Insurable Interest and the Law

Franziska Arnold-Dwyer

• Publisher: Routledge
• Year: 2020
• ISBN:
  9780429664120
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Seguros

This book assesses the role of the doctrine of insurable interest within modern insurance law by examining its rationales and suggesting how shortcomings could be fixed.

Over the centuries, English law on insurable interest – a combination of statutes and case law – has become complex and unclear. Other jurisdictions have relaxed, or even abolished, the requirement for an insurable interest. Yet, the UK insurance industry has overwhelmingly supported the retention of the doctrine of insurable interest. This book explores whether the traditional justifications for the doctrine – the policy against wagering, the prevention of moral hazard and the doctrine's relationship with the indemnity principle – still stand up to scrutiny and argues that, far from being obsolete, they have acquired new significance in the global financial markets and following the liberalisation of gambling. It is also argued that the doctrine of insurable interest is an integral part of a system of insurance contract law rules and market practice. Rather than rejecting the doctrine, the book recommends a recalibration of insurable interest to afford better pre-contractual transparency to a proposer as to the suitability of the policy to his or her interest in the subject-matter to be insured.

Providing a powerful defence for the retention of insurable interest, this book will appeal to both academics and practitioners working in the field of insurance law.

1 Introduction

The UK insurance industry has a long history in the international insurance and reinsurance markets. Today, the UK insurance and long-term savings provider industry is the largest in Europe, and fourth largest in the world,¹ but faces new challenges from technical innovations, consumer protection demands, the sharing economy, alternative risk transfers and financings in the capital markets and Brexit. Since 2006 the Law Commission of England and Wales and the Scottish Law Commission (together, the ‘LC’) have been engaged in a joint project to transform English and Scottish insurance contract law into a modern insurance law fit for the 21st century. Thus, the Consumer Insurance (Disclosure and Representations) Act 2012 (‘CIDRA’) significantly rebalanced the approach to the pre-contractual provision of information by consumer insureds to their insurers. The Insurance Act 2015 (‘IA 2015’) reformed, inter alia, the pre-contractual duty of disclosure of non-consumer insureds and, for consumer and non-consumer insureds alike, the law on breach of insurance warranties and conditions and fraudulent claims.

The final outstanding piece of the LC’s insurance contract law reform project is the doctrine of insurable interest. The doctrine of insurable interest is concerned with the insured’s relationship with the subject-matter of insurance. The LC have identified a number of issues with the current law on insurable interest, including its complexity and uncertainty. Some commentators argue that the doctrine of insurable interest is an anachronism which is no longer needed. In contrast, the insurance industry has overwhelmingly supported the retention of the doctrine of insurable interest. The LC have put forward proposals for a ‘Draft Insurable Interest Bill’² (the ‘IIB’), which widens and clarifies the ambit of the doctrine of insurable interest in relation to life and life-related insurance. At the time of writing, it is uncertain whether, when and to what extent the IIB will be introduced in, and passed into law by, Parliament. The IIB leaves the law relating to other types of insurance, including property and liability insurance, largely untouched. In the United States, the doctrine of insurable interest has attracted judicial and legislative attention in relation to stranger-originated life insurance (‘STOLI’). STOLIs are investment schemes facilitated or instigated by a third party investor pursuant to which a person, in whose life the investor has no insurable interest, takes out life insurance, with the premium payments being funded by the investor and with the intention that the policy be assigned to the investor shortly after the policy has been issued.

1 Association of British Insurers (‘ABI’), ‘UK Insurance & Long-Term Savings – The State of the Market 2019’ (February 2019), 2.

2 LC, Insurable Interest Bill (June 2018).

This book examines the English law on insurable interest and contributes to the debate whether the doctrine remains relevant to modern English insurance law and market practice and whether and how the doctrine of insurable interest should be reformed. Thus far, the debate has been focussed on the doctrine’s failings in delivering on what it promises to do: namely to differentiate contracts of insurance from wagers, to prevent or reduce moral hazard and to support the indemnity principle (together, the ‘Traditional Justifications’). Rather than rejecting the doctrine of insurable interest for its flaws, it is examined what the doctrine still has to offer and how its shortcomings might be fixed. It is argued that the doctrine of insurable interest is part of a system of insurance contract law rules and market practice. The Traditional Justifications are still relevant and command new significance. Moreover, the doctrine can be rationalized on two novel grounds: its existence (1) is integral to the operation of other doctrines and principles of insurance law and, in relation to property insurance, the operation and performance of standard terms contracts, and (2) is a defining characteristic of property indemnity insurance contracts. However, the doctrine of insurable interest would operate more fairly and effectively if it were to be supported by (1) a statutory duty on an insurer to decline to enter into a contract of insurance which it knows would be void for lack of insurable interest, and (2) a regulatory obligation on insurers to provide information to the insured on the insurable interest requirement specific to the type of policy in question before the contract is entered into.

