As part of its broader review of insurance law, the Law Commission has published an updated draft of the Insurable Interest Bill (relating to life insurance and other insurances relating to human life). The purpose of the draft bill is to modernise the law and to bring clarity and consistency to an area of law governed by a mixture of statute and common law principles.
Generally speaking to have an insurable interest a person taking out the insurance must be affected by the subject matter of the policy. In other words, they must benefit from the preservation of the subject matter or stand to suffer a disadvantage should it be lost or damaged. Currently, an insurance policy will be void if there is no insurable interest and also illegal. One of the changes proposed is to ensure that in the future, policies void for lack of insurable interest will not be illegal and therefore premiums paid would be refundable.
Of the changes proposed one of the most pertinent relates to who may have an insurable interest in the life of another under the principles of ‘natural affection’. This will no longer be restricted to a person’s spouse but will apply to cohabitants (where they live together as spouses) and children. In these cases insurable interest is automatic and there is, therefore, no need to show any economic loss on the occurrence of an insured event. However, the bill also proposes changes to the economic interest test, which applies in situations where there is not an automatic insurable interest, such as an employer’s interest in the life of an employee. The bill proposes that rather than having to prove actual economic loss, an employer would only have to demonstrate that there is a ‘reasonable prospect’ that they may suffer an economic loss on the occurrence of the insured event. Another amendment proposed by the draft bill is to allow pension trustees and administrators of group schemes to have an insurable interest in the lives of members of the group. While such insurance arrangements are often already made in practice, under the current law the legal basis for doing so is uncertain.
Each of these proposed changes implemented should improve the ability of insureds to protect their legitimate interests. The Commission has asked for responses to their proposals by 14 September 2018.
For further information regarding this topic or any other insurance litigation matters please contact Roger Franklin – Head of Insurance Litigation, or any member of the Edwin Coe Insurance Litigation team.