Updating the law of insurable interest

The Law Commission and the Scottish Law Commission have today published updated draft legislation intended to pull the law of insurable interest into the 21st century.

Insurable interest is the requirement where someone taking out insurance must be at risk of suffering a loss or disadvantage if the insured event occurs. Without insurable interest, an insurance contract is void.

But the current law, some of which dates from 1774, is antiquated and overly restrictive. It prevents insurers from selling economically and socially useful insurance products that people want to buy including life insurance for loved ones.

Speaking on behalf of both Commissions, Law Commissioner Stephen Lewis said:

“If the Insurable Interest bill were implemented, it would make the law more modern and flexible, allowing people to better protect themselves and their families.

“We are publishing an updated draft to give stakeholders the chance to make sure that the legislation works as intended.”

A focus on life-related insurance

From stakeholder responses to the Law Commissions’ last consultation on insurable interest, it was clear that there was little demand for reform of the law in the area of indemnity and non-life insurance. The updated bill therefore focusses on life insurance and other insurances which relate to human life, such as accident and health cover.

The bill suggests broadening the concept of insurable interest for life-related insurance in the following ways:

  • Providing that individuals have an automatic insurable interest in cohabitants, not just spouses or civil partners.
  • Extending insurable interest to cover children and grandchildren, so that they could lawfully be covered under travel or health policies.
  • Confirming in law that pension trustees and other administrators of group schemes have an insurable interest in the lives of members of the group. This would ensure that employers’ life and health policies have the full support of the law.
  • Allowing for trustees of private trusts to purchase life insurance bonds if the settlor or truster of the trust would have had the necessary insurable interest to do so.

As part of seeking views the Commissions would also welcome further comments from stakeholders as to how and why this Bill is needed and how it would better support the insurance market.

Comments on the updated draft Bill are welcome until Wednesday 31 October 2018.