nor the equitable interest in the corporate assets required for a valid insurance on those assets: Macaura v. Northern Assurance Co., [1925] A.C. 619 (H.L.) In examining the issue it will be necessary to consider first whether Macaura would provide the insurers with a valid defence in this case and, if so, whether Macaura is or should continue to be the law in Ontario.
1. The Facts
2. On February 7, 1972, the respondent, Andreas Kosmopoulos, entered into a commercial lease for premises located in the City of Toronto. From these premises he operated a business of manufacturing and selling leather goods under the name of Spring Leather Goods. This business was carried on as a sole proprietorship.
3. On the advice of his solicitor Mr. Kosmopoulos incorporated Kosmopoulos Leather Goods Limited ("the company") in order to protect his personal assets. Mr. Kosmopoulos was the sole shareholder and director of the company. Even though the business was thereafter technically carried on through the limited company, Mr. Kosmopoulos always thought that he owned the store and its assets. Virtually all the documentation required in the business, including bank accounts, sales tax permits and hydro and telephone accounts, made no reference to the company but rather to "Andreas Kosmopoulos carrying on business as Spring Leather Goods" (or some similar phrase). Although Mr. Kosmopoulos' solicitor tried to obtain the approval of the landlord to an assignment of the lease of the premises from Mr. Kosmopoulos to the company, this approval was never obtained. The lessee at all material times was Mr. Kosmopoulos and not the company.
4. Soon after Mr. Kosmopoulos started conducting his business in the leased premises he contacted the respondent, Aristides Roussakis, in order to obtain insurance for the contents of the business premises. The respondents, Aristides Roussakis and Art Roussakis Insurance Agency Limited ("the insurance agency"), obtained a fire insurance policy with the General Accident Group for coverage from March 14, 1972 to March 14, 1975. Even though the insurance agency was well aware of the fact that the business was being carried on by an incorporated company, the insured was described on the policy as "Andreas Kosmopoulos O/A Spring Leather Goods". This policy was renewed but expired before the date of the loss and was replaced with subscription policies issued by Simcoe‑Bay Group and Commercial Insurance Company. The appellant insurance companies are subscribing companies to the two replacement policies. Both of the replacement policies showed the insured as "Andreas Kosmopoulos O/A Spring Leather Goods".
5. On May 24, 1977 a fire broke out in the adjoining premises and caused fire, water and smoke damage to the assets of the company and to the rented premises. Mr. Kosmopoulos filed proofs of loss under the replacement policies on December 6, 1977 but the appellant companies refused payment and the present action was commenced.
2. The Courts Below
6. On October 29, 1981 R. E. Holland J. of the Supreme Court of Ontario held that Mr. Kosmopoulos was the tenant of the premises in which the business was carried on. Therefore, on established authority, he had an insurable interest in the leasehold improvements and damage to these totalled $1,699.26.
7. Holland J. also observed that on established authority Mr. Kosmopoulos could not recover for the destruction of the assets of the business because these were owned by the company which he had incorporated. But he held that the source of that principle, Macaura v. Northern Assurance Co., supra, could be distinguished because in this case the company was a mere "fiction" which had nothing to do with the risk that was underwritten. Mr. Kosmopoulos was therefore held to have an insurable interest and judgment was given in his favour against the appellant companies for the total amount of $68,726.26, plus interest.
8. Mr. Kosmopoulos also claimed against the insurance agency. Holland J. found the agency liable for undertaking to see that the patterns which were destroyed in the fire were insured. Judgment was given in favour of Mr. Kosmopoulos for $2,500 which was the value of the patterns. Had he found that Mr. Kosmopoulos had no insurable interest Holland J. would have found the insurance agency fully liable for the loss because it was put on inquiry to obtain the correct name of the insured and was negligent in failing to do so.
9. On June 8, 1983 the Court of Appeal of Ontario dismissed the insurers' appeals and Mr. Kosmopoulos' cross‑appeal against the insurance agency. Zuber J.A., MacKinnon A.C.J.O. and Brooke J.A. concurring, considered whether the Court of Appeal was bound to accept Macaura as the law in Ontario in light of the decisions of this Court in Guarantee Co. of North America v. Aqua‑Land Exploration Ltd., [1966] S.C.R. 133, and Wandlyn Motels Ltd. v. Commerce General Insurance Co., [1970] S.C.R. 992. After examining these decisions, Zuber J.A. concluded:
... the Supreme Court of Canada has accepted the rule in Macaura only to the extent that it needed to do to decide the Aqua‑Land case, i.e., that one shareholder of three had no insurable interest in the assets of the corporation. Therefore, the issue of whether a sole shareholder has an insurable interest in the assets of the corporation, in my view, remains open in this province.
