Insurance Contracts CP - Law Reform Commission

(2) A potential financial loss recognised by law which existed at the time of contracting
2.71 At the present time the insurable interest must be recognised by law and the interest that is
recognised is limited to the interest that is so recognised. A creditor is thus entitled to insure the life of a
debtor and where two persons buy a house on a joint and several basis for the mortgage debt, each
person is able to insure the life of the other to cover the whole of the mortgage debt. As the English and
Scottish Law Commissions point out, this category of insurable interest is problematical, firstly because
the financial loss test, defined as a pecuniary interest that is capable of valuation, is difficult to define and
excludes general considerations such as ―reasonable expectation‖, as distinct from an enforceable legal
entitlement. Secondly, the Law Commissions highlight the difficulty in recovering the sums insured when
the courts incline towards giving the insured the amount lost rather than the value of the interest on the
life assured, as of the date the policy was taken out. Thirdly, should the insured recover the sum of
his/her loss (eg via a separate policy of insurance) this will exhaust the entitlement: Hebden v West. 113
The most important practical consequence of this restrictive category arises in relation to
employee/employer and key employee insurance taken out by an employer.
(3) Statutory obligations
2.72 There are relatively few examples of this category in Irish statute law. The Married Women‟s
Status Act 1882, s.11 provides that a policy of insurance taken out by a husband or wife, for the benefit of
his/her spouse or children, creates a statutory trust and the benefits are payable directly to the
beneficiary. There are also judicial decisions that overlap on this issue. A husband may have an
insurable interest in his wife‘s property, to the extent that the parties to the marriage live together and use
that property. Should the husband become insolvent and some chattels be removed from property that
ought to be available to satisfy his creditors, that may be a fraud upon his creditors but will not prevent an
insurable interest arising: Goulstone v The Royal Insurance Company. 114 Conversely, Lord Kenyon, in
Reed v Royal Exchange Assurance Company 115 remarked that it is not necessary to show an insurable
interest is held by a wife in her husband‘s property ―as it must be presumed that the plaintiff [wife] was
interested in his life.‖ 116 The Married Women‟s Property Act 1882 has proved an enduring precedent.
Section 11 of the Act provided that a policy of insurance effected by a man or woman on his/her own life,
and expressed to be for the benefit of his/her husband/wife or of their children is to create a trust in favour
of those objects; the monies payable are not to form a part of the estate of the insured so long as any
object of the trust remains unperformed. Case-law suggests that section 11 often produced litigation over
the identity of the beneficiary (eg Prescott v Prescott) 117 and many judicial utterances are directed at the
privity of contract problem rather than that of insurable interest. 118 Section 11 was replaced by section
7(1) of the Married Women‟s Status Act 1957, providing that a trust could arise in relation to a life
assurance or endowment policy expressed to be for the benefit of, or by its express terms purporting to
confer a benefit on, a wife, husband or child of the insured. Section 7(8) defined a child so as to include a
stepchild, illegitimate child, adopted person or person to whom the insured stands in loco parentis.
2.73 The logic of the 1882 and 1957 legislation is clear: children or surviving spouses should have a
source of income, to be provided out of private insurance. Whether this rationale is intelligible within the
context of State welfare provision for adult and child dependants may be an open question, but there is
no doubt that the failure of the legislature to allow adult children to be the subject of insurance cover so as
to facilitate direct financial provision for the healthcare and maintenance requirements of elderly parents
by private insurance is most unfortunate. While the law will already enable a parent to benefit from a life
policy taken out by an adult child by way of assignment it would be preferable to facilitate direct provision
113
114
115
116
117
118
(1863) 3 B & S 579. This case is considered below at M, Valuation Difficulties, para 2.85
(1858) 1 F & F 276.
(1795) Peake Add Cas 70.
See MacGillivray paras. 1.066 to 1.069.
[1905] 1IR 156, following In Re Adams Policy Trusts (1883 ) L3 ChD 525. See also In Re O‟Donnell [1968] NI
52.
Eg Cleaver v Mutual Reserve Fund Life Association [1892] 1QB 147 per Lord Esher at 152.
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