Re-assessing insurable interest

Before the principle of insurable interest was enshrined in statute, wagering (cloaked as insurance) was prevalent and effectively meant anyone who could afford the premium might profit from fortuitous misfortunes like a ship lost in a storm or the death of a noble or reigning monarch. Insurable interest was introduced to non-life insurance with the Marine Insurance Act 1745, and to life insurance with the Life Assurance Act 1774 respectively, to outlaw “mischievous” gambling activities of this nature.

Three prerequisites for insurable interest

The Marine Insurance Act 1906 identifies three prerequisites for insurable interest to be present – first, the insured may benefit by the safety or be prejudiced by the loss of the subject matter in question; second, the insured must stand in a legal or equitable relation to the property at risk; and lastly, any benefit, prejudice, or incurring of liability must arise in consequence of the insured’s legal or equitable relation to the subject matter. Insurable interest must exist at the time of loss.
An obvious example is the ownership of property. In a contract of sale, the existence of a legally binding agreement is needed to prove insurable interest. Importantly, the subject matter of an insurance policy may never be a contract for goods to be purchased in the future, as this would allow for a gaming or wagering policy to be created. A mere expectation of interest (or the hope of a future relationship with the property), then, does not entail an insurable interest and is not recognised at law.

Insurable interest in non-indemnity contracts

The principle of insurable interest is useful in indemnity or non-life insurance where the client must prove they have suffered a financial loss.

In non-indemnity (or contingency) insurance, however, there is no question of having to prove a financial loss: life insurances are not indemnity contracts because, firstly, it is not possible to place a value on human life (at common law, for example, you have an unlimited interest in your own life), and secondly, the intention of a life policy often is not to guard against financial loss but to provide for future savings. Not all life policies, however, are non-indemnity contracts: a policy by a creditor on the life of a debtor, for example, is a form of indemnity insurance.

Modern life insurance policies are fundamentally savings plans wherein the investment aspect largely outweighs the insurance element. The question has, therefore, been asked whether insur¬able interest in non-indemnity contracts serves any useful function and if the emphasis should not rather be on determining whether a contract is not a wager.

Insurable interest overseas

In New Zealand and Australia, for example, the requirement for insurable interest in life insurance was removed. A more apt approach is to emphasise the intention of the parties, among other considerations, in deciding if a policy is enforceable and valid. I believe removing the requirement for insurable interest muddies the waters: it is enough to expand the circumstances where insurable interest can be present. The Insurable Interest Bill is an attempt by the Law Commission of England and Wales to “improve an antiquated and restrictive insurance law.”

The Bill is restricted to life and life-related insurances and its recommendations include expanding on the concept of insurable interest by (1) providing persons have an automatic insurable interest in cohabitants (not only spouses), (2) extending insurable interest to include children and grandchildren, (3) establishing that administra¬tors of group schemes have insurable interest in the lives of the members of the group. The requirement remains that insurable interest must exist at the time of entering the contract.

At present, the Bill is in the consultation phase: If an Act is passed through Parliament, other countries like South Africa may want to follow suit in re-assessing its legal stance on insurable interest in non-indemnity contracts.

Brendan Trollip, FA News, October 2023
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