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Insurable interest

The Law Commission and the Scottish Law Commission are revisiting the issue of Insurable Interest. Despite previously looking at the matter in an Issues Paper in 2008 and as part of their 2011 Consultation Paper, the Law Commission decided in 2012 that reforming the law of Insurable Interest “was not a priority”. However, following discussions in 2014 with Life Insurers, who expressed concern over the current law, they are now returning to the issue. On 27 March 2015 the Law Commission published an issues paper, Issues Paper 10 – Insurable Interest: Updated Proposals, which seeks to update their position from their 2011 paper; they are now inviting responses, and the deadline for doing so is 29 June 2015.

Problems with the Current Law

The Law Commission has identified 3 problems with the current law[1]:

(1)   The current law is a mix of both archaic statute and common law;

(2)   The current definition of Insurable Interest derived from case law is uncertain; and

(3)   The doctrine differs depending on the type of insurance.

The Law Commission has dealt with Insurable Interest in two groups. The first group is Indemnity Insurance, including buildings insurance, liability insurance and business interruption insurance; the second is contingency insurance including life, critical illness and accident insurance.


[1] Page 3, Issues Paper 10: Insurable Interest: Update Proposals (March 2015)

Indemnity insurance

The Law Commission retains its stance that Insurable Interest should remain, insisting that it is a fundamental aspect of insurance law; it helps maintain market discipline by reducing the possibility of speculative trading and protects Insurers against invalid claims. The Law Commission, following consultation with the industry, recommends enshrining the principle in statute that is both clear and unambiguous. With regard to defining an Insurable Interest, following consultation, the Law Commission has chosen to propose a non-exhaustive list of examples that would act as a definition.

Law Commission Proposals – Indemnity Insurance:

  • An insurance contract is void for lack of insurable interest unless the policyholder has an insurable interest at the time the contract is made or there is a reasonable prospect (or similar) at the outset that the policyholder will acquire one during the life of the policy.

  • Acquiring an insurable interest during the life of the policy will be definitive proof of a reasonable prospect at the outset.

  • Insured must have an insurable interest at the time of loss to make a claim.

  • Premiums should be returned to the Insured if a policy is void for lack of insurable interest.

  • Statute will define a non-exhaustive list of examples.

Life insurance and non-indemnity insurance

The Law Commission feels that the current law in life, accident and critical illness insurance is unduly restrictive for a number of reasons. The first is the ability of people to insure their own life and that of their spouse for unlimited amounts, but not cohabitants and children. Further to this, the law currently only allows pecuniary loss recognised by law and the insurable interest at the time the contract was entered, both of these are given very narrow interpretations by the courts and are deemed excessively restrictive. Following consultation with the industry the Law Commission considers it should be for the parties to agree levels of cover.  Again, as with indemnity insurance, the Law Commission is looking to codify the definition of insurable interest in statute.

Law Commission Proposals – life insurance and non-indemnity Insurance

  • A person has an insurable interest where there is a reasonable prospect (or similar) that the insured will retain an economic benefit on the preservation of life or incur an economic loss on death.

  • No statutory limit on the amount of cover the insured can obtain over the life insured.

  • Co-habitants, where they live together as spouses, have an insurable interest, regardless of being able to show economic loss.

  • Parents can take out insurance on the lives of their children without evidence of economic loss.

  • Trustees should have an unlimited interest in the lives of the members of any group scheme.

  • Employers should have an unlimited interest in the lives of their employees when entering into a group scheme whose purpose is to provide benefits for its employees or their families.

As for indemnity insurance, the Law Commission is proposing that if a policy lacks an insurable interest it shall be void and not illegal, meaning the Insured would be entitled to recover any premiums paid. 

Conclusion

The aim of the proposals is to provide more certainty by codifying the current mix of common law and statute. There are however some significant changes being proposed to the current common law position, specifically with regard to the ‘reasonable prospect’ definition of insurable interest and life insurance, and the issue of co-habitants and children. Having ‘reasonable prospect’ in a definition of insurable interest could pose significant practical application problems, and the Law Commission is looking for consultees views on wording.

The Law Commission is now inviting responses and the deadline for responding is 29 June 2015. 

Contact

For further information please contact James Whelan, Trainee Solicitor on 020 7645 4351.

By James Whelan

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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