He then went on to point out that in the days when both the federal and provincial legislation required a company to have more than one shareholder the issue was of little significance. But now that single shareholders and single directors are possible under both the Canada and Ontario Business Corporations Acts it has assumed new importance. He saw no reason to impose "the rigidity of the Macaura rule on this recent development in company law". He then referred to American Indemnity Co. v. Southern Missionary College, 260 S.W.2d 269 (Tenn. 1953) in which a parent company was held to have an insurable interest in the assets of its subsidiary and in particular the following passage from the judgment of Neil C.J., at p. 272:
We think the two corporations are separate entities, but their existence as such is a mere fiction of the law. The subordinate corporation does the bidding of its parent down to the minutest detail. The domination of the parent over its offspring was so complete as to make them practically indistinguishable except in name. There can be no other reasonable conclusion from the admitted facts but that Mercentile Enterprises was an agency or instrumentality of the complainant, and all property including the money burglarized was in reality the property of the latter, subject of course to the claims of creditors of the former.
In effect, Neil C.J. "lifted the corporate veil" in order to find an insurable interest.
10. On November 21, 1983 this Court granted the insurers leave to appeal and granted Mr. Kosmopoulos and Kosmopoulos Leather Goods Limited leave to cross‑appeal.
3. The Issue
11. Counsel for the appellant insurance companies submit that Mr. Kosmopoulos as sole shareholder had no legal or equitable interest in the company's assets. They urge the Court to follow Macaura. Counsel for the respondents argue that the corporate veil should be lifted and, when this is done, it becomes clear that the company's property was, in law, the property of Mr. Kosmopoulos. The Macaura case therefore provides no defence of lack of insurable interest to the insurers. Alternatively, it is submitted by the respondents that Mr. Kosmopoulos had an insurable interest as bailee of the company's assets. Finally, the respondents urge that this Court should no longer follow Macaura. I shall deal with the respondents' submissions in order.
(a) "Lifting the Corporate Veil"
12. As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by "lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities" principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue": L. C. B. Gower, Modern Company Law (4th ed. 1979), at p. 112. I have no doubt that theoretically the veil could be lifted in this case to do justice, as was done in American Indemnity Co. v. Southern Missionary College, supra, cited by the Court of Appeal of Ontario. But a number of factors lead me to think it would be unwise to do so.
13. There is a persuasive argument that "those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice": Gower, supra, at p. 138. Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burdens. He should not be permitted to "blow hot and cold" at the same time.
14. I am mindful too of this Court's decision in the Aqua‑Land Exploration Ltd. case, supra, in which the Court did not "lift the veil" in order to find that one of three shareholders in a corporation had an insurable interest in its asset. So also in the Wandlyn Motels Ltd. case, supra, the Court refused to regard a motel owned by a man who held all but two of the shares of the insured, Wandlyn Motels Ltd., as the property of that corporation. If the corporate veil were to be lifted in this case, then a very arbitrary and, in my view, indefensible distinction might emerge between companies with more than one shareholder and companies with only one shareholder: for a recent comment on the arbitrary and technical distinctions that would be created by lifting the corporate veil in this case, see Jacob S. Ziegel, ``Shareholder's Insurable Interest‑‑Another Attempt to Scuttle the Macaura v. Northern Assurance Co. Doctrine: Kosmopoulos v. Constitution Insurance Co.'' (1984), 62 Can. Bar Rev. 95, at pp. 102‑03. In addition, it is my view that if the application of a rule leads to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to ameliorate its ill effects on a case‑by‑case basis.
15. For all these reasons, I would not lift the corporate veil in this case. The company was a legal entity distinct from Mr. Kosmopoulos. It, and not Mr. Kosmopoulos, legally owned the assets of the business.
