What's It To You? Insurable Interest: The Law Commissions' Proposal

Having scrutinised the doctrine of "insurable interest" the Commissions ask indemnity insurers whether there is, in fact, any continued need for this doctrine.

Curiously, what links the origins and now the proposed abandonment of the doctrine in England is gambling. The statutory requirement for an "insurable interest" was introduced in the eighteenth century to deter wagering and protect against moral hazard (the incentive to destroy the insured property or taking of an insured life).

Since the Gambling Act 2005 came into effect on 1 September 2007, many indemnity insurance contracts may now be valid despite a lack of insurable interest. However, this does not mean that the holders of such policies will be able to recover under them. Many of the abuses against which the requirement for an insurable interest protected are, in fact, satisfactorily catered for by the common law "indemnity principle". The principle dictates that a policyholder is only entitled to compensation for a loss which it has actually suffered and for an amount not exceeding its loss. Its application is unaffected by the Gambling Act 2005.

The principle is a legally distinct concept from the requirement of an "insurable interest", but one increasingly difficult to differentiate in practice. Particularly so with the courts over time straining to define what amounts to an insurable interest. Since the case of Feasey v Sun Life Assurance Co of Canada (2003), the strict requirement for a policyholder to demonstrate a legal or equitable interest in the insured subject matter has been interpreted more leniently in favour of the policyholder.

Lastly, the Commissions have identified something of an anomaly. It remains a criminal offence under the Marine Insurance (Gambling Policies) Act 1906 for a policyholder to take out a contract of marine insurance without an insurable interest.

The Commissions' proposals and insurers' response

The Commissions conclude that there is little to be gained by reintroducing the requirement for an insurable interest for indemnity contracts. Instead...