One of the issues considered in the recent English High Court decision of Western Trading Ltd v Great Lakes Reinsurance (UK) PLC  was whether the claimant (Western) had a sufficient insurable interest in the damaged properties.
Western, which was the Named Insured, did not own the properties. Rather, it was a company through which the owner (Mr Singh) managed and operated his property portfolio.
Under English law, the insured must have an "insurable interest" in the subject matter of the insurance. The rationale for this rule is that it prevents policies of insurance being taken out as a form of gambling or speculation. Its origin lies in the Life Assurance Act 1774, which sought to prohibit people from insuring the lives of third parties with whom they had no real connection, as a form of speculation, in the hope of profiting from their deaths. (It is an interesting historical curiosity that this practice was widespread enough to merit legislation.)
The insurable interest requirement also applies to property insurance. It is not necessary for an insured to "own" the insured property outright – a less direct interest is enough. For example, it may be enough that the insured is in possession of the property, or simply that it would suffer loss if the property were to be damaged. In other words, there may be an insurable interest if the insured has 'something to lose' – and it is recognised that the something may be hard to quantify.
In this case, the Court held that Western did have a sufficient insurable interest. In reaching this conclusion, the Court took into consideration the fact that Western paid rent to Mr Singh, managed the properties on a day-to-day basis, was responsible for their upkeep, dealt with insurance, paid the rates, granted leases to sub-tenants, and ultimately had to account to Mr Singh. There was no question of speculation or of any improper advantage being obtained by the Insured.
The Court noted that this kind of property management arrangement is a common one and ultimately concluded that it was "obvious" that Western did have an insurable interest in the circumstances.
The legal position in Australia is rather different, and it provides an interesting point of comparison.
In Australia, there is no requirement for an insured to have an interest in the insured property when the contract of insurance is entered into or at the time of the loss. If the insured has suffered a pecuniary or economic loss, the fact that it does not have a legal or equitable interest in the insured property will not bar it from recovering under the policy: see sections 16 and 17 of the Insurance Contracts Act (Cth) 1984.
In other words, the common law proprietary test, which requires an insurable interest, has been replaced with a test which focuses on economic loss.
This means that an argument such as the one made in Western would not be viable for an insurer in Australia. It would still be open to the insurer to question whether, as a matter of fact, the insured had suffered an economic loss, but the insurer would not be able to avoid liability simply on the basis that the insured had no insurable interest per se.
This change in the law was founded on a view that the requirement as to an insurable interest was based on "imprecise drafting and historical accident, rather than the implementation of any clear legislative policy."
The insurable interest rule was also seen as serving no useful purpose in the context of an indemnity policy, given that the indemnity principle would in any case prevent a recovery where the insured has not suffered any loss.
The outcome in Western would therefore have been the same under Australian law (in that the Insurer would not have been entitled to avoid liability) but the reasoning would have been different, and the Insurer would have had to approach the claim from a different perspective.