(b) Mr. Kosmopoulos as Bailee
16. It is submitted by counsel for the respondents that Mr. Kosmopoulos was in possession and control of the stock and merchandise of the corporation and was responsible for its safekeeping. This was said to make Mr. Kosmopoulos a bailee of the assets for the corporation and to give him an insurable interest. But there does not appear to be any evidence of an express bailment. If Mr. Kosmopoulos possessed and controlled the property of the corporation merely by virtue of his being director and senior employee of the corporation, his possession and control would be that of the corporation. Indeed, there is authority to the effect that a servant cannot, except in exceptional circumstances, be a bailee of his master's goods: Associated Portland Cement Manufacturers (1910), Ltd. v. Ashton, [1915] 2 K.B. 1. A bailment cannot exist if the bailor still has possession and control of the items alleged to be bailed. To assert that Mr. Kosmopoulos possessed and controlled the property in his personal capacity would be to lift the veil and regard Mr. Kosmopoulos as separate and distinct from the company rather than as its director and senior employee. For the reasons I have given I would not lift the corporate veil in this case. Accordingly, I find no merit in the bailment argument.
17. I would conclude, therefore, that Mr. Kosmopoulos was a sole shareholder with neither a legal nor an equitable interest in the assets of the company. If Macaura is presently the law in Ontario and should continue to be the law in Ontario, then the defence of lack of insurable interest must succeed. It is to that question that I now turn.
(c) The Macaura Principle
18. A review of the Macaura principle requires, I believe, some analysis of the background against which the decision was made, an examination of the decision itself and of the way in which it has been applied in Canada.
19. Over a century before the House of Lords decided Macaura, it had considered the nature of an insurable interest in Lucena v. Craufurd (1806), 2 Bos. & Pul. (N.R.) 269, 127 E.R. 630. In that case the Royal Commissioners had obtained policies of insurance on several ships and their cargos. During a voyage from the United Provinces several of the ships were lost at sea before reaching a British port. The Royal Commissioners argued (in the first count) that an Act of Parliament, which authorized them in time of war to take possession of ships and cargos belonging to inhabitants of the United Provinces and detained in or brought to British ports, gave them sufficient interest to insure the ships. It was also alleged (in the second count) that the insurance was obtained for the benefit of the Crown and that the Crown had an insurable interest. The House of Lords ordered a new trial because of misdirection of the jury on the first count. At the new trial there was a verdict for the plaintiffs on the second count and this was sustained on appeal. Accordingly, the frequently cited opinions of their Lordships on the nature of an insurable interest were not critical to the ultimate disposition of the case. Nevertheless, these opinions form the substratum of the subsequent debate over the nature of an insurable interest.
20. Lawrence J. expressed what is now called by academic commentators the "factual expectancy test" at p. 643:
...interest does not necessarily imply a right to the whole, or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring; and where a man is so circumstanced with respect to matters exposed to certain risks or dangers, as to have a moral certainty of advantage or benefit, but for those risks or dangers he may be said to be interested in the safety of the thing. 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.
To Lawrence J. a moral certainty of profit or loss was a sufficient interest.
21. Lord Eldon was somewhat nervous of the "moral certainty" test for an insurable interest. He said at p. 650:
This is not a case in which there is any averment of an interest in these commissioners beneficial to themselves, and the question is, Whether the power, or faculty, or right of concern and management which these commissioners might or might not have had, which they would have had if the ships had come into port, and which they might have ceased to have the moment after, be the subject of a legal insurance? Since the 19 Geo. 2 it is clear that the insured must have an interest, whatever we understand by that term. In order to distinguish that intermediate thing between a strict right, or a right derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amounts to a moral certainty. I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party. In the 19 Geo. 2, as well as in every other statute and charter relating to insurance, the objects of insurance are plainly described to be ships, cargoes, wares, merchandize, or effects. One or two later statutes mention property; but as to expectation of profits and some other species of interest which have been insured in later times, there is nothing to show that they were considered as insurable. I do not wish that certain decisions which have taken place since the 19 Geo. 2 should be now disturbed, but considering the caution with which the Legislature has provided against gambling by insurances upon fanciful property, one should not wish to see the doctrines of those cases carried further, unless they can be shown to be bottomed in principles less exceptionable than they would be found to be upon closer investigation.
Because he required a legally enforceable right of some kind in order to constitute an insurable interest, he said that, if he had to pronounce on the first count, he would have held that the Act of Parliament did not afford a sufficient legal basis for an insurable interest since the Royal Commissioners acquired no legal rights over the ships until they reached British ports. Besides emphasizing the difficulty of identifying an "intermediate thing" between a legal right and a mere expectation in the passage immediately supra, Lord Eldon elsewhere stressed the problem of ascertaining the limit on who could insure. He said at pp. 651‑52:
If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First the dock company, then the dock‑master, then the warehouse‑keeper, then the porter, then every other person who to a moral certainty would have any thing to do with the property, and of course get something by it.
