Can a shareholder validly take out insurance in his own name against loss of or damage to the

company's property?

It is eminently sensible for everyone to insure their major assets against loss or damage.

There is a particular trap where the property being insured belongs to a company and the person taking
out the policy is a shareholder - perhaps the sole shareholder - in that company.

In this situation, important questions to bear in mind when taking out the policy include -

in whose name is the property to be insured? In the name of the company or in the name of the
shareholder?
What, precisely, is the property that is being insured - is the shareholder insuring the property
owned by the company against damage or destruction, or is he insuring himself against the loss
he will suffer if his shares suffer decline in value as a result of the company's property being
damaged or destroyed?

The consequences of the separate legal personality of a company

The most fundamental principle of modern company law is that a company is a legal person, separate
from its directors and shareholders. In other words, a company is a legal entity, capable of having rights
and incurring obligations that vest in the company itself.

This principle has many corollaries, one of which is that a company is capable of acquiring and owning
property in its own right. The owner of the property is then the company itself. Its shareholders do not
own that property, and indeed have no real right (right in rem) in that property.

All that the shareholders have are personal rights (rights in personam) that are exercisable against the
company, which usually include the right to vote at shareholders' meetings and the right to dividends.

These principles were clearly articulated by the English House of Lords in Macaura v Northern
Assurance Co Ltd [1925] AC 619 (HL) where Lord Buckmaster said that -

'no shareholder has any right to any item of property owned by the company, for he has no legal or
equitable interest therein. He is entitled to 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.'

No difficulty arises from that aspect of the Macaura judgment.

What was controversial in the judgment was that the House of Lords went on to hold that a shareholder
- even if he holds all the shares in the company - does not have an insurable interest in the company's
property.

According to this judgment, if a shareholder professes to insure, in his own name, property that is owned
by the company, and if that property is later damaged or destroyed, the insurer can lawfully refuse to pay
out under the policy on the grounds that the policy had been invalid from the start - the shareholder
taking out the policy had no insurable interest in the property covered by the policy.

A trap for the unwary

The Macaura principle created a considerable trap for the unwary, particularly in the situation where a
shareholder held all the shares in a company and, through ignorance or inadvertence, insured the
company's property under a policy taken out by him in his personal capacity, instead of taking out the
policy in the name of the company.

Such a shareholder might pay premiums for many years and then, when he made a claim under the
policy, he could find his claim rejected on the technical ground that, as a shareholder, he had no
insurable interest in the company's property and that the policy had been invalid from the start.

What is an insurable interest?

The concept of an insurable interest is not synonymous with ownership. A person has an insurable
interest in property if "he stands to lose something of an appreciable commercial value by the
destruction of the thing insured." (Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374.)

In Macaura's case, the House of Lords took the view that if, as occurred in that case, the insurance was
against loss or destruction by fire of a plantation owned by the company, the shareholder's shares were
not exposed to the risk of fire. A decline in the value of those shares, attributable to the burning down of
the company's plantation, was therefore not covered by the policy.

Even in England, the Macaura decision was widely regarded as misguided, and was criticised even by
the English Court of Appeal.

An important decision of the Cape High Court on the concept of an insurable interest

In South Africa, the Western Cape High Court recently rejected the Macaura principle in Lorcom
Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd [2013] ZAWCHC 64; 2013 (5) SA 42
(WCC); [2013] 4 All SA 71 (WCC).

In a lengthy and closely reasoned judgment, Rogers J pointed out that the legal requirement of an
insurable interest is simply a means of outlawing what are in reality gambling transactions in which a
person who has nothing to lose financially from (and consequently ought to be indifferent to) damage to
or destruction of property belonging to another person, takes out a policy of insurance in respect of that
property.

Viewed in this light, the question in determining the validity of an insurance policy is not whether the
insured had an insurable interest in a technical sense, but simply whether the insurance was in reality
no more than a wagering or gambling transaction in which the person taking out the insurance was, in
effect, taking out a wager with the insurer that the property would be damaged or destroyed and the
insurer was wagering that it would not be.

Rogers J went on to say (at para [26]) that there is no reason why the inquiry into whether a person who
has taken out a policy of insurance has a financial or other legitimate interest, quite outside of the
insurance policy, in the subject of the policy should be an unduly technical matter. The legal principle
should simply be that a contract of insurance is enforceable if it is not in effect merely a gambling
contract between the insured and the insurer.

Thus, the courts had earlier held in Phillips v General Accident 1983 (4) 652 (W) that a husband had an
insurable interest in an engagement ring belonging to his wife because he had bought it for her and
because, although he was under no legal obligation to replace it if it was stolen, he nevertheless felt
under a moral obligation to do so

The insurable interest of a shareholder in the company's property

In Lorcom, Rogers J held (at para [69]) that -

"A 100% shareholding in a company gives the shareholder an interest in the company's assets sufficient
to rationally sustain insurance cover expressed with reference to the underlying value of the assets."

Although this is a decision of the Cape High Court and not of the Supreme Court of Appeal, it seems safe
to conclude that - in South Africa - the judgment has finally laid the ghost of the House of Lords decision
in Macaura to rest and determined that in this country a 100% shareholding in a company gives the
shareholder a sufficient interest in the company's assets to entitle the shareholder to insure the
company's assets in his own name. The decision is explicitly silent - see para [72]) - on what the position
would be where the person taking out the insurance has less than a 100% shareholding.

The Lorcom judgment also makes clear (see para [70]) that a policy covers only the particular asset that
is being insured. This aspect can create a trap for the unwary.

Thus, a shareholder who insures the company's property has no claim for the diminution in the value
of his shares that has resulted from damage to the company's property. Conversely, (see para [73]) a
100% shareholder who takes out insurance on the company's property need not prove, when making a
claim, the amount by which his shareholding has decreased in value.

Finally, the Lorcom judgment is concerned only with the concept of insurable interest, and inter alia
with the question whether a shareholder has an insurable interest in property owned by the company.

The judgment does not disturb and leaves wholly intact the principle that a shareholder has no right in
rem in the company's property, and merely has rights in personam against the company.