The opinions expressed in this article are the author’s own and do not necessarily reflect the view of UKGI.
A Broker's Duty of Care: Insurable Interest
This article has been provided by Robin Wood, chartered insurance practitioner and expert on insurance broking market practice and standards, and Roger Franklin, Head of Insurance Litigation at Edwin Coe Solicitors.
We have majored on the issue of making sure that property is insured in the correct name and the example of the property occupied by the company but owned by the Directors pension fund is a classic example but there are other instances that you need to be alert to if you are going to discharge your duty of care.
Originally, in the 17th and the first 70 years of the 18th century, there was no need for insurable interest of the policy owner in the subject of the insurance so the public were affecting life assurance policies on famous people in the hope that they might die early. In other words, a legal method of gambling. To say the least, King George was becoming decidedly unsettled about the “book” on his continuing well-being.
The authorities described this process as “mischievous” gambling and in 1774 the Life Assurance Act (also known as the Gambling Act) was enacted.
The first thing you need to know is that, at that time, a lack of insurable interest rendered a policy null and void, i.e., as if it never existed. Since then, the Courts have tended to support an insurable interest, whenever possible. The general approach of the Court when faced with arguments on insurable interest was set out by Brett MR in Stock v Inglis  1 QBD 564 as follows (at 571):
“It is the duty of the Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often a technical objection, and one which has no real merit, certainly not as between the insured and the insurer.”
However, we must also respect the fact that insurers have a duty to their owners and capacity providers so we must not expect an insurer to always accept that position and/or waive their rights when there is a clear contractual escape route open to them
So, if it is discovered at the time of a fire that the policy is insured in the firm’s name but owned by the pension fund, one insurer might simply allow the change of names and pay the claim, and another might avoid. It is not a risk you want to take for your client.
The principle of insurable interest is that no-one can insure for more than their potential financial loss or the value of a right recognised and protected by the Courts. To do so would encourage moral hazard. This interest must be definite (involve financial loss or the loss of a legal right) and be capable of valuation.
A person has an unlimited interest in his/her own life (subject to affordability of premiums) as does a person in the life of their spouse.
Otherwise, insurable interest arises in specific relationships laid down by the Act and subsequent case law.
For Life Assurance, the interest must exist at the time of inception, for marine insurance at the time of a claim, and for general insurance at inception and the time of a claim.
Under a general insurance policy, the name of the person or body interested must be named on the policy and this is where your guidance is most likely to be needed.
- Is the property insured in the correct name?
- Is the property leased or owned under a loan agreement?
- Is the property mortgaged?
- Does your client have a financial interest in something insured by someone else?
Let us consider goods held on trust for someone else. A very common situation in business. Indeed, there is often an extension under a commercial policy for goods held on trust.
A trust can exist without anything in writing. This means that someone holds something for another, perhaps to be returned at some time to the settlor or for a third party. Your client may be acting as a trustee and responsible for the property. It is at that point that you need to discharge your duty of care to recommend to the client that they insure the goods and to ensure there is evidence of the trust, and that the parties are named. In the alternative, that they tell the owner of the property that they will not take responsibility.
For example, your client is a waste recycler and holds waste owned by others, recycles it, and then sells it on their behalf.
For example, your client is an antique auctioneer who holds lots for the vendors until the hammer falls.
In both cases, you need to ask the client if they are responsible for the goods and, if they are, that an insurable interest exists (if you know the value) and you should take reasonable steps to recommend that the client insures appropriately.
If your client is not responsible for insuring the goods, then they can only be insured under the policy you are arranging if the owner of the goods or perhaps the mortgagee is named on the policy. That is why banks want to be named on your client’s insurance policy.
Equally, if your client themselves leave property with others they should be alert to the need to check whether those goods are in fact insured under their own policies or someone else’s.
A very good example arises if your client is a tenant. Often, the landlord will arrange insurance on the property but is it adequate for your client’s Demands and Needs? A landlord is obliged to send a copy of the insurance policy to a tenant so perhaps you might ask a client in that situation for a copy of the policy to consider whether it is adequate.
Insurable interest has many facets and too many for one article but for the moment, consider the following questions:
- Have you told me about everything your firm owns?
- Have you told me about property you are responsible for?
- Do you keep anything for anyone else?
- Do you have copies of policies that others have arranged which might affect you? (Landlords, contractors etc, pension trustees etc)
- Is there a charge on any property you use or own?
A Word of Warning
You are insurance brokers, not lawyers. Insurable interest is defined by acts of parliament, case law and lawyers and to meet the standard of a reasonably competent insurance broker we would say that you need to spot the flaws and the potential gaps in cover, not be an expert on the subject.
When you are gathering information, think whether your client can lose financially or lose a right, and if the answer is in the affirmative and that value or right is not insured, you should investigate further.
Remember that you do not need to go on forensic enquiry (a set of clear questions is enough) and you are entitled to assume your client is telling the truth.
A ‘More Common than You Might Expect’ Case Study
This week we will leave you with quite a common occurrence over 30 years which is where your client is insuring something owned or used by a party that he/she might not wish to be known too widely. We have had several cases where a property has been purchased for another person but insured in the wrong name.
Our experience is that insurers are not too supportive where lack of insurable interest arises in this way.
In one case it was a very expensive flat insured in the wrong name, in other cases it has been expensive items of jewellery.
Your duty of care extends to putting the client in a position where they can make an informed decision so whenever a client adds property to cover, always convey the caveat that the owner of the property or anyone with an interest in it must be identified on the policy.
Secret or private arrangements are common, and it is up to you to decide whether you want to be judgemental or are conflicted, just do not ignore your duty of care to the client which may be a trading entity or an individual/s.
We are going to look at the scope of your duty as it relates to classes of business. Be ready to be shocked at the extent of your responsibility but we are also going to give you some really good ideas for new business.