Having scrutinised the doctrine of "insurable interest" the Commissions ask indemnity insurers whether there is, in fact, any continued need for this doctrine.
Curiously, what links the origins and now the proposed abandonment of the doctrine in England is gambling. The statutory requirement for an "insurable interest" was introduced in the eighteenth century to deter wagering and protect against moral hazard (the incentive to destroy the insured property or taking of an insured life).
Since the Gambling Act 2005 came into effect on 1 September 2007, many indemnity insurance contracts may now be valid despite a lack of insurable interest. However, this does not mean that the holders of such policies will be able to recover under them. Many of the abuses against which the requirement for an insurable interest protected are, in fact, satisfactorily catered for by the common law "indemnity principle". The principle dictates that a policyholder is only entitled to compensation for a loss which it has actually suffered and for an amount not exceeding its loss. Its application is unaffected by the Gambling Act 2005.
The principle is a legally distinct concept from the requirement of an "insurable interest", but one increasingly difficult to differentiate in practice. Particularly so with the courts over time straining to define what amounts to an insurable interest. Since the case of Feasey v Sun Life Assurance Co of Canada (2003), the strict requirement for a policyholder to demonstrate a legal or equitable interest in the insured subject matter has been interpreted more leniently in favour of the policyholder.
Lastly, the Commissions have identified something of an anomaly. It remains a criminal offence under the Marine Insurance (Gambling Policies) Act 1906 for a policyholder to take out a contract of marine insurance without an insurable interest.
The Commissions' proposals and insurers' response
The Commissions conclude that there is little to be gained by reintroducing the requirement for an insurable interest for indemnity contracts. Instead, they propose clarifying the law where needed and resolving outstanding anomalies. One proposal is to repeal the criminal sanction imposed for taking out a contract of marine insurance without an insurable interest.
At a time when fraudulent claims and issues of moral hazard are again back in the headlines, insurers are well advised to make a full inventory of the usefulness of all forms of protection at their disposal. This includes a reappraisal of existing law and proposed reforms. They should review with caution any encouragement to discard any layer of protection against inappropriate claims, whatever its shortcomings. If the existing law does not otherwise fully meet their needs, their underwriting, contract wordings and claims practices must provide such protection.
All indemnity insurers would be particularly well advised to consider carefully the implications for them of one additional specific question raised by the Commissions: whether a legal requirement should be imposed upon all insurers themselves to check whether policyholders have an expectation or a chance of loss at the outset of the contract so as to deter an increase in moral hazard risks rather than leave this to some form of regulation.
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