Date01 December 1995
Published date01 December 1995

This article examines the issues of insurable interest (the rights of the bailor and bailee to insure) and contribution (the relationship between the bailor’s and bailee’s insurers) in relation to insurance in a bailment scenario.


The owner of goods obviously has an interest in protecting his property by means of insurance. He can obtain a number of policies covering a variety of risks, but when a loss occurs, he can recover no more than the value of his loss. Very often, someone other than the owner may also be interested in insuring the same goods against loss, for example, a bailee. A bailee does not have title to the goods, but as he has possession of them, he may be legally responsible for the safekeeping of the goods, and hence it is common for a bailee to obtain insurance coverage. Thus the same goods may, at the same time, be covered under the owner’s policy as well as the bailee’s policy. The purpose of this article is to discuss the rights of the bailor and the bailee to insure goods under a bailment and also to consider the rights of the bailor’s and bailee’s insurers inter se when a loss occurs.


It has been said that a bailment is incapable of precise legal definition because it covers many different relationships1. Be that as it may, for the purposes of this article, the bailment can be simply described as the delivery of goods by the owner (bailor) to another (bailee) on the condition that they will be restored by the bailee to the bailor, or according to his directions, as soon as the purpose for which they are bailed shall be answered2. Thus the bailee is essentially the person to whom the possession of goods has been entrusted by the owner (the bailor) who retains title or ownership.


Where the bailor or the bailee wishes to effect their own insurance on the goods comprised in the bailment, they must have insurable interest in the goods. Although there is no statutory requirement of insurable interest for non-life insurance3, nonetheless, insurable interest is still required at the

time of loss because a non-life insurance is essentially a contract of indemnity4. In the absence of any interest and if the insurance contract is purely speculative, it could be rendered void and unenforceable by S.6 of the Civil Law Act for being a wagering or gaming contract.

Insurable interest has been defined by Lord Eldon in Lucena v. Crawford5 as 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 other party.”

So a person would have insurable interest in a thing if he will be financially prejudiced by its loss because he has a legal, equitable or contractual right to the thing insured.

Insurance in a bailment scenario would be an insurance on goods. The bailor, being the legal owner of the goods, would suffer a financial loss if the goods should suffer damage or loss and so clearly has insurable interest. The question is whether the bailee has insurable interest to insure the goods. It was decided in Marks v. Hamilton6 that a person who was in possession as apparent owner, responsible to those who were the real owners and who can be called on to account for property has insurable interest. This is because possessory title is a good root of title in common law, good against everyone except the legal owner and hence, possession coupled with a legal liability such as that which arises in a bailment7 would give rise to insurable interest. Hence even the gratuitous bailee would have insurable interest simply by virtue of the personal liability that may arise from his responsibility for the goods and his corresponding duty to account to the bailor.

The next issue is whether the bailee has insurable interest in the absence of liability in respect of those goods. An insurance of goods is a contract of indemnity and hence it is necessary for an insured to show that he has insurable interest at the time of the loss. The question here is whether a bailee who is not responsible for the loss of the goods has an interest that entitles him to claim insurance. The answer to this question is found in the decision of Waters v. Monarch Fire and Life Assurance Co8 where it was held that bailees could insure the goods entrusted to them and in the event of loss, still claim the full value of the damage, irrespective of liability. In this case, flour and corn factors (bailees) effected floating policies over

goods in their warehouse, whether their own or those held in trust or on commission. A fire destroyed all the goods in the warehouse under circumstances that imposed no liability on them for the loss. First, it was decided that as a matter of construction, the policies were not intended to be limited to the personal interest of the plaintiffs because the promise in the policies was to make good the damage to the goods. As the property was wholly destroyed, the insurers had to make good the whole value and not merely the personal interest of the bailees. Lord Campbell CJ also added that such policies were not illegal. Indeed, if they were not allowed, “it would be most inconvenient in business if a wharfinger could not, at his own cost, keep up a floating policy for the benefit of all who might become his customers.” Hence, it was decided that the bailees could recover their own interest in the goods and would be regarded as trustees of the remainder for the owners of the goods.

The court’s decision in Waters v. Monarch Fire and Life Assurance Co clearly had its merits, as it resulted in convenience and business efficacy. It also benefitted the uninsured bailor who would otherwise have no recourse for his loss. Nonetheless, the question remained whether such a policy (where the bailees had insured the goods and were allowed to recover in the absence of personal loss or liability) was consistent with the requirement of insurable interest in indemnity insurance. The court had another opportunity to address this issue of insurable interest in Hepburn v. Tomlinson (Hauliers) Ltd9, where the House of Lords approved and upheld the decision in Waters v. Monarch Fire and Life Assurance Co. The clearest explanation in resolving the issue is found in the judgement of Lord Pearce. His lordship, after considering the position of the agent who had no interest but yet insures for others, said,

“The bailee of goods is in a very different position. He has a right to sue for conversion, holding in trust for the owner such of the damages as represent the owner’s interest. He may likewise sue in negligence for the full value of the goods, though he would have had a good answer to an action by the bailor for the loss of the goods bailed (The Winkfield10).”11

Thus in Lord Pearce’s view,

“A bailee or mortgagee, therefore (or others in analogous positions), has, by virtue of his position and his interest in the property, a right to insure for the whole of its value, holding in trust for the owner or mortgagor the amount attributable to their interest. The hold otherwise would be commercially inconvenient and would have no

justification in common sense. In my opinion, there is no burden on him to prove his intention to insure their interest on their behalf. If, however, the defendants can affirmatively prove that he had an intention not to do so, his insurance quoad that other interest is gaming and he cannot recover.”12

In this case, carriers effected a goods in transit policy on tobacco which was stolen under circumstances attaching no legal liability to them. The owners of the goods had been expressly named in the policy and the conditions were those appropriate to a first party and not a liability policy. The House of Lords held that the carriers were entitled to recover the full value of the tobacco for the benefit of the owners and it was not necessary to prove that they had intended to insure for interest of the owners.

Thus the bailee’s insurable interest was analyzed in terms of the principles of the law of agency. When a bailee effects goods insurance, the presumption in law is that he is insuring and claiming losses as an agent for and on behalf of his principal, the bailor. In this respect though, there need not be actual authority from the bailor. In fact, Lord Campbell CJ observed...

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