Necessary Safeguard in Insurance Law and Practice

Necessary Safeguard in Insurance Law and Practice Presented by: Dr Terry O'Neill Date: 10 September 2020 Interconnectedness Of Insurable Interest - The doctrine of insurable interest is integral to the operation of other doctrines and principles of insurance law. Abolition of insurable interest would have significant knock-on effect. • Methodology: Review of all major principles of insurance contract law to test whether they would work if the insured had no insurable interest. • Findings  The principles of indemnity, abandonment and subrogation all depend upon the existence of an insurable interest.  The presence of an insurable interest provides an optimal environment for the discharge of the pre-contractual duty to give a fair presentation of the risk.  A strong insurable interest based on proprietary or contractual rights in property also helps to establish that the insured's loss was proximately caused by an insured peril.  The doctrine of insurable interest also supports the observance of utmost good faith since it operates as a doctrinal mechanism that counters specific types of moral hazard - In relation to property insurance, the doctrine of insurable interest is integral to the operation and performance of standard contract terms. Abolition of insurable interest would have significant knock-on effect. • Methodology: Review of 50+ property policy wordings on a term-by-term basis • Findings  The doctrine of insurable interest is embedded in specific contractual terms commonly found in standard property policy wordings.  They contain terms that would be rendered inapplicable, or are inconsistent with, the absence of an insurable interest or can create conflicts with the proprietary or contractual rights of third parties.  Standard property policy wordings contain a significant number of risk mitigation and control terms that impose obligations on the insured (either directly as duties, or indirectly as exclusions from coverage) which cannot be discharged, or be complied with, by an insured who has no access to or control over the insured property.  Where risk mitigation obligations and notice requirements are qualified by 'reasonableness' or 'practicality', y', they offer little protection to the insurer in relation to a policyholder for whom, on account of having no interest, it would not be reasonable or practicable to take any steps which he cannot practically or legally - The insurance market perceives the requirement for an insurable interest to be part of market practice and as an essential characteristic of contracts of insurance. • Methodology: interviews with market participants and analysis of responses to Law Commission consultation on insurable interest. • Findings  Insurable interest is 'DNA of the Market' and 'hallmark of insurance'  It is seen to promote market discipline and guards against moral hazard Case For Retaining The Doctrine Of Insurable Interest 1. The policies behind the traditional rationales (anti-wagering and moral hazard) for the doctrine of insurable interest remain relevant and have indeed acquired fresh significance following the Financial Crisis, the expansion of derivative contracts and the liberalization of gambling. 2. The requirement for an insurable interest delineates insurance contracts from other types of speculative contracts, as well as setting a boundary for insurers' realm of operation and supporting their financial stability. 3. It is a mechanism for aligning the interests of the insured and the insurer in the preservation of the insured subject-matter and supports post-contractual fair dealings between the parties. 4. The doctrine of insurable interest is integral to the operation of other doctrines and principles of insurance law. 5. In relation to property insurance, the doctrine of insurable interest is integral to the operation and performance of standard contract terms. 6. The insurance market perceives the requirement for an insurable interest to be part of market practice and as an essential characteristic of contracts of insurance. 7. No positive case for abolition. Consequences Of Lack Of Insurable Interest - If retention of insurable interest is accepted, also consider remedies and enforcement - Current position (see above): • Contract of insurance is rendered void and/or claims made thereunder are unenforceable - • Query whether premium returnable • Illegality Criticisms: • Law Commission: insurers can write risks, collect premium and then decline the payment, whereas policyholders are "exposed to having neither their claims paid, nor their premiums returned if a policy is found to be illegal" = asymmetry (sentiment also reflected in courts' approach "to lean in favor of an insurable interest") • Professor Davey: the remedial regime for lack of insurable interest is rendered ineffective since its enforcement depends upon the insurer raising the matter as a