Partner Article

Law Commission Reforms to Insurance Contract Law: Insurable Interest

With Watson Burton LLP Law Firm

On 14 January 2008 the Law Commission published ‘Issues Paper 4’ on insurable interest. This is the first part of the proposals to be considered in relation to a second Consultation Paper on Insurance Contract Law reform. The Law Commission have invited all responses to their proposals on insurable interest to be made by 11 April 2008.

The law currently states that for an insurance policy to be valid, the insured must have a sufficient interest in the subject matter of the insurance. The law differentiates between indemnity and non indemnity insurance. Indemnity insurance covers the insured for the amount they have lost, examples of which are liability or property insurance. Non-indemnity policies provide the insured with a set amount after a ‘trigger event’, such as policies of life and accident insurance, although theoretically property insurance may also fall within this category.

The differing and complex approach to insurable interest makes it difficult for both insurers and the policyholder to understand and apply the law. The doctrine of insurable interest is said to assist, firstly, in defining insurance and secondly, in preventing undesirable social effects, but it is questionable whether the doctrine of insurable interest can still be justified.

Summary of Proposed Reforms

• Indemnity Insurance- The Gambling Act 2005 appears to have abolished the requirement of insurable interest in indemnity insurance. However, the indemnity principle requires the policyholder to have suffered a loss. A person will only have suffered a loss if they have a connection with the subject matter of the contract, thereby distinguishing insurance from gambling and preventing undesirable social effects. It is therefore proposed that the doctrine of insurable interest is now unnecessary in indemnity insurance. The Law Commission does not support the reintroduction of a statutory requirement for insurable interest in indemnity contracts.
• Life Insurance- The Law Commission proposes that the doctrine of insurable interest for life insurance should be retained but the category of insurable interest should be increased to permit unlimited rights to insure, for example, the lives of fiancé(e)s, siblings, grandparents or grandchildren.
• Legal Pecuniary Loss- They propose extending the current test of a pecuniary interest to allow a person to obtain insurance where he has a reasonable expectation of pecuniary or economic loss on the death of the life of the insured.
• Consent - A further proposal is that the consent of the life insured should provide an alternative ground for establishing insurable interest. The amount insured should be limited to the amount to which the life insured consents.
• Group Insurance- Provision of policies both to employees and their wider families.
• The Assurance Act 1774, section 2- This section requires that the names of all interested parties are to be listed in the life policy. This is said to be an unnecessary technicality which the Law Commission propose should be repealed.
• Marine Insurance- Propose to abolish the Criminal penalties imposed by Marine Insurance (Gambling Policies) Act 1909 for making a marine policy without an insurable interest.
• The Law Commission proposes that a formal requirement is put on insurers to enquire whether there is sufficient possibility of indemnity loss before the contract is made.

The Australians have taken a bold approach in their reform of Insurance Contract Law and completely abolished the doctrine of insurable interest. However, it appears that the preliminary view of the Law Commission is that the doctrine of insurable interest in life insurance should be retained, but allowing for the expansion of the categories of interest, thereby allowing more people rights to insure the lives of others.

If you would like further details about the Law Commissions proposed Insurance Contract Law Reform or would like to respond to their proposals you can find further details at the Law Commission website: www.lawcom.gov.uk/insurance_contract.htm.

If you have any comments or questions about this article or about any other Insurance related matters, please contact Victoria Ferguson of Watson Burton LLP Professions and Insurance Group at victoria.ferguson@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .