Insurance Contracts CP - Law Reform Commission

Life Insurance Company. 151 In James v Royal Insurance Co. 152 E entered a business partnership with J.
in order to gain access to premises where the business was carried on. E promised the landlord M that
he would insure fixtures and furniture located on the premises. The fixtures and furniture were destroyed
or damaged by a fire. The insurance company resisted the claim on the basis of lack of insurable interest
vesting in E but Lawson J said E had an insurable interest, both as bailee and by virtue of his being under
a legal obligation to M to insure.
(8) Valuation Difficulties
2.84 On the question whether an employer has an insurable interest in the life of an employee, Irish
law settled this point in 1841 in Scott v Roose. 153 ‗Key employee‘ policies are a matter of common
practice.
2.85 In relation to the converse position, the interest on an employee in an employer‘s life, the
scope of the insurable interest is a matter of controversy because it is limited by the notion of a pecuniary
interest. In Hebden v West, 154 H, a bank clerk, took out a policy of life insurance upon the life of P, the
managing partner of the bank. That policy, for £5,000, was followed by another policy for £2,500 with
another insurance company. H owed P £4,700, a sum which P promised would not be recovered during
his lifetime, and H had a contract of employment, at £600 per annum, for seven years, at the date of P‘s
death. The only pecuniary interest related to H‘s salary which over the period was computed at £4,200.
Because the first insurer had paid out the insured sum of £5,000, an amount that more than covered H‘s
pecuniary interest, an action to recover on the second policy failed on the basis that section 3 of the 1774
Act limited monies payable by reference to the pecuniary interest. The Law Commission is rightly critical
of this decision arguing that the second company had collected the premiums from an insured who was
clearly not gaming or wagering and that the court, incorrectly, aligned this contract with an indemnity
contract. This limitation has a potentially devastating effect on the recoverability of assured sums. Key
workers, for example, may be so important to an organisation or employer that the employer may seek to
effect insurance on the life of that employee foreseeing that loss of that employee will have very adverse
effects for the business. Some case-law 155 suggests that the employer‘s insurable interest is measured
by the notice period that the employer is entitled to (eg a week, a month or year) rather than anticipated
business losses. Mac Gillivray 156 also points out that the value of an employee may only become
apparent after the insurance has commenced and that any early effort at fixing the mercantile value of
any insurable interest does not really work in this context. The English and Scottish Law Commissions
state that it is typical practice to value a key employee at a figure of up to 10 times annual salary and
suggest that any such a round figure estimate may be contrary to the 1774 Act. Any other estimate,
based upon likely future business generated by the employee, the English and Scottish Law
Commissions argue, 157 would be an expectation interest rather than a pecuniary interest and thus fail to
satisfy section 1 of the 1774 Act.
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153
154
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(1856) 3 EI. & Bl. 870. In marine policies carriers were also held to have an insurable interest in goods carried
by them and for which they might be liable if lost: see Littledale J in Crowley v Cohen (1832) 3 B & Ad. 178.
PPI policies are void where the 1906 Act applies: Edwards (John) & Co v Motor Union Insurance Co [1922] 2
KB 249.
(1875) 9 ILTR 194, following Marks v Hamilton (1852) 21 LJ Ex 109.
(1841) 31 Eq. R. 170.
(1863) 3 B & S 579, criticised by the English and Scottish Law Commissions in Issues Paper 4: Insurable
Interest, para. 3.28.
Simcock v Scottish Imperial Ins Co (1902) 10 SLT 286; Turnbull v Scottish Provident Institution (1896) 34 SLR
146.
Paras 1-073 -1-074. Templeman, op cit p.213 queries whether these problems are theoretical rather than
real, given that policies are enforceable in their own terms and the insurable interest point is never taken by
the insurer.
Para 4.12.
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