Summary: The Law Commission have today published their amended draft bill on the question of “insurable interest”. The latest draft is to be welcomed as it is primarily focussed on life products rather than attempting to address the more complicated issues that arise out of insurable interest in non-life products.

The Law Commission have today published their amended draft bill on the question of “insurable interest”. 

The latest draft is to be welcomed as it is primarily focussed on life products rather than attempting to address the more complicated issues that arise out of insurable interest in non-life products. The history is that the Law Commission (who advise the UK government on changes to the law) have for some time been attempting to respond to the insurance market’s concerns about the potential illegality of certain products if the Insured did not have an “insurable interest” and the resulting limitation on the insurance market’s ability to write particularly certain types of life products for which there is demand.

The new draft bill covers what is known as “life related” insurance, therefore including contracts of insurance where the insured event is “death, injury, ill health or incapacity of an individual”. This is, of course, much broader than purely life policies. The new proposals are that the law will cover traditional life insurance contracts plus other insurances which depend on human life or health, such as personal accident, critical illness and disability insurances. It also covers investment/linked insurance products which have a life insurance element.

The draft law proposes a broad test as to what an interest in the life of another person means. An Insured might have an insurable interest in any circumstances where they have a “reasonable prospect” of suffering economic loss on the occurrence of the insured event such as death, illness or injury.

The draft bill provides that an Insured has an insurable interest in circumstances where the Insured is a spouse or civil partner or lives with the Insured as a spouse or civil partner; is a child or grandchild of the Insured; where the Insured is a member of pension or other group scheme; and in certain trust circumstances.

Importantly, also, the new draft bill provides that if there is no insurable interest, the contract is void as opposed to illegal, which is the position under the existing law. 

The insurance market is likely to welcome these developments enabling the law to be more market focussed.

Whilst these proposals in the draft bill are from the Law Commission, there is no certainty that Parliament will approve the new law but this is certainly an important step in the right direction.