Life tenants, remaindermen settled estates and insurance

In discussing the question of life estates and rights of residence in my letter in the September 2016 LSJ (‘Wording Counts’) I suggested at the end that it might be worthwhile to write a separate article on the question of insurance so far as it bore on relations between life tenants and remaindermen. The subject is quite interesting and I will outline the position as I see it.

Legal interests

In the case of legal interests, as opposed to equitable interests, there is no obligation on either life tenant or remainderman to effect insurance although each would have an insurable interest and can insure that interest. At common law if a life tenant takes out a policy with the remainderman specified as a person interested then the life tenant can insure for full value covering both interests. Under the Insurance Contracts Act 1984 (Cth), where a life tenant has insured persons interested but not named in the policy, those interested persons can claim insurance moneys available after the interest of the life tenant has been paid unless the policy states that not to be the position (s 49).

Up until 1837 the Fires Prevention (Metropolis) Act 1774 (Imp) (14 GeoIII Ch 78) (the ‘FPMA’) was in force in New South Wales. Section 83 provided that any person having an interest in property destroyed by fire could require the proceeds of an insurance policy to be applied in repair or reinstatement of the property destroyed or damaged. This was to prevent a life tenant or other person with an interest less than the fee simple from keeping insurance moneys for his benefit to the detriment of others having an interest. The purpose was to prevent fraud; it did not authorize a life tenant to insure so as to recover more than his loss.

Section 83 of the FPMA was re-enacted in almost the same terms by section 71 of the Sydney Building Act 1837.

It was determined in Reid v Fitzgerald (1926) 48 WN (NSW) 25 (‘Reid’), that the effect of this was to repeal, so far as relevant, the FPMA. This Act, or at least section 83 of it, had been held to apply to buildings outside the London metropolis, and the same rather strange reasoning was held to apply to section 71 of the Sydney Building Act. This latter Act was itself repealed by the City of Sydney Improvement Act 1879. It was held in Reid and confirmed in Hazelwood v Webber (1944) 52 CLR 268 at 274 that this repeal did not reinstate the FPMA. In any event had it done so the reinstated Act would probably have been repealed by the Imperial Acts Application Act 1968. This is now only of historical interest but it does explain some earlier English cases.

There is a view that if a life tenant insures for the full value of a property the insurance is held for all persons interested. This is true only if that was the intention. If not then as insurance policies are policies of indemnity the interest of a life tenant may be less than that of an owner in fee simple (In re Bladon; Dando v Porter (1911) 2 Ch 350 at 354 (‘Re Bladon’)).

In the case of a legal life tenant of an estate which includes a real estate property Blackacre, but where the life tenant does not live in the property it may well be found that the tenant for life insuring was not doing so for all persons interested. If for instance the life tenant is aged 90, his interest in Blackacre is not its full value. His loss is not to the total value of the Blackacre improvements. If he insures for the full value, all he can recover is his own loss unless his intention was to cover all interests as the policy is to indemnify him against his loss. British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86 is authority for this but it does seem to assume that intention is subjective rather than objective. While this was the position at common law, it has been altered to some extent by section 49 of the Insurance Contracts Act.

Now, if a life tenant insures for the full value, then after the life tenant has been indemnified, other persons interested can recover their loss up to the balance of the sum insured. While this is a change, it should be remembered that the insurer has been receiving premiums on the basis of the sum insured. As I have said, the policy terms can exclude section 49 rights.

If a legal life estate is determinable upon the tenant failing to insure, or is conditional upon such insurance being effected, then such insurance is regarded as being for the benefit of all persons interested in succession. This is logical as otherwise there would be no point in the condition. It is an exception to the rule that insurance policies are policies of indemnity only.

Equitable estates and settled estates

There is no statutory or common law obligation on an equitable life tenant to insure. There can of course be an obligation under the terms of the trust or settlement.

A more difficult question arises in the case of trustees of settled estates and this should be considered under the headings of (a) power and (b) duty.

As I said in the September letter, section 41 of the Trustee Act 1925 (NSW) gives power to a trustee to insure. If this is done the premiums are a charge against income and insurance moneys received are taken as capital in the settled estate and can be applied in reinstatement (s 42). It seems likely that section 41 was enacted, following somewhat similar provisions in English trustee legislation, because it was thought at the time that trustees had no power to insure unless the beneficiaries agreed. In any event the power now clearly exists.

It might be thought that because section 41 gives power there could be no duty on trustees to insure. That was the position in England in earlier days, but it is not so now in New South Wales at least.

The question was considered carefully by Cohen J in Pateman v Heyen (1993) 33 NSWLR 188 so that it is not necessary here to set out the authorities on each side of the argument. In short the judgment held that the duty of a trustee administering a trust estate was to ‘exercise such care and skill as a man of ordinary prudence would exercise and he is liable for a loss resulting from his failure to comply with this standard’. In general, a prudent person would insure if funds are available. There are other authorities which support the view noted in Jacobs’, Law of Trusts in Australia, 7th ed [1719].

Where there are no settled funds held on the same trusts, the position is likely to be different as the section 41 power cannot be exercised. The position taken now in Jacobs’ is that if funds are available, trustees would be wise to insure. There is no statutory power to mortgage or otherwise to raise moneys for payment of premiums.

If there is a provision in a settled estate making the life tenant bound to insure then the insurance is for the benefit of the estate generally or the persons entitled in succession (Re Bladon at 354). The position here is the same as for a legal life estate determinable on failure to insure.

Rights of residence

It was thought in the past that persons having a mere right of residence had no insurable interest themselves although it could be made a condition of their right that they insured for full value in the name of the trustee. As section 16 of the Insurance Contracts Act now provides that an insurable interest is not necessary to insure, a person with a right of residence can insure, and in the event of loss, recover his or her pecuniary or economic loss. However it is far better to set out insurance obligations in wills or trusts.

Summary

In the case of legal life tenants and remaindermen, they can insure if they wish but are not bound to do so. A life tenant insuring is entitled to retain insurance proceeds for the value of his or her interest. If a life tenancy is conditional upon the life tenant insuring, the insurance monies are for the benefit of all persons so interested.

In the case of equitable interests:

1. if a tenant for life is bound to insure, the insurance moneys are for the benefit of all persons interested in the insured property;
2. there is no obligation on an equitable life tenant to insure unless (i) applies; and
3. trustees of a settled estate have power to insure and the better view is that if funds are available, they have a duty to insure.

It follows from all of this that Mr Browne was quite correct when he said in his article in the June LSJ (‘Life Estates and Personal Rights of Residence’ (June 2016) 23 Law Society Journal, 82) that in the case of equitable life estates or rights of residence it is wise to set out clearly the obligations to insure and pay premiums. To do so will avoid any doubts of fact or law about obligations and entitlements.

William V Windeyer is a Past President of the Law Society of NSW, and a former solicitor and Supreme Court Judge.