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 IntroductionThe historical development of the insurable interest requirement Formative periodInsurable interest under the lex mercatoria and common lawWager and wager policiesEarly legislationThe Marine Insurance Act 1746The Life Assurance Act 1774Consolidation The Gaming Act 1845The Marine Insurance Act 1906The Gambling Act 2005The legal bases for insurable interestLegal basesMarine propertyNon-marine goodsBuildings and landProfit and future incomeLife Liability Debtor’s property and debtor’s lifeDebtReinsuranceTiming and consequences of lack of insurable interestMarine insuranceLife insuranceNon-marine goods, buildings and land, and liability insuranceDefence of lack of insurable interestThe courts’ strategies to "lean in favour of an insurable interest"The defence of lack of insurable interest and good faithWaiver and assignment Marine insuranceLife insuranceNon-marine property insuranceThe meaning of insurable interest Property insuranceThe classic definition of insurable interestExpanding the meaning of insurable interestExpanding insurable interest to pervasive interestsPervasive interest –v- legal interest test –v- moral certainty testHas the notion of pervasive interest become obsolete?Life insurancePecuniary interestsPresumed interestsStatutory extensionsA new approach to insurable interest: FeaseyThe principlesConstructionWard LJ’s dissenting judgmentReception and analysisInsurable Interest – Quo Vadis? The LC’s proposalsThe case for reform of the doctrineThe IIBWould the IIB address the issues identified?Academic debateExamining the Traditional JustificationAbolitionRetention and expansionRemediesForeign law approaches AustraliaUS / New YorkCanadaGermanySouth AfricaPeople’s Republic of ChinaThemes for reformThe anti-wagering justificationWagers and insurance distinguishedDoctrinal distinctionEconomic analysisPublic policy and the differentiation between insurance and wagersPolicy on gamblingPolicy on insuranceReasons against gambling by insurersDividing line for tax treatmentDividing line for takaful insurancePolicy against wagering under the guise of insurance Sham transactionsMisrepresentationUnintentional wager policiesContracts of insurance differentiated from CDSWhat are CDS?CDS and insurance contracts distinguishedRestraining effect of insurable interest requirementThe anti-wagering justification and the definition of insurable interestThe moral hazard justificationHistorical background and economic analysisCriticismsDoubtful deterrent effectReverse moral hazardInappropriateness of contract law ‘Skin in the game’ in property insuranceHow does an insurable interest constitute skin in the game? Relationship with other anti-moral hazard techniquesRelationship between insurable interest and moral hazard restatedMoral hazard in the capital marketsMoral hazard and STOLIMoral hazard and the definition of insurable interest The indemnity justificationThe indemnity principleCriticismsThe relationship between the doctrine of insurable interest and the indemnity principleThe indemnity justification and the definition of insurable interestIndemnity dependent on nature and extent interestMultiple claimsValuationThe integral dimension of insurable interest – insurance contract lawUtmost good faith and pre-contractual risk presentationUtmost good faithPre-contractual risk presentation under the IA 2015Pre-contractual representations under CIDRACausationNo interestEconomic interestsConsequential lossDuty to mitigate lossDuty to prevent, avert and mitigate lossReasonableness and insurable interestFailure to mitigate as an intervening causeAbandonment SubrogationRelationship with the doctrine of insurable interestRights of action against third partiesSignificance of abandonment and subrogation The integral dimension of insurable interest – policy terms Methodology for surveyInsurable interest and title requirementsClauses requiring loss and exclusion of consequential lossRetention, deductibles and limits of liabilityLoss prevention and loss mitigationRisk Control TermsNotice of loss Claims conditionsBasis of settlement (reinstatement and repairs)Subrogation provisionsInsurable interest as part of contractual fabricThe definitional dimension of insurable interestHistorical background to definition of ‘contract of insurance’Doctrinal analysis of definition of ‘contract of insurance’ Interest –v- insurable interest in property insuranceDefinition for regulatory and tax purposesConceptual analysesAbraham’s four conceptions of insuranceMerkin and Steele’s models of insuranceInsurable interest and market perceptionDefinitional role Economic interestReconciliation between definitional and validity roles Route A: contracts with ‘interest’ but without ‘insurable interest’Route B: non-insurance contracts under the guise of insuranceConsequences of falling outside definitionConsequences for policyholderConsequences for insurerRemedies, enforcement and reformEvaluation of remedies regimeFairnessEffectiveness and enforcementInterference with the parties’ contractRemedial gap between legal consequences and regulatory sanctionsAuthorization and permissionsPrudential regulationConduct of business regulationFOSInsurers’ duties in relation to insurable interestSuggested wordingsThe duty to declineA regulatory product information requirementLegal bases for the duty to decline and the regulatory product information requirementBenefits and detrimentsConclusion