Insurance contract law reform

In a consultation opening today, the Scottish Law Commission and the Law Commission are proposing  a range of reforms, including allowing a wider range of people to insure the lives of those on whom they are dependent.

The existing law is based on the Life Assurance Act 1774 which prohibits people from insuring the lives of others without an "insurable interest". This means that you can insure your own life or the life of your husband, wife or civil partner - but you have no automatic right to insure the life of someone else, such as a live-in partner, parent or child. You can only insure another person where you are tied by a legal obligation. The courts have interpreted this narrowly, refusing to allow insurance based on a moral obligation for a son to look after his father, or to bury his mother.

The Commissions are seeking views on whether the existing rules should be changed to allow people to insure another's life where:

• there is a real probability that the policyholder will benefit economically from the continued life of the insured or suffer economic loss if they were to die, or
• a couple have lived together in the same household as spouses for five years before the start of the policy.

The Commissions are also asking whether parents should be entitled to insure the lives of children under 18-years-old for a limited amount.

David Hertzell, the Law Commissioner leading the project for England and Wales, said:

"The English law of insurable interest has fallen out of step with modern families. In a world in which people are often dependent on others for long-term care, the restrictions look increasingly outdated. We need a law that works in the 21st century, not the 18th."

Professor Hector MacQueen, Scottish Law Commissioner, said:

"We are keen to hear people's views on our ideas for clarifying and simplifying the law, bringing it up to date and making it work for bereaved families and dependants."

The consultation is part of a wider review of insurance contract law, which also includes proposals to:

• improve remedies for late payment of valid insurance claims;
• clarify the law on insurers' remedies for fraudulent claims;
• simplify the law on policies and premiums in marine insurance.

Regarding remedies for late payment of valid insurance claims, the Commissions are proposing that insurance contract law in England and Wales should be brought into line with the law in Scotland and follow the principles of normal contract law.

In England and Wales today, if an insurance company takes a long time to pay a valid claim or refuses to pay it altogether, the policyholder can sue. But they cannot claim for any loss they may suffer because of the delay in receiving the money.

Individuals and very small businesses may complain to the financial ombudsman service (FOS), which may award compensation. But other businesses have no remedy. This is particularly harsh on small and medium businesses just above the FOS limits.

As a general rule, if one party breaks a contract, the other may claim damages for any loss they have suffered, as long as it was foreseeable. Judges in England and Wales have decided that the same does not apply in insurance law. Evidence received by the Law Commissions indicates that there is wide support for reform, from insurers and policyholders alike.

The Commissions are proposing that insurance contract law in England and Wales should be brought into line with the law in Scotland and follow the principles of normal contract law. Specifically:

• an insurer’s primary obligation should be to pay valid claims after a reasonable time;
• insurers who unreasonably delay or do not pay a valid claim should be liable for damages for foreseeable loss, as they would under general contract law;
• in business insurance, contract terms could be used to limit or exclude the insurers’ liability to pay damages provided that the delay is due to an honest error made in good faith.

David Hertzell, the Law Commissioner leading the project for England and Wales, said:

"In this respect, insurance contract law is unfair, unprincipled and out of step with today’s commercial realities. Small businesses, such as those struggling to get back on their feet after the recent riots, or after floods, are particularly vulnerable to late payment of insurance claims. We are seeking a solution that balances the insurers’ need to investigate claims against policyholders’ expectations that valid claims will be paid on time."

Professor Hector MacQueen, Scottish Law Commissioner, said:

"We believe the Scottish approach to damages for late payment is fair and could provide a good model for the law in England and Wales. However, we are seeking views on how helpful it would be to clarify the insurer’s duty of good faith in Scots law."

The Commissions seek responses by 20 March 2012.  

For further details, see the project page.