In this regular feature we take a look at common clauses found in Energy Insurance that are often not well understood and try to look at what their intentions are, and what they cover or exclude.
In this article we look at ‘Policy Proof of Interest’ clauses.
The phrase ‘Policy Proof of Interest’ is often seen in slips and in policies, often along with the phrase ‘Full Interest Admitted’ (or PPI, FIA).
But what do these mean?
To answer that we first need to understand that for an insurance policy to be valid and enforceable the Insured must have an ‘insurable interest’ in the subject matter of the policy.
In English law this is set out in the Marine Insurance Act of 1906, which in Section 4 provides:
“(1) Every contract of marine insurance by way of gaming or wagering is void. A contract of marine insurance is deemed to be a gaming or wagering contract
(a) Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest;”
The term ‘Insurable Interest’ is defined in Section 5(1) of the 1906 Act:
“Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure”
Section 5(2) provides:
“In particular a person is interested in the 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 the insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof”
Section 6(1) of the 1906 Act states that the interest must be shown by the assured “at the time of loss”. He cannot acquire interest by any act or election after he is aware of the loss, though he is not required to have an insurable interest at the time when the insurance was effected.
Therefore where there is no insurable interest and also no expectation of acquiring an insurable interest at the time the contract of marine insurance is made, the contact is statutorily deemed to be a gaming and wagering contract, and therefore void.
As a matter of market practice, insurers have been prepared to write policies on a ‘Policy Proof of Interest’ (PPI) basis and not require the Insured to prove an insurable interest. These are, however, technically void and unenforceable under English law.
When agreeing to a PPI provision the insurer agrees not to deny coverage for lack of insurable interest. This creates an honourable, rather than legally enforceable, agreement where the insurer is agreeing to dispense with proof of insurable interest. This has in the past been referred to as an ‘Honour Policy’, with the parties relying on the honour of the Insured that he has an insurable interest and on the honour of the Insurer that he will not contest a claim on lack of evidence of insurable interest.
Under the Marine Insurance Act of 1745, policies effected specifically not requiring proof of interest were not only void, but illegal, however under the Marine Insurance Act of 1906 such a provision does not exist and PPI policies are simply void rather than illegal.
The fact that a policy is effected on PPI terms does not necessarily mean the Insured in fact has no insurable interest, however the incorporation of PPI terms may be enough to technically invalidate what might otherwise be valid policy.
In the past a PPI clause was often a slip of paper attached to the policy by a pin or staple that could be removed by the Insured when presenting a claim, in the incorrect believe that by doing so made the policy valid. However the Marine Insurance Act makes such polices invalid and once invalid the act of removing a clause does not make the contract valid.
A common form of PPI clause states: [Heading] This slip is not part of the policy, and is not attached hereto, but is to be considered as binding in honour on the underwriters, the Assured however having permission to remove it from the policy should they do desire. [Clause text] In the event of claim it is hereby agreed that this policy shall be deemed sufficient proof of interest. Full interest admitted.
Opining on PPI polices in the case of Thos Cheshire & Co v Vaughan Bros and Co (1920) Lord Justice Scrutton said their use placed judges in difficulty in that they have a duty not to enforce void contracts but usually have no evidence other than pinholes in the margin of the policy. He added that businessmen should be aware that if they persistently enter into contracts which are null and void under a statute, they must not complain if the courts obey the statute rather than their commercial practice. He went on to say that since businessmen cannot rely on honour to defeat the law, they are equally at risk if one of the parties reneges on his undertaking, especially where professional or commercial inhibitions on doing so are overcome by financial pressure, in particular where one of the parties has become insolvent and his insolvency practitioner maintains the strict legal position.
WHEN AND WHY ARE PPI TERMS USED?
Lord Justice Scrutton further states that there are cases where there is a real loss, but it is difficult to prove its exact amount, and it is convenient in a business sense to have it assessed beforehand. One such example often seen in Offshore Energy Insurance is the insuring of ‘Additional Total Loss’ amounts in the event of a Platform or a Mobile Offshore Drilling Unit (MODU).
These additional sums payable to the Insured may have various different descriptions such as ‘Increased Value’, ‘Increased Cost of Construction’, ‘Accelerated Cost of Construction’, ‘Additional Total Loss Amount’ and ‘Stipulated Loss Amount’.
Where the replacement cost of a platform or unit is simply split over ‘All Risks’ and one of these additional Total Loss descriptions to reduce the overall premium (as a Total Loss rate will be lower than the All Risks rate) there should be no need whatsoever for PPI terms as the Insured’s insurable interest is easily evidenced.
However where the Insured is looking to collect a sum over and above the replacement cost, for example to cover him for loss of hire (not covered by a loss of hire policy excluding total loss) or other lost revenue and additional costs and expenses that will inevitably be incurred following a Total Loss, the insurable interest of such amounts is more difficult to prove and it is tempting to have insurers agree to waive the requirement of the Insured to prove his insurable interest following a loss.
However, depending upon how the jurisdiction and law of the policy in question treats PPI clauses, it may be better to seek an ‘agreed value’ policy (if insurers will agree such) rather than risk adding PPI terms that may make the policy unenforceable should the need ever arise where the insurer for whatever reason is not honouring the clear intent to waive proof of insurable interest.
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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email email@example.com.