Insurable Interest: Law Commissions publish revised draft Bill

United KingdomScotland

The Law Commission and Scottish Law Commission have published a revised draft Insurable Interest Bill. The Bill focuses on Life policies and seeks to reform the prescriptive rules about insurable interest in Life policies that remain rooted in Victorian social values.

The new Bill has been drafted in response to feedback that the Law Commissions received to their earlier proposals for the reform of the insurable interest doctrine in both Life and non-Life insurance. The Law Commissions’ consultation on those proposals failed to generate any enthusiasm for reform of insurable interest in Non-Life policies or in respect of “parametric” (Industry Loss Warranty) contracts, which were included in the earlier draft. Wisely, in our opinion, the Law Commission has decided to concentrate on bringing the Life reforms onto the statute books.

Life

The wording of the draft Bill has been modified from the initial draft, but the basic aims of the proposed legislation remain the same.

This includes the concept of “life-related” insurance. A contract of life-related insurance includes any contract of insurance under which the insured event is the “death, injury, ill-health or incapacity of an individual” (although marine insurance is expressly excluded).

The term is intended to cover traditional life insurance contracts which pay out on the death of the life insured (or in some cases the earlier surrender or expiry of the policy). It is also intended to capture insurances which otherwise depend on human life or health such as personal accident, critical illness and disability insurances. This category would also cover insurance-linked investment products which have a life insurance element, including annuities.

There has been a shift of emphasis from the first draft of the Bill in that section 2(2) now raises the prospect of economic loss to a ground for insurable interest in itself, as opposed to simply one of a number of potential grounds. A policyholder may insure the life of another person on the grounds that they would suffer a financial loss on the other’s death (or the occurrence of another insured event such as injury or incapacity). This category already includes debtors, and employers taking out “key person” policies on employees. As in the earlier draft, it also includes the interests of children and grandchildren in parents and grandparents if the prospect of economic loss can be demonstrated.

What is now the second category of interests is based on specific relationships: if the relationship exists, there is no need for the insured to demonstrate financial dependency or expectation of financial loss. Insurable interest is taken on the basis of the nature of the relationship. This list now includes cohabitant, reflecting a huge shift in social attitudes since the 19th century. It also includes children and grandchildren (where the policy is taken out by parents or grandparents), and the trustees of pension and other group schemes. “Mid-term beneficiaries” who join a scheme after inception are also now specifically included.

Controversially, the interests of children and grandchildren have still not been included in the second category as giving rise to an insurable interest as of right (without needing to prove the prospect of economic loss). This is the result of a residual concern that children or grandchildren may “knock off” elderly relatives – the concern is expressed in terms of moral hazard and by reference to the debate on assisted dying. However, we still find it difficult to see why a child or grandchild with an economic interest should be any less of a moral hazard than one without. Arguably, proof of an economic interest might constitute more of a moral hazard, not less.

Despite this potential anomaly, the reform of insurable interest in Life policies is welcome, and hopefully the Bill will become law in the relatively near future.

Further reading

Draft Insurable Interest Bill and related documents.

Law-Now Insurable Interest: Law Commission publishes draft Bill.