Before turning to an examination of the later cases which considered the divergent opinions expressed in Lucena v. Craufurd, supra, it is appropriate at this point to assess the two reasons cited by Lord Eldon in support of his position.
22. It is interesting that Lord Eldon should have advanced in support of the restrictive definition of insurable interest the virtue of certainty and pointed to the alleged lack of certainty which would, in his view, result from a broader definition. Brown and Menezes, Insurance Law in Canada (1982), at p. 84, suggest the very opposite:
After Macaura, it is no longer possible to claim merely that one would be adversely affected by the loss; the insured must assert that he owned an interest in the objects destroyed. This provides the illusion of great certainty. Property law is among the most technical and certain segments of the law. This certainty is totally illusory because the new formulation makes no concessions either to the reasons for which insurable interest is a component of insurance law or for commonplace business transactions....Assuming that an insurable interest in "things" must mean property, among the simple questions raised are matters such as how does one own a direct interest in property which is not in existence at the time of the contract? Can next season's crops or fluctuating inventory be insured? Are warehousing and other bailee policies subject to the law as set out in Macaura so as to limit the right to insure to the bailee's liability to the bailor?
Lawrence J.'s view of insurable interest avoids these problems and, in my view, provides a readily ascertainable standard.
23. Lord Eldon's concern that a broader definition of insurable interest would lead to too much insurance may also be illusory. Insureds will still have to disclose all material circumstances (see the Insurance Act, R.S.O. 1980, c. 218, s. 125, stat. con. 1) and declare the nature of their interests (Insurance Act, supra, s. 125, stat. con. 2) to the insurer in order to enable it to judge the risk to be taken. If the insurer cannot estimate the likelihood of the loss occurring (because, for example, the information is in the hands of third parties) then it does not have to write the policy. It can also protect itself by limiting its liability or it can charge larger premiums. As is stated in a learned article by Bertram Harnett and John V. Thornton, "Insurable Interest in Property: A Socio‑Economic Reevaluation of a Legal Concept," 48 Columbia Law Rev. 1162 (1948), at p. 1175, "an effective curb on excessive insurance is the general ability of insurance carriers to decline risks, or insert protective clauses". I recognize that a broadening of the definition of insurable interest may increase the liability of the insurance companies upon the occurrence of a single insured event owing to an increased number of policies for the same risk. But insurance companies have always faced the difficult task of calculating their total potential liability arising upon the occurrence of an insured event in order to judge whether to make a particular policy or class of policies and to calculate the appropriate premium to be charged. It is not for this Court to substitute its judgment for the sound business judgment and actuarial expertise of insurance companies by holding that a certain class of policies should not be made because it will result in "too much insurance".
24. I would have thought that a stronger argument could be made that there is too little insurance. Why should the porter in Lord Eldon's example not be able to obtain insurance against the possibility of being temporarily out of work as a result of the sinking of the ships? As far as the insurer is concerned, how would this insurance differ from, say, health insurance covering loss of wages resulting from his own disability? If anything, the moral hazard would seem to be lower in the case of a porter's insurance on the possibility of loss resulting from the sinking of a ship. A broadening of the concept of insurable interest would, it seems to me, allow for the creation of more socially beneficial insurance policies than is the case at present with no increase in risk to the insurer. I therefore find both of Lord Eldon's reasons for adopting a restrictive approach to insurable interest unpersuasive.
25. It seemed for a time as if Lord Eldon's view was going to be abandoned and that of Lawrence J. upheld. In Patterson v. Harris (1861), 1 B. & S. 336, 121 E.R. 740, and in Wilson v. Jones (1867), L.R. 2 Ex. 139, courts allowed two shareholders of a company established for the purpose of laying down a trans‑Atlantic submarine cable to recover on an insurance policy once the cable had been destroyed even although neither had a legally enforceable right in the cable. In Blascheck v. Bussell (1916), 33 T.L.R. 51 (Eng. K.B.), there was no challenge to the insurable interest of the plaintiff who had insured the health of an actor he had engaged for a performance. That interest was a purely pecuniary, non‑legal one concerned with the consequences of the actor's non‑performance on account of injury. But the House of Lords in Macaura resolved the matter in favour of Lord Eldon.
