Misrepresentation, Non-Disclosure and Breach ... - Law Commission

INSURANCE ON THE LIFE OF ANOTHER
Different types of life insurance
6.53 There are many ways in which life insurance may be structured. An individual
may insure their own life, so that any benefit is paid to their estate. They may
insure their own life and assign the benefit to another. Alternatively, they may
insure another’s life, so that they receive the benefit if the other person dies.
6.54 Take a typical case in which a husband and wife wish to take out life insurance. It
would be possible for each to take out a separate life insurance policy on their
own life, with either the payments paid to their estates or assigned to the other.
Alternatively, they may each take out separate policies on each other’s lives, so
that each benefits if the other dies. Another variation is to take out a “joint life,
first death” policy, which is usually structured as a joint policy on each other’s
lives: if the husband dies first, the wife receives a payment, and vice versa. Or
the couple may take out a policy that pays only if they both die (referred to as
insurance on the “death of the last survivor”).
6.55 Life insurance may raise difficult legal issues about insurable interest (particularly
if the parties are cohabiting rather than married). We do not examine these
issues here. Instead, we intend to consider them in our second consultation
paper. Here we focus on a limited issue. How should the law treat a
misrepresentation by the life insured, where they are not the policyholder under
the contract?
Consumer life-of-another policies: misrepresentations by the life insured
6.56 This issue arises where a consumer policyholder takes out insurance on another
person’s life, for example, where a husband insures his wife’s life. The person
whose life is being insured is asked questions about their age and state of health,
and the insurer relies on the information to underwrite the risk. However, this
person is not a party to the contract. Under current law they are under no duty to
disclose information, and if they misrepresent the position, this will not of itself
give the insurer the right to avoid the policy unless the policyholder knows of the
misrepresentation.
6.57 The insurer may, reasonably, want the policyholder to be contractually bound by
the information provided. Under current law, the easiest way to achieve this is to
use a basis of the contract clause. The policyholder signs a form to say that the
answers given by the life insured form “the basis of the contract”. This converts
all the answers provided by the life insured into warranties.
6.58 The problem with basis of the contract clauses is that they go much further than
is required to protect the insurer’s legitimate interests. By converting every
statement by the person whose life is insured into a warranty, the insurer is
automatically discharged from liability for any breach. Even an innocent and
reasonable mistake by the person whose life is insured would prevent the
policyholder from recovering under the policy, whether it was material to the risk
or not. We think this goes too far.
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