The Law Commissions of England and Wales and of Scotland have published a new draft of the Insurable Interest Bill.
This most recent draft takes into account feedback received on an earlier draft, published in April 2016. The Bill forms part of the wide-ranging review of insurance contract law that has resulted in the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015.
What does the draft Bill cover?
The Bill amends the law relating to “insurable interest” – the requirement for the insured to have some relationship, usually economic, to the subject of the insurance. The Law Commissions have dropped proposals to change the law relating to non-life insurance contracts as they found a lack of market appetite for changes in this area.
The draft Bill widens the categories of interest which an insured must have in order to be able to insure. The draft Bill creates, for the purposes of establishing insurable interest only, a new definition of “life-related insurance”. Under the Bill, life-related insurance includes any contract of insurance under which the insured event is the “death, injury, ill-health or incapacity of an individual, or the life of an individual continuing”.
The draft Bill affirms the current rule that the insured must have an interest when the contract is entered into. If this is not the case then the contract will be void, but it will not be illegal (as is currently the case).
An insured will have an insurable interest in the subject matter of the policy where there is a reasonable prospect that they will suffer an economic loss if the risk insured occurs (for example, death, injury, ill-health or incapacity). The Bill then sets out a non-exhaustive definition of insurable interests that will be specifically recognised in life-related contexts.
An insured will have an interest where the individual who is the subject of the policy:
- is the insured;
- is the spouse or civil partner (or is living as a spouse or civil partner) of the insured; and
- is any child treated as a child or grandchild of the insured.Legislation and common law repealedVoid contracts Comments on the Bill should be submitted by Friday 14 September 2018.
- View: Law Commission drop non-life contracts from latest insurable interest proposals
- The law already provides that the insurer can retain premiums paid where an insured has acted deliberately or recklessly in the course of its pre-contractual disclosure. These provisions do not apply to a contract which is void for lack of insurable interest because the contract will not be a valid contract. The draft Bill provides that the insurer may retain the premiums paid where the insured knew or did not care that any statement about their interest was untrue or misleading. Where the insured is a consumer, the insurer cannot recover the premium if it would be unfair on the consumer to do so.
- The Bill repeals sections 2 and 3 of the Life Assurance Act 1774 and amends section 1 as it applies to life contracts. It also repeals any existing common law rules concerning insurable interest in life insurance policies. The Law Commissions have made clear that the Bill does not impact the concept of insurable interest in the Marine Insurance Act 1906.
- The Bill also states that an insurable interest is established where pension trustees and other administrators make insurance arrangements for members of a group scheme and where insurance is for the benefit of an individual who is the subject of the contract (this change reflects the needs of businesses wishing to provide insurance coverage for their employees’ dependents should they die). The Bill also provides for an interest where trustees of private trusts purchase insurance bonds in circumstances where the settlor would have the necessary interest. The Bill also allows individuals to join group insurance policies after they have been taken out where the policy provides reference to a category of lives that may be insured.