26. Macaura, owner of the Killymoon estate in Northern Ireland, obtained five fire insurance policies in his own name on timber situated on the estate. The timber was in fact owned by the Irish‑Canadian Saw Mills Ltd., the sole shareholder of which was Macaura. Macaura was, as well, the sole creditor of the company apart from a few small debts. The House of Lords nevertheless held that Macaura had no insurable interest either as creditor or shareholder in the timber which was subsequently destroyed by fire. Lord Sumner stated at p. 630:
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.
Lord Buckmaster, supporting the decision in Macaura, put his support on two grounds. First, like Lord Eldon in Lucena v. Craufurd, supra, he could not understand "how a moral certainty can be so defined as to render it an essential part of a definite legal proposition" (p. 627). As I have already mentioned in the context of Lord Eldon's difficulty in identifying an "intermediate thing" between a legal right and a mere expectation, the Macaura definition, if anything, is even more uncertain than Lawrence J.'s definition in Lucena v. Craufurd. Second, he was of the view that major problems of valuation would arise (p. 627):
If he [the shareholder] 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.
The difficulty of measuring the loss suffered by an individual shareholder should not, in my view, prevent a broadening of the definition of insurable interest. Modern company statutes, such as the Business Corporations Act, 1982, S.O. 1982, c. 4, s. 184 and ss. 186‑189, require courts in certain circumstances to value shares. The task is obviously not considered impossible. Indeed, the House of Lords knew that it was feasible at the time Macaura was decided. In Wilson v. Jones, supra, which the House distinguished but did not disapprove in Macaura, the court allowed an insurance based on an interest in the "adventure" of the corporation even although the insured did not own the property involved in that adventure. One might be forgiven for thinking that the interests of individual shareholders in the "adventure" of a corporation are fully as difficult of computation as the interests of individual shareholders in the assets of the corporation.
27. Quite apart from the fact that Lord Buckmaster's rationale for a restrictive concept of insurable interest seems somewhat less than convincing, the Macaura case is in itself a rather odd case. The case originally went to arbitration on the question of fraud. The arbitrator held that there was no fraud but that the insured had no insurable interest. Professor Robert Keeton, Basic Text on Insurance Law (1971), has noted that "it is difficult to reject the inference that, though not proved, [the charges of fraud] influenced the court to reach a theory of insurable interest that is nothing short of pernicious" (p. 117). See also Brown and Menezes, supra, at p. 69. In my view, this inference, if legitimate, further weakens the authority of Macaura as a precedent.
28. Another curious thing about Macaura is that it has not been strictly applied in later cases. An attempt has been made to offset the arbitrariness and harshness of the Macaura principle by the use of a presumption of sorts. This presumption first appeared in the pre‑Macaura case of Stock v. Inglis (1884), 12 Q.B.D. 564 (C.A.), where Brett M.R. stated at p. 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.
29. The existence of this presumption since Macaura has been noted in a number of cases: see, for example, Zimmerman v. St. Paul Fire & Marine Insurance Co. (1968), 1 D.L.R. (3d) 277 (Sask. C.A.), at p. 281, Aqua‑Land Exploration Ltd. v. Guarantee Co. of North America (1964), 44 D.L.R. (2d) 645 (Ont. C.A.), per Schroeder J.A., at p. 652, Norwich Union Fire Insurance Society Ltd. v. Traynor, [1972] N.Z.L.R. 504 (C.A.), at p. 505. In view of the questionable reasoning of Lord Eldon in Lucena v. Craufurd, and of their Lordships in Macaura, and in view of the fact that the allegation of fraud may have influenced the result in Macaura, the expressed reluctance in these cases to follow it to the letter is hardly surprising. In addition, the Macaura principle has not been extended to all types of insurance. Professor Marvin G. Baer notes that the factual expectancy test has been used in Canada to define insurable interest in the life and health insurance fields: see Baer "Recent Developments in Canadian Law: Insurance Law" (1985), 17 Ottawa Law Rev. 631, at p. 655, and the Insurance Act, supra, s. 156 (life insurance) and s. 258 (accident and sickness insurance).
30. Nevertheless, long ago this Court without referring to Lucena v. Craufurd approved and adopted Lord Eldon's view of the nature of an insurable interest. In Clark v. Scottish Imperial Insurance Co. (1879), 4 S.C.R. 192, Ritchie C.J. held that "any interest which would be recognized by a Court of Law or Equity is an insurable interest" (p. 204). As well, this Court has recently referred to Macaura in Aqua‑Land Exploration Ltd. and in Wandlyn Motels Ltd. In neither case did the Court examine the case in any detail. It appears to have been accepted without question. The following comment by Harnett and Thor