The Law Commission and Scottish Law Commission have invited responses to their proposals for the reform of the law of insurable interest by 11 April 2008.

The Law Commissions' preliminary view is that insurable interest in indemnity insurance no longer applies under English law and should also be abolished in Scotland. Insurable interest should, however, be retained - though relaxed - in the area of life insurance.

For an analysis of the Law Commissions' proposals please see full article below:

Full Article

The Law Commissions have considered the need for insurance law reform in the area of insurable interest because of the complexity of the statutes and caselaw governing this area. What constitutes an insurable interest is not clearly defined and varies between different types of insurance and jurisdiction. The Commissions state that for an interest to be insurable, the policyholder must gain a benefit from the preservation of the subject matter or suffer a disadvantage should it be lost. The Law Commissions' issues paper covers insurable interest in indemnity and non-indemnity insurance and may be seen by some as pro-consumer. The proposed reforms are summarised below.

Indemnity Insurance

The Gambling Act 2005 appears to have removed the requirement that the policyholder must have an insurable interest. However, the impact of the Act is not entirely clear and although it seems that, under English law, most contracts of indemnity insurance are valid (except perhaps marine contracts) with or without an insurable interest, those made under Scottish law are not. This creates a disparity.

Proposed Reforms

  • There should not be a reinstatement of the requirement for insurable interest in indemnity insurance polices. The indemnity principle requires that the policyholder has suffered a loss before a claim can be made. Policyholders can only suffer a loss if they have a connection to the subject matter of the contract and a vested interest in the furtherance of the insured or its activities. Therefore the indemnity principle already serves to distinguish insurance from gambling because of the requirement for loss, which the policyholder must demonstrate.
  • The Commissions suggest the abolition of the criminal penalties imposed by the Marine Insurance (Gambling Policies) Act 1909. It is currently a criminal offence to take out a contract of marine insurance without an insurable interest.
  • They also propose that the requirement for an insurable interest should be abolished in Scottish law.

Non-Indemnity Insurance – Life

  • A policyholder may currently take out unlimited insurance on his life, or on the life of his spouse or civil partner. However, the law does not recognise an insurable interest between other relationships of 'natural affection' (e.g. cohabitees or parents taking out insurance on the lives of their adult children on whom they depend). This problem is usually solved by the assured taking out life insurance and assigning the benefit to the person he intends to protect. However, the Commissions argue that the need for assignment is an unnecessary complication.
  • The requirement for an insurable interest complicates group insurance policies. Employers may be limited in what they can recover to the economic value of the employee during their notice period, which may seriously curtail a business' entitlement to recover an amount equivalent to the worth of that employee.
  • The interest payable on an open-ended debt may not be insurable, because the deceased debtor's liability for the interest does not exist at the time of the inception of the policy.
  • The Life Assurance Act 1774 requires that the names of all interested parties must be listed in the policy. This requirement can make policies illegal on a technicality.

Proposed Reforms

  • The Commissions consider that the doctrine of insurable interest in non-indemnity life insurance should be retained. This is partly to prevent people from insuring the lives of others without their consent. Such insurance has been historically regarded as equivalent to gambling on people's lives and being potentially dangerous and immoral. However, it is suggested that the range of people who could claim to have an insurable interest should be expanded to include a greater number of dependency relationships such as children/parents and cohabitees. The Commissions seek views on whether unlimited rights to insure the lives of financé(e)s, siblings, grandparents and grandchildren should be allowed. These proposals are suggested because of the argument that close relationships are more likely to have a genuine vested interest in the welfare of the insured and therefore could not amount to immoral gambling.
  • The Commissions suggest that insurance should be allowed where the policyholder has a reasonable expectation of pecuniary or economic loss on the death of the life insured. This would allow employers to claim for an expected loss of business upon the death of a key employee and allow insurance protecting against open-ended debt repayments of the deceased.
  • In the absence of the demonstration of an insurable interest, an alternative would be for the policyholder to obtain the consent of the insured under the life policy. The insured would consent to the amount that could be gained by the policyholder under the insurance upon death.
  • The Commissions suggest that the requirements of insurable interest should be less strictly interpreted so that beneficial group policies are more easily obtained.
  • The Commissions consider that a life insurance policy should not require the names of all interested parties to be listed as required by the Life Assurance Act 1774, as this is viewed as an unnecessary technicality. Therefore the Commissions propose the repeal of this part of the Act.
  • The Commissions propose to soften the consequences of taking out life insurance polices without an insurable interest. Rather then being deemed illegal, the policies should be deemed void to reflect the fact that the policyholder has not gambled with life insurance but has often merely taken out the wrong type of insurance. The Commissions' proposal allows policyholders to have their premiums returned in the absence of fraud.

Non-Indemnity Policies - Non-Life

The difficulty with the current law in relation to non-indemnity, non-life insurance is that it is unclear whether an insurable interest is required at all, depending on the type of insurance sought

Proposed Reform

The law in relation to ships/goods/merchandises and land/buildings is different and the Commissions have sought information on these sorts of policies. Given that non-indemnity, valued policies bear similarities to credit derivatives, the Commissions ask whether there should continue to be a requirement for insurable interest or whether the rules can be relaxed.

The Commissions have invited responses to the proposals made in the issues paper by 11 April 2008.

Further reading: Insurance Contract Law Issues Paper 4 - Insurable Interest.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 20/03/2008.