Reforming The Principles of Insurable Interests in English Insurance Law - Research Paper Example

REFORMING THE PRINCIPLES OF INSURABLE INTERESTS IN ENGLISH INSURANCE LAW AIM AND OBJECTIVE OF THIS RESEARCH STUDY: The principle of insurable interest refers to the fact that a person seeking insurance must have an actual pecuniary interest in the subject matter of the insurance, i.e, he must stand to lose something of value and not benefit from the loss of the insured matter.(www.helplinelaw.com). This appears to be a valid principle, because “if insurance were to be available without restriction it could act as an incentive to crime” (The Law Commission and the Scottish Law Commission, 2006). Furthermore the report points out that the two major reasons for introducing the principle of insurable interest are (a) to prevent gambling through insurance and (b) to deter moral hazards, such as encouraging a person to take an insurance and then do away with the person who is the subject of the insurance, in order to benefit from it1. However, the UK Law Commission and the Scottish Law Commission (2006) have stated three broad criticisms of the existing law, which includes inaccessibility, incoherence, and unduly restrictiveness. One of these is the fact that spouses may insure each others’ lives, however cohabitees “do not gain such a right merely as consequence of cohabitation.”2 This study therefore seeks to examine whether there is a need to reform the Law in order to allow cohabitees to insure each other’s lives. In view of the increasing trend towards cohabitation, should cohabiting couples have the same rights as married couples to insure each others’ lives and will their interest qualify as an insurable interest? This is an issue that is of vital importance, especially because cohabitation is becoming increasingly common, as was revealed in a Consultation Paper published by the Law Commission3, and the rights of cohabitees need to be protected. LITERATURE REVIEW: Insurance basically refers to the contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards (Lehman and Phelps, 2005). In an insurance contract, one party, the insured, pays a specified amount of money, called a premium, to another party, the insurer. The insurer, in turn, agrees to compensate the insured for specific future losses. The losses covered are listed in the contract, and the contract is called a policy (Lehman and Phelps, 2005). However, before a person can apply for an insurance of another person, there should be insurable interest and the consent of the person being insured (Smith, 1995). The UK Department of Trade and Industry (2003) defined insurable interest as “the principle that the insured must have an interest, usually financial, in the risk for which the policy is to be issued”. Insurable interest is basically a right, benefit, or advantage arising out of property that is of such nature that it may properly be indemnified (Lehman and Phelps, 2005). In a third person view, he (the owner) must stand in the right kind of relationship to the person or property that he wants to insure (Clarke, 1997). The insured must be acceptable as a risk - not only to the insurer but also to society, which must be satisfied that he is a person whose purpose in seeking insurance is a proper purpose (Clarke, 1997). Insurable interest is basically an advantage to the person seeking insurance because it protects them from illegal acts of wagering or gambling in the part of the insurers (Clarke, 1997). That means, the person applying for the insurance must have a real interest in seeing that the insured person remains alive (Smith, 1995). Thus, a person cannot just insure anyone. Being able to ensure anyone can basically result in morbid gambling in the insurance business. The person who applied for the insurance of another person can commit murder just to claim the insurance for his or her own benefit. The insurable interest prevents this from happening, since it first verifies if the person applying for the insurance has sufficient relationship with the person or object to be insured. For example, a mother can apply insurance for her children, but not for her co-workers or acquaintances. Another example is that business partners can apply insurance for each other but not for a business competitor (Smith, 1995). In other words, two reasons must always be present – the economic reason, whereas the two parties rely on each other economically; and love and affection, whereas the two parties have close relationships with each other (Smith, 1995). Clarke (1997) explains that to wager in insurance can have several negative repercussions. First, wagers occupy the time of the court and divert their attention from causes of real interest and concern (Clark, 1997). Second, even though wagering in insurance is a thing of the past, the serious schemer in today’s world can have the most convenient technologies to carry out his or her plan (Clark, 1997). This basically prevents life insurance from becoming a gambling device and prevents someone from taking out insurance policies simply because people are known smokers or known to drink and drive (Zevnik, 2004). But UK Insurance Law is still far from being perfect. For instance, there is still the problem of identifying causation under the UK Insurance Law. Identifying and proving the cause of injury or death has been problematic and difficult in many ways, and as an example, the Fairchild case made causation rules even more difficult (Stanley and Lambert, 2006; Causton, 2005; Morgan. 2004). Following the issue of causation is the issue of insurable interest in English Insurance Law. Merkin (2007) criticized UK’s insurable interest policy, stating that it is a ‘confusing and illogical mess’. Merkin (1997) explained that the Life Assurance Act 1774, which where the concept of insurable interest originated, requires a person obtaining a life policy to possess an insurable interest in the life of the named assured at inception, and also demands the naming in the policy of the persons interested in the life assured. However, Merkin (1997) explained that there is no specific insurable interest requirement for non-life insurance, although a policy taken out without interest is a wagering policy and void under s 18 of the Gaming Act 1845 and the principle of indemnity holds the assured to recovering his actual loss on the happening of the insured peril. There was a reform known as the Gambling Act 2005 which will supposedly free nonmarine policies from the requirement of initial insurable interest and will supposedly govern only by the indemnity rule. The problem is that this reform does not affect the Life Insurance Act 1774, creating a very vague and confusing situation for those who are dealing with such a case (Merkin, 1997). Similarly, the UK Law Commission and the Scottish Law Commission (2006) admitted that the insurable interest policies have several weaknesses. The following are some general weaknesses they noticed: The law is inaccessible and uncertain - for example, there is still doubt as to whether the Life Assurance Act 1774 applies to indemnity as well as contingency insurances. The law lacks coherence. It has been developed piecemeal and there are anomalies and omissions (UK Law Commission and the Scottish Law Commission, 2006, p.10) The law is unduly restrictive. For example, spouses may insure each other’s lives. Cohabitees, however, do not gain such a right merely as consequence of cohabitation. Cohabitation is being increasingly frequent and the attitude of the public is also changing, so that marriage is no longer considered mandatory among large sections of the public. (British panel survey, 1998). Hence it is vital that legal provisions should provide for their rights. METHODOLOGY: The Insurable Interest policy based from the Life Insurance Act 1774 is already three centuries old. Despite the suggestions made by the UK Law Commission and the Scottish Law Commission (2006), there are still those who oppose the idea or basically creating inertia for development. In addition, the reformation of the insurable interest policy is also being debated in countries that adopted it, specifically the United States. However, the salient aspect that arises in the case of cohabiting couples is the question of whether their insurable interest is valid enough to require reform of the law to include them as parties who can insure each others’ lives? The following research questions will be explored in the study: Should the bar that prevents cohabiting couples from insuring each other be lifted? Should a cohabiting couple’s interest be included with the valid categories of insurable interest? Research Method: According to Saunders et al (2003), defining the aims and objectives of the research study is important to generate evidence of the “the researcher’s clear sense of purpose and direction.”(p 25). The literature review undertaken above is helpful to understand the limitations in insurance law, and the possible need to extend the category of insurable interest to include cohabitees. The Literature review also highlights the fact that cohabitation is now increasingly common and accepted in the U.K. This provides the necessary background for the study. This study does not undertake a detailed research into the question of insurable interest itself and all its ramifications. Rather this study aims to specifically assess the limitation in one specific area – that of cohabitees. It seeks to explore the prevailing view among the cohabiting members of the UK public, in order to determine whether there is a widespread perception that the law needs to be reformed. Both qualitative and quantitative research methods were considered for this study. As pointed out by William Trochim (2001), every study has a qualitative as well as a quantitative element to it, since even a numerical response may involve several shades of meaning and even purely verbal responses can be counted. But the distinction lies in the approach of the researcher. Qualitative methods lend themselves well to those studies where a special understanding of the issues is sought to be achieved and in the generation of a level of information that is very detailed and comprehensive and which is mostly obtained through in depth interviews (Troachim, 2001). Qualitative data is primarily concerned with the collection of individual opinions and the preferred method that is often selected for use with this kind of research is structured or semi structured interviews. A set of questions forms the guideline based upon which participants are asked to respond and also offer any additional remarks or comments. A structured interview tends to adhere to the format laid out by the questions, while the semi structured interview permits the researcher to question participants more in depth and to also to deviate slightly from the prepared question format where necessary. The qualitative method is chosen for this study, because it is a form of exploratory research, that allows for an indepth questioning of participants on a particular research question. Exploratory study is basically a valuable means of finding out what is happening, or to seek new insights, or to assess a phenomenon (Saunders et al, 2003). This research method can be useful in exploring the future of the insurable interest policy in terms of reform. Three principal ways of conducting an exploratory study includes: search of literatures; talking to experts in the subjects; and conducting interviews (Saunders et al, 2003). This study will perform two of those three principal ways – literature search; and conducting interviews with participants. Samples: The samples selected for this study will be cohabiting couples primarily located in the London area. It is proposed to approach at least 30 to 40 couples living within this general area, to seek brief interviews in order to solicit their views on insurance policies and the question of insurable interest. Of the couples approached, an effort will be made to include only those participants who have actually taken an insurance policy or have considered taking an insurance policy and are therefore familiar with it. This