This book is structured as follows: Chapter 2 looks into the history, and Chapter 3 identifies the legal bases for the requirement for an insurable interest and discusses the courts’ approach to dealing with insurable interest issues. Chapter 4 discusses the meaning of insurable interest, namely what kind of relationship between the insured and the insured property is needed to satisfy the insurable interest requirement. Chapter 5 takes stock of the existing debate on the law on insurable interest – the criticisms raised and how it might be reformed – including the LC’s IIB proposals and academic contributions, and provides an overview of the approaches taken by a number of foreign jurisdictions. Chapter 6, Chapter 7 and 8 reassess whether the Traditional Justifications are still relevant to modern insurance law and market practice. Chapter 9 explores the interconnectedness of the doctrine with other doctrines and principles of insurance law. Chapter 10 considers the extent to which the notion of an insurable interest is embedded in property insurance policy wordings. Chapter 11 examines whether, in addition to being a validity requirement, the requirement for an insurable interest is a definitional characteristic of contracts of indemnity insurance. Chapter 12 evaluates the doctrine of insurable interest’s remedial and enforcement mechanisms and puts forward suggestions for making the operation of the doctrine fairer and more effective. Chapter 13 concludes with some observations on reforming the doctrine of insurable interest.

2 The historical development of the insurable interest requirement

Formative period

Insurable interest under the lex mercatoria and common law

English insurance law emerged from the lex mercatoria, a body of transnational customary law which had gradually developed as a result of dealings between merchants.¹ By the beginning of the 17th century, the use of insurance had become so established that the preamble to the Policies of Assurance Act 1601 stated that it had been ‘time out of mind a usage’ among English and foreign merchants to procure insurance on ships and goods. Inherent in the concept of a contract of insurance under the lex mercatoria was that the contract was subject to the indemnity principle and that the insured should run part of the risk, or share into the adventure, itself.² In early insurance practice, the insured ‘running the risk’, whilst not using the terminology of insurable interest, translated into a requirement that the insured had a proprietary interest in the subject-matter of the insurance, most commonly ships or goods in transit, so that in the event of (physical) loss or damage, the insured would suffer an actual loss. Thus ownership and interest tended to coincide. At the close of the 17th century it appears to have been settled law in England that a lack of insurable interest rendered a contract of insurance void:

Take it that the law is settled, that if a man has no interest, and insures, the insurance is void, although it be expressed in the policy interested or not interested, and the reason the law goes upon, is the encouragement of trade, and not that persons unconcerned in trade, nor interested in the ship, should profit by it.³

1 HN Bennett, ‘Mapping the Doctrine of Utmost Good Faith in Insurance Contract Law’ [1999] LMCLQ 165, 186.

2 John Weskett, A Compleat Digest of the Theory, Laws, and Practice of Insurance (London 1781) 226–227, 587.

3 Goddart v Garrett (1692) 23 ER 774.

In Lynch v Dalzell⁴ the House of Lords affirmed a decision by Lord Chancellor King that the party claiming for a loss under a contract of insurance must have an interest in the insured subject-matter at the time of the loss. In Sadlers’ Company v Badcock,⁵ the court said that it is necessary for the insured to have an interest at the time of entering into the contract and at the time of the loss. Lord Hardwicke noted the rationales for an insurable interest: the prevention of fraud and the wilful destruction of insured property. Moreover, without any interest the insured could not suffer any loss. These rationales solidified into the Traditional Justifications are discussed in Chapter 6, Chapter 7 and 8.

Wager and wager policies

In contrast, wagering contracts were enforceable at common law⁶ unless they contravened a specific public policy or were injurious to a third party or were prohibited by statute. In the 18th century, gambling was a popular pastime and was not regarded as morally objectionable. Wager insurance or wager policies constituted a grey area between the dichotomy of wagering contracts on the one hand and contracts of insurance on the other. Across Europe a practice had developed to write insurance policies on an ‘interest or no interest’ or ‘without further proof of interest’ or ‘valued free from average’ or ‘without the benefit of salvage’ basis. The perceived commercial benefits of these clauses – in a world of limited communication – were that a merchant could take out insurance in circumstances when it was unclear whether cargo had been lost or sold, a specified value could be assigned to the cargo and, upon a claim being made, the insured did not have to produce evidence of interest.⁷ However, such policies were soon used in circumstances where the insured had no interest at all in the insured subject-matter of the policy; they were acquired for purely speculative or even fraudulent purposes. Park reported that since the Revolution of 1688 ‘interest or no interest, or without further proof of interest policies’ had been “increasing at an alarming degree and by such rapid strides as to threaten to ...