Draft Insurable Interest Bill

The Law Commission and Scottish Law Commission have published a draft Insurable Interest bill. The new Bill is intended to rectify perceived shortcomings in the existing law and enable insurance providers to respond to demand for a wider range of life, accident and critical illness cover.

Under the current law a person taking out insurance must be affected by the subject matter of the insurance and must stand to gain a benefit from its preservation or suffer a disadvantage from its loss or damage. Under section 3 of the Life Assurance Act 1774 the amount payable under a life assurance policy is restricted to the value of the insured’s legally recognised interest in the life of the person whose life is insured. These rules on insurable interest are perceived to be unclear, antiquated and restrictive and inhibiting the provision of life, accident and sickness insurance in areas for which there is a demand.

The Bill adopts a new distinction between life and non-life insurance. Previously the distinction had been between indemnity insurance, such as property and liability insurance where the sum payable is assessed at the time of loss and is measured by the insured’s financial loss, and contingency insurance where the sum payable is agreed and fixed at inception. The proposed reform of the law on insurable interest did not fit comfortably with this distinction as accident, sickness and life cover for key employees contains an element of indemnity and some valued property insurance policies provide for payment of a fixed sum.

The proposal is that for life insurance, which include life, sickness and accident policies, an insured must have an insurable interest in the life of the individual who is the subject of the insurance. That insurable interest is extended from the present legally recognised pecuniary interest to a reasonable prospect of suffering economic loss on the occurrence of the insured event (death, illness of, or injury to, the insured person). The absence of such an insurable interest would render the policy void, rather than illegal, and so premiums paid would have, in the absence of an untrue or misleading statement, to be refunded.

The new law would enable parents to take out travel and health policies for their children and legitimise group life and health insurance policies for employees and their families, which are generally honoured by insurers but not strictly legally enforceable. Key person life assurance could also be legitimately extended to cover the real value of the key person to the organisation, rather than being restricted to the person’s notice period as at present.

The daft bill also includes a non-exhaustive list of situations where an insurable interest will exist. The relationships of natural affection will extend beyond spouses and civil partners to include cohabitants who live with the insured as spouse or civil partner, and children and grandchildren, recognising that parents and grandparent are sometimes economically dependent on their adult children and grandchildren. The bar on offspring having an insurable interest in their parents and grandparents is to continue, for fear of exposing the vulnerable elderly in assisted dying. Children who wish to protect themselves against the consequences of parental care costs would be able to do so under the new, wider economic interest.

The draft bill, along with explanatory notes and the responses to earlier consultations is available at http://www.lawcom.gov.uk/project/insurance-contract-law-insurable-interest/. Comments are invited and should be emailed to the Law Commission by 14 September 2018.


Illegality as a Defence

The refusal of the courts to allow the law to be used to benefit parties engaged in serious unlawful activity was illustrated in a High Court appeal against a decision to strike out a claim. Under the Civil Procedure Rules a claim can be struck out if it has no reasonable grounds for being brought.

In Dalvinder Gujra v (1) Balbir Roath (2) Shakti Roath [2018] EWHC 854 (QB) the Claimant’s case was that the Defendants had agreed to pay him £500 to set fire to two of their motorcars and had further agreed that if he was arrested that they would ensure that charges would not be pursued. In accordance with this agreement the Claimant set fire to the cars but the police were called and arrested him. The Defendants did not tell the police that the Claimant had acted with their permission and he was charged with arson. He stood trial and was acquitted.

The Claimant then brought a claim against the Defendants in negligence. He alleged that the Defendants’ failure to tell the police about the agreement was a breach of their duty of care to him which exposed him to prosecution. He claimed damages for the time spent on remand and on bail leading up to his trial.

The Defendants applied to have the claim struck out. They denied that there was any such agreement but argued that if there had been it must have been for the purpose of assisting them in making a fraudulent insurance claim. Such an agreement would have been unenforceable as a contract because a contract is illegal and void if the object, whether directly or indirectly, is the commission of a crime. The negligence claim had no reasonable grounds for being brought because it was founded on the Claimant’s illegality and so the principle that no cause of action arises from an illegal or flagrantly immoral act (known as ex turpi causa) applied. On his own case, therefore, the Claimant’s actions in setting fire to the cars were patently illegal and it would be ‘an affront to public conscience and to the integrity of the legal system for the law to afford the Claimant a remedy’. Master Davison agreed and struck the claim out.

The Claimant’s appeal was dismissed. He advanced a number of arguments, most of which were specific to the particular and peculiar circumstances of the claim. One argument, however, concerned the use of ex turpi causa illegality as a defence. The fact that a claimant was engaged in an illegal activity which brought about his injury does not automatically mean his claim for damages for personal injury must be dismissed and the test for establishing illegality, as set out in the case of Patel v Mirza [2016] UKSC 52, is in three parts:

  • Has there been illegal conduct?
  • Having regard to the nature and circumstance of the illegal conduct, is it in the public interest to deny the relief claimed?
  • Is denial of the relief a proportionate response to the illegality?

Mr Justice Spencer considered that a serious attempted fraud upon an insurance company could not be said to be no more than a minor transgression. The public interest was served by deterring or defeating dishonest insurance claims by denying the Claimant a remedy. The loss of the damages claimed for time spent on remand and on bail was in no way disproportionate to the unlawfulness of the Claimant’s conduct in involving himself in such a serious attempt at fraud.

So there is no limit to what a QC can do after all…

In Allianz Insurance plc v Tonicstar Limited [2018] EWCA Civ 434 the Court of Appeal has overturned the decision of Mr Justice Teare to remove a QC as an arbitrator on the grounds that he did not have the requisite experience of insurance or reinsurance. Under clause 15.5 of the Joint Excess Loss Committee Clauses arbitrators had to be persons from the “trade or business of insurance”, and so a QC with more than 10 years’ experience of acting in insurance and reinsurance disputes did not qualify for appointment (see my post “There are some things that even a QC cannot do…” November 15 2017).

Mr Justice Teare felt bound by an earlier unreported decision of Mr Justice Morison in Company X v Company Y (2000) although he indicated that, uninhibited by that authority, he might have decided the case differently. Lord Justice Leggatt in the Court of Appeal was not so constrained and found that Mr Justice Morison’s interpretation of the clause was indefensible and that it did not impose any restriction on how the ten years’ experience was to be acquired.

Counsel for the Respondent did not attempt to support Mr Justice Morison’s interpretation but instead argued that although the QC undoubtedly had considerable more than 10 years’ experience of insurance and reinsurance law, there was no evidence that he had any experience of insurance or reinsurance “itself”. He took as an example a sports arbitration and suggested that having experience of sports law would not be enough to demonstrate experience of sports. Similarly, experience of engineering or telecommunications law was not the same as experience of engineering or telecommunications.

Lord Justice Leggatt rejected this argument. Insurance and reinsurance differ from sports, engineering and telecommunications in that insurance contracts create legal rights and obligations whereas the law regulating sports, engineering and telecommunications is clearly distinct from the activities themselves. Those who work in insurance, whether as brokers, underwriters or in claims, need to have some legal knowledge and understanding. The practical and legal aspects of insurance and reinsurance are intertwined and there is no such thing as insurance or reinsurance “itself” which is separate and distinct from the law of insurance and reinsurance.

Two points: the capability of QCs to do anything and everything is restored, and the crucial importance of the legal elements of the CII and CILA examinations is underlined.

Aggregation of Claims

In Spire Healthcare Ltd v Royal and Sun Alliance Insurance PLC [2018] EWCA Civ 317, the Court of Appeal considered the wording of the schedule and a proviso in a liability policy. The schedule set limits of £10 million for any one claim and £20 million for all claims during the period of cover. The proviso provided that the total amount payable arising out of all claims consequent on or attributable to one source or original cause ‘shall not exceed the limit in the schedule’ without specifying whether that limit was £10 million or £20 million.

The claim arose out of unnecessary and negligent operations performed by a surgeon for which Spire Healthcare Ltd (“Spire”) agreed to pay compensation to the patients. His Honour Judge Waksman QC ruled that the insurer’s liability to indemnify Spire was limited to £10 million as the claims were consequent on or attributable to one source or original cause. Spire appealed.

Spire’s arguments were that the proviso was inconsistent with the schedule and that a reasonable reader would have focused on the schedule. The schedule contained no reference to the proviso and as the proviso did not expressly say that linked claims were to be treated as a single claim it was wrong to assume that they would be treated as such. The wording of the schedule and proviso was ambiguous and applying the contra proferentem rule the construction more favourable to the insured should apply.

In dismissing the appeal, Lord Justice Simon’s starting point was to consider the combined effect of the schedule and proviso without giving greater or lesser weight to either. The approach to the interpretation of the policy of was that of sophisticated insured who is assisted by professional advice and who does not restrict their reading to the limits of indemnity in the schedule. The judge acknowledged that the wording of the proviso could have been clearer (HHJ Waksman QC had said ‘in frequently used, modified and revised policies of insurance, neatness and elegance are often lost’) but also that in some circumstances, for example where there is a deductible or excess, the aggregation of claims might work to the insured’s advantage. There was no real ambiguity in the schedule and proviso when read together and so the contra proferentem rule did not apply.

Two observations on the case. First, Lord Justice Simon recognised that the insured in a liability policy of this type was a sophisticated reader who read all the policy and was  professionally advised. Second, a lot of time and expense might have been saved if neatness, elegance and a greater degree of precision had been retained in the modification and revision of the policy.

Warranty or condition precedent to liability?

In Bluebon Limited (in liquidation) and (1) Ageas UK Limited (2) Aviva Insurance Limited (3) Towergate Underwriting Group Limited [2017] EWHC 3301 (Comm) the High Court considered whether a term in an insurance policy was a warranty or a condition precedent to liability.

The Claimant insured owned a hotel that was destroyed by fire. The insurers were the First and Second Defendants and the brokers were the Third Defendants. The policy contained a term, described as an Electrical Inspection Warranty (“EIW”), that required the electrical installation to be inspected and tested every five years. It was agreed that the electrical installation had not been tested within the five years prior to policy inception or at any time since.

The insurers contended that the EIW was a warranty and that the breach entitled them to declare the policy void from inception. Alternatively, they contended that the term was a suspensive warranty and that cover was suspended from inception until the electrical installation was inspected. In practical effect there was no difference of outcome whether the EIW was a ‘true’ or a ‘suspensory’ warranty as there was no dispute that the electrical installation had not been inspected post-inception. Under both a true and suspensory warranty the insurers were entitled to declare the policy void from inception and refund the premiums paid, less an amount paid for an earlier burst pipe claim.

The insured and their brokers contended that the compliance with the EIW was a condition precedent to the insurers’ liability for a fire caused by a fault in the electrical installation. Unless the fire was caused by a fault in the electrical installation then the insurers were liable.   The construction of the EIW was tried as a preliminary issue and the cause of the fire was not considered.

The Honourable Mr Justice Bryan considered that the description of the EIW in the policy as a warranty was not necessarily conclusive, not least because, as Mr Justice Mackinnon observed in Roberts v Anglo Saxon Insurance Company [1927], the word warranty “is often used with the greatest possible ambiguity in insurance policies”. The consequences of a breach, that the policy would be null and void from inception, were not spelled out and the policy’s general conditions provided that due observance and fulfilment of the policy terms, which included the EIW, were conditions precedent to the liability of the insurers to make any payment.

Instead the judge applied the three-stage test identified by Mr Justice Rix in HIH Casualty & General Insurance v New Hampshire Insurance Co. [2001] (“HIH”). The first question was whether the EIW was a term that went to the root of the contract. Here the purpose of the EIW was to ensure that, as far as possible, the electrical installation was sound and without defect and thereby the risk of fire was reduced. It was clear, therefore, that the EIW went to the root of the contract.


The second question was whether the EIW was descriptive of or had a material effect on the risk of loss. Fire was an insured peril under all sections of the policy and therefore the test was satisfied.

The third question was whether, in the event of breach by the insured, damages would be an unsatisfactory and inadequate remedy for the insurer. Damages would be a suitable remedy if the insurers could reduce or extinguish their liability to the extent that a fire was caused by a fault in the electrical installation that would have been discovered and remedied through compliance with the EIW. The judge considered that it might be impossible to establish whether a fire was caused by a defect in the electrical installation, particularly in the event of destruction in a particularly fierce fire. Damages were not, therefore, a satisfactory or adequate remedy for the insurer.

The three tests in HIH were satisfied and so the EIW was a warranty and not a condition precedent to liability. The judge, however, preferred the construction of the EIW as a suspensive rather than a true warranty (although it made no practical difference in the circumstances of this claim). He considered that the EIW should reflect the intention of the parties by reference to what a reasonable person having all the background knowledge of the parties would understand it to mean. The EIW clearly contemplated that if there had not been an inspection within the last five years then one was to be undertaken immediately, and that cover would be suspended until it took place. It would be wrong to say that if an inspection was outstanding at the time of inception, but one was undertaken shortly afterwards, the policy would nevertheless be null and void.

The significant point to note from the decision is that the judge did not consider the description in the policy of the EIW as a warranty to be conclusive. Care should be taken when drafting terms that an insurer wishes to rely on as warranties that the consequences of a breach are made clear and that they are consistent with the general policy conditions.


Claims notification conditions

In Zurich Insurance plc and Maccaferri Limited [2016] EWCA Civ 1302 the Court of Appeal upheld a High Court finding that Zurich Insurance was not entitled to decline to indemnify its insured on the grounds of breach of the claims notification clause.

The claim arose out of an accident at work in which the claimant, who had already lost the sight of one eye, lost the sight in his other eye, rendering him blind. Maccaferri supplied the allegedly faulty machine to Jewsons who in turn supplied it to the claimant’s employers, Drayton.

The claim notification condition in Maccaferri’s public and products liability policy with Zurich was in two parts. The first part provided that the insured had to give notice in writing to the insurer “as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof”. The second part provided the insured shall also “on receiving verbal or written notice of any claim intimate or send same or a copy thereof immediately to the Insurer”.

The accident occurred on 22 September 2011 although it did not appear in Drayton’s accident book until 27 November 2011. On 28 September 2011 both Drayton and Jewson informed Maccaferri by telephone that there had been an incident involving the machine and that it was to be taken off hire and retained for investigation. The recipient of the telephone call at Maccaferri said that neither Drayton or Zurich gave him any further details of the incident and he was not told of any serious personal injury having been caused nor was there any complaint about the machine. By 24 October 2011 Maccaferri were aware that there had been an accident involving the machine because they agreed to provide test certificates. By 12 January 2012 Maccaferri know that someone had been injured because telephone calls were made enquiring as to the injured party’s condition. In June 2012 the Maccaferri employee who had taken the telephone calls in September 2011 overheard a pub conversation that appeared to relate to the same incident but introduced the injured party’s loss of sight. He reported the conversation to his superior and whilst he thought that the injured party might bring a claim, he thought it unlikely that the claim would be brought against Maccaferri because he considered that there was nothing wrong with the machine.

The claimant began a claim against Drayton in July/August 2012. Judgment was entered for damages to be assessed on 18 February 2013. On around 29 March 2013 Drayton brought Jewson into the proceedings for a contribution toward the damages to be paid to the claimant and then on 18 July 2013 Jewson wrote to Maccaferri to inform them that they had issued a claim against them for a contribution. On receipt of that letter, two years and nine months after the accident, Maccaferri notified Zurich. Zurich refused to indemnify Maccaferri on the grounds of late notification in breach of the first part of the notification clause.

Zurich’s case was that Maccaferri were required to notify Zurich of the incident as soon as they were aware of both the occurrence of the incident and that it might lead to a claim. This might not occur simultaneously as they might be notified of the occurence and only later become aware that it might lead to a claim. Lord Justice Christopher Clarke rejected this construction of the first part of the notification condition. Whether an event is one likely to give rise to a claim is to be determined by reference to the position immediately after it occurs. Zurich sought to impose an obligation on Maccaferri to carry out a continuous assessment of past events in order to see whether a claim might be forthcoming. Lord Justice Clarke found that the construction of the Zurich notification clause did not impose such an obligation, although he noted that other clauses in other policies can have that effect.

As drafted, the Zurich notification condition required Maccaferri to notify Zurich if, when it became aware of the incident and with the actual knowledge it possessed at that time, a reasonable person would have thought it at least 50% likely that a claim wold be made. Clearly that would be a desirable obligation to impose on their insured but in order to do so, the notification clause would have to be re-drafted.

Fraudulent claims and the consequences

The consequences of pursuing fraudulent claims have been shown on two recent motor cases. Both claimants have been committed to prison.

In Ewere, the claimant was at home and answered the door to a motorist who admitted that she had accidentally collided with his parked car whilst parking her own. The two went to look at their cars and discovered a mark on the claimant’s car, although it was later decided that the mark was there already. They exchanged details and went their separate ways. Some weeks later, the claimant began a personal injuries claim for neck and shoulder whiplash, saying that he had been in the car when the collision occurred. He then produced his GP records which recorded him as having said that he had hit his head on the steering wheel in the collision but made no mention of neck or shoulder pain. The claim was pursued to trial where it was dismissed.

The defendant’s insurers applied for the claimant to be committed to prison for contempt of court. Mr Justice Slade found that the claimant had had not been in the car and had not suffered any injuries in the collision and committed him to prison.

In Ahmed the claimant overtook on the inside lane, cut in front of the defendant’s car and then braked suddenly for no reason, causing the defendant to collide with him. The claimant alleged that he had been in the same lane all along, in slow moving traffic and that the defendant had driven into the back of his car. Unfortunately for the claimant, the incident was captured on CCTV. The claim was pursued to trial where it was dismissed and the District Judge found that the claim was fundamentally dishonest.

The defendant’s insurers applied for the claimant to be committed to prison. Mr Justice Spencer found that the claimant’s version of events was false and that he had made false statements that he could not have honestly believed were true and committed him to prison.

In contempt proceedings the applicant must prove beyond a reasonable doubt (one of the few exceptions to the usual test of balance of probabilities in civil proceedings[1]) that the respondent had made false statements, that the respondent had no honest belief in the truth of his statements, that the statements were likely to interfere with the course of justice and that the respondent knew that the statements were likely to interfere with the course of justice. Both claimants will now have an extended opportunity to reflect on whether the potential financial gain was really worth the risk of the loss of their liberty.

[1] The others are proceedings in the Election Court, sexual offences prevention orders and risk of sexual harm orders.