Insurable Interest and the Law

Dr Franziska Arnold-Dwyer, Lecturer in Insurance Law and Deputy Director of the Insurance, Shipping & Aviation Law Institute at the Centre for Commercial Law Studies, Queen Mary University of London.

TABLE OF CONTENTS






Introduction

The historical development of the insurable interest requirement
Formative period

Insurable interest under the lex mercatoria and common law

Wager and wager policies

Early legislation

The Marine Insurance Act 1746

The Life Assurance Act 1774

Consolidation

The Gaming Act 1845

The Marine Insurance Act 1906

The Gambling Act 2005

The legal bases for insurable interest
Legal bases

Marine property

Non-marine goods

Buildings and land

Profit and future income

Life

Liability

Debtor’s property and debtor’s life

Debt

Reinsurance

Timing and consequences of lack of insurable interest

Marine insurance

Life insurance

Non-marine goods, buildings and land, and liability insurance

Defence of lack of insurable interest

The courts’ strategies to "lean in favour of an insurable interest"

The defence of lack of insurable interest and good faith

Waiver and assignment

Marine insurance

Life insurance

Non-marine property insurance

The meaning of insurable interest
Property insurance

The classic definition of insurable interest

Expanding the meaning of insurable interest

Expanding insurable interest to pervasive interests

Pervasive interest –v- legal interest test –v- moral certainty test

Has the notion of pervasive interest become obsolete?

Life insurance

Pecuniary interests

Presumed interests

Statutory extensions

A new approach to insurable interest: Feasey

The principles

Construction

Ward LJ’s dissenting judgment

Reception and analysis

Insurable Interest – Quo Vadis?
The LC’s proposals

The case for reform of the doctrine

The IIB

Would the IIB address the issues identified?

Academic debate

Examining the Traditional Justification

Abolition

Retention and expansion

Remedies

Foreign law approaches

Australia

US / New York

Canada

Germany

South Africa

People’s Republic of China

Themes for reform

The anti-wagering justification
Wagers and insurance distinguished

Doctrinal distinction

Economic analysis

Public policy and the differentiation between insurance and wagers

Policy on gambling

Policy on insurance

Reasons against gambling by insurers

Dividing line for tax treatment

Dividing line for takaful insurance

Policy against wagering under the guise of insurance

Sham transactions

Misrepresentation

Unintentional wager policies

Contracts of insurance differentiated from CDS

What are CDS?

CDS and insurance contracts distinguished

Restraining effect of insurable interest requirement

The anti-wagering justification and the definition of insurable interest

The moral hazard justification
Historical background and economic analysis

Criticisms

Doubtful deterrent effect

Reverse moral hazard

Inappropriateness of contract law

‘Skin in the game’ in property insurance

How does an insurable interest constitute skin in the game?

Relationship with other anti-moral hazard techniques

Relationship between insurable interest and moral hazard restated

Moral hazard in the capital markets

Moral hazard and STOLI

Moral hazard and the definition of insurable interest

The indemnity justification
The indemnity principle

Criticisms

The relationship between the doctrine of insurable interest and the indemnity principle

The indemnity justification and the definition of insurable interest

Indemnity dependent on nature and extent interest

Multiple claims

Valuation

The integral dimension of insurable interest – insurance contract law
Utmost good faith and pre-contractual risk presentation

Utmost good faith

Pre-contractual risk presentation under the IA 2015

Pre-contractual representations under CIDRA

Causation

No interest

Economic interests

Consequential loss

Duty to mitigate loss

Duty to prevent, avert and mitigate loss

Reasonableness and insurable interest

Failure to mitigate as an intervening cause

Abandonment

Subrogation

Relationship with the doctrine of insurable interest

Rights of action against third parties

Significance of abandonment and subrogation

The integral dimension of insurable interest – policy terms
Methodology for survey

Insurable interest and title requirements

Clauses requiring loss and exclusion of consequential loss

Retention, deductibles and limits of liability

Loss prevention and loss mitigation

Risk Control Terms

Notice of loss

Claims conditions

Basis of settlement (reinstatement and repairs)

Subrogation provisions

Insurable interest as part of contractual fabric

The definitional dimension of insurable interest
Historical background to definition of ‘contract of insurance’

Doctrinal analysis of definition of ‘contract of insurance’

Interest –v- insurable interest in property insurance

Definition for regulatory and tax purposes

Conceptual analyses

Abraham’s four conceptions of insurance

Merkin and Steele’s models of insurance

Insurable interest and market perception

Definitional role

Economic interest

Reconciliation between definitional and validity roles

Route A: contracts with ‘interest’ but without ‘insurable interest’

Route B: non-insurance contracts under the guise of insurance

Consequences of falling outside definition

Consequences for policyholder

Consequences for insurer

Remedies, enforcement and reform
Evaluation of remedies regime

Fairness

Effectiveness and enforcement

Interference with the parties’ contract

Remedial gap between legal consequences and regulatory sanctions

Authorization and permissions

Prudential regulation

Conduct of business regulation

FOS

Insurers’ duties in relation to insurable interest

Suggested wordings

The duty to decline

A regulatory product information requirement

Legal bases for the duty to decline and the regulatory product information requirement

Benefits and detriments

Conclusion