will exclude those couples who are very young, i.e, below the age of 20 and couples above the age of 50. The reason for excluding older couples is primarily because the researcher estimates that it may be more difficult to find cohabiting couples among the older generation. Data Collection: A literature search on local libraries and online libraries will be conducted. The literatures should be about Life Insurance Act 1774 reform suggestions, specifically on the insurable interest act. The next stage will be to approach couples at supermarkets, or through the telephone directory, at universities or other means such as email enquiries to find out whether they would be interested in participating in such a study. The personal interview method is assessed to be the best suited for this study. In order to avoid the imposition of researcher bias, it is proposed to conduct time line interviews (Schamber, 2000) and to maintain exact records of participant responses. Therefore, personal interviews will be recorded with a cassette recorder, while phone interviews will be recorded with a phone recorder for later transcription. The theme of the interviews will revolve around the problem statements or problem questions presented above. However, in view of the ethical considerations which must be taken into account in any study, it is proposed to allow the respondents to remain anonymous and not impose any condition on them to disclose their identity., This may also ensure more honest responses from them. The time frame for this study is estimated to be about four months, in order to give the researcher adequate time to collect a sufficient number of interviews and to carry out analysis and write up results. Questionnaire: The following brief questionnaire is proposed to be administered to the participants: (a) Your age and Sex? (b) Do you currently have a life insurance policy? (c) Have you ever tried to get an insurance policy for your partner? (d) Are you aware of the term “insurable interest”? (e) Have you ever been refused a policy on your partner on the grounds of “no insurable interest”? (f) Do you think it is a good policy not to include cohabitees in the category of “insurable interest?” (g) Do you think the law needs reform in this area or do you feel it is fine as it is? (h) If you were in a position to offer an opinion, would you write to the Law Commission with your views? Data Analysis The data from the interviews will be transcribed. A qualitative analysis of important themes will be conducted to determine which among the ideas do the respondents agree or disagree with. The questions proposed above are flexible and it is proposed to spend more time with those participants who offer interesting responses which can explore relevant issues. Responses will be categorized into categories by transcribing them separately on index cards, so that these can later be assembled to provide a good idea of prevailing trends among the population sample. The possible limitation that may exist in this study is the paucity of legal and informed opinion, however it may not be possible for the researcher to obtain interviews with busy solicitors and barristers or those in a position to offer discriminating opinions on the complexities of the law in this area. However, since this research aims to get a general idea of what the public pulse in a particular area, i.e, London, is, the techniques utilized may achieve the desired ends. CONCLUSION The study will explore the opinions and views of cohabitees on whether they feel the law should be reformed to include them in the category of insurable interests, so that they can take policies on each other. However, the key concern that should be looked at in this research is the participation of the respondents. Since this will be a qualitative research, participation of the respondents and their willingness to express their opinions without constraints are important factors, as also their knowledge of the subject matter that is being examined in the study. However, it is likely that the views of the Law Commission on the need for reform might find its echoes among members of the public as well. Bibliography: Barnett, JR., R.B. and Vllasi, J.K. (2007). Still Nervous About That Insurable Interest. Trust and Estates, 52-55 British Household Panel Survey data for 1998, IN J Ermisch, 2000. “Personal Relationships and Marriage Expectations.” University of Essex Clarke, M.A. (1997). Policies and Perceptions of Insurance: An Introduction to Insurance Law. Clarendon Press, Oxford. Comitto, T.F. (2006). Insurable Interest: From Mundane to Hot Topic. Journal of Financial Service Professionals, pp.16-18 Connolly, J. (2005). Insurable interest on NCOiL Agenda. National Underwriter Life and Health, 108(26), pp.7-49 Davey, J. (2004). The Reform of Gambling and the Future of Insurance Law. Legal Studies, 24 (4), 507-515. “Fundamental Principles of Insurance” [online] available at: http://www.helplinelaw.com/docs/main.php3?id=INSU2 Lehman, J. and Phelps, S. (2005). Insurable Interest. In J. Lehman and S. Phelps (Eds), Wests Encyclopedia of American Law. Detroit: Gale Merkin, R. (2007). Reforming Insurance Law: Is There A Case For Reverse Transportation? English and Scottish Law Commissions. Paskind, M. (1999). N.M. a step ahead in insurable interest. Albuquerque Journal, Albuquerque, N.M. Piontek, S. (2004). Defend Insurable Interest. National Underwriter Life and Health, 108(26), p.4 Saunders, Mark et al, 2003. “Research Methods for Business Students” Prentice Hall Schamber, Linda, 2000. “Time Line interviews and inductive content analysis: Their effectiveness for exploring cognitive behaviors.” Journal of the American Society for Information Science, 51(8): 734-44 Smith, G. (1998). It Takes Proof If You Want To Insure The Life Of Another. Syracuse Herald Journal, Syracuse NY. Trochim, William, M.K., 2001. “The Research Methods Knowledge Database.” (2nd edn) OH: Atomic Dog Publishing UK Department of Trade and Industry (20043). Liability Insurance. Crown, UK. UK Law Commission and the Scottish Law Commission (2006). Insurