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.