Reforming insurance law: insurable interest

Out-Law Guide | 17 Jan 2012 | 11:04 am | 2 min. read

A person who takes out insurance must have an 'insurable interest' in the subject matter of the cover – otherwise, the contract will be invalid andd may even be illegal in some instances.

This guide was last updated in July 2018.

Broadly speaking, having an insurable interest means that the person buying the cover benefits from the safety and wellbeing of the thing insured, or freedom from liability in relation to it. Alternatively, that person would be prejudiced by damage or loss to the thing insured, or the existence of liability in relation to it.

Historically, insurable interest has been required to prevent "moral hazard", or bad faith; and to distinguish insurance from other activities, such as gambling. But with betting now made legally respectable, and with regulatory and tax authorities using a number of other factors to define what is and is not insurance, does the doctrine still serve a purpose?

The Life Assurance Act 1774, the Marine Insurance Act 1906 and Scots common law all provide that an insurance contract without insurable interest is void. Historic case law in England and Wales also provides that these contracts are illegal.

There are also inconsistencies in the law of insurable interest and how it is currently applied for different types of insurance – indemnity and life insurance. Even the Law Commissions have admitted that they had trouble analysing it. A large chunk of the doctrine may even have been abolished by accident under the Gambling Act 2005, which made gambling contracts enforceable in law for the first time.

Other statutory remnants still apply. For example, the names of all interested parties must be listed in a life policy, otherwise the policy is illegal (although group policies can be taken out for the benefit of members of a stated class). It is also a criminal offence to take out a contract of marine insurance without insurable interest. In recent years, however, the English courts have been stretching the boundaries of insurable interest rather than hold a policy invalid on what is often seen as a technicality.

The English and Scottish Law Commissions have been consulting on legal reform for the doctrine of insurable interest for over ten years as part of their over-arching review of insurance contracts – a review that has led to both the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015. Because of difficulty in achieving a well-supported set of proposals, no legal reform for insurable interest has yet been achieved however it now looks as though it could be imminent.

There have been four previous consultations relating to the topic in 2008, 2011, 2015 and 2016. The April 2016 consultation was the first to publish draft legislation for comment. A fifth, most recent consultation, published in June 2018 has published an updated version of that draft legislation for comment following responses received.

You can read our separate analysis of the Law Commissions’ most recent fifth consultation on the issue of insurable interest in July 2018