defense • Consensus that 'illegality' consequences is disproportionate and unnecessary • Remedial gap in the 'unsuitable policy scenario' Remedial Gap In The Unsuitable Policy Scenario - Unsuitable policy scenario: • Insurer is not required to check for an insurable interest at the requirement precontract stage; prospective policyholder may not know about • A policyholder suffers a genuine loss (the "Uninsured Loss") in relation to which s/he had thought to have insurance protection but for which s/he is not in fact covered because, unknowingly, s/he lacks an insurable interest in the insured subject-matter BUT • The policyholder would have had an insurable interest and, accordingly, an enforceable claim in relation to his/her Uninsured Loss under a different kind of policy OR • The policyholder has rights or control over a (legal) person (a "controlled person") who would have had an insurable interest in the subject-matter if the policy had been entered into by that person and s/he could have caused the controlled person to do so and, accordingly, the controlled person would have had an enforceable claim in relation to the Uninsured Loss • = The policy is invalid for lack of insurable interest but the interest that the policyholder does in fact have could have been validly covered by another policy (an "Alternative Policy") - Remedial gap: • Policyholder's Uninsured Loss is not covered • Policyholder suffered a loss of chance to insure under the Alternative Policy • No contractual remedies and no remedies under IA 2015 / CIDRA 2012 • Potential regulatory contraventions by insurer (terms of insurer's Part 4A Permission, PRIN, ICOBS) but limited rights of private action by a policyholder who has suffered a loss as a result of the contravention pursuant to FSMA 2000, s.138D FOS: very few insurable interest complaints and most of them have been decided along black letter law principles - How to make remedies / enforcement regime fairer and more efficient? Re-Balancing The Remedies / Enforcement Regime - Aim: close remedial gap and insurers to take greater responsibility at pre-contract stage - How? 1. Impose a statutory duty on the insurer to decline to enter into a contract of insurance that would be void for lack of insurable interest if, at the time of the contract, the insurer knows, or ought to know, or is presumed to know, that the contract of insurance would be void for lack of insurable interest 2. Breach of statutory duty by insurer: policyholder has remedy (in damages) if Alternative Policy would have been available and s/he has suffered a loss as result of the breach of the duty 3. Impose regulatory requirement on the insurer / insurance distributor to provide information on the insurable interest rec requirement as applicable to the contract as part of IPID (ICOBS, 6.1) - Too onerous on insurers? No: 1. Quid pro quo for retention of insurable interest 2. Within the scope of duty of good faith and within spirit of existing PRIN and ICOBS rules and guidance 3. Promotes compliance with insurable interest requirement from the outset and preempts costly disputes / technical defenses at claims stage The Law Commission's Reform Proposals - Law Commission has put forward a revised Insurable Interest Bill (June 2018) - Earlier proposals in relation to indemnity insurance have been dropped - Insurable Interest Bill is confined to contracts of 'life-related insurance': under which the insured event is the death, injury, ill-health or incapacity of an individual, or the life of an individual continuing [cl.1] - Retention of requirement for an insurable interest at the time of the contract as a validity requirement for contracts of life-related insurance, but they would no longer be rendered illegal for lack of insurable interest [cl.2(1) and cl.6]. - Widened definition of insurable interest for life-related insurance: • a broad economic interest test for determining whether the insured has an insurable interest in the life insured: "if there is a reasonable prospect" of suffering "economic loss" on the occurrence of the insured event [cl.2(2)] • a non-exhaustive list of specific examples of in which the insured would have an automatic insurable interest: extension of the presumed interest category to cohabitants, children, grandchildren and those treated as children or grandchildren; a person who administers a pension or other group scheme in the lives of the members of the scheme; and an insured who takes out insurance which is for the benefit of the life insured or their nominee (aimed at employers) [cl.2(3)] • where insurance is taken out by a trustee, the trustee has an insurable interest in the relevant life if the settlor of the trust would have such an interest (added cater for life investment-linked products where the investor (the settlor) puts money in trust and the trustee then purchases a life assurance bond) [cl.2(4)] - What next? Waiting for a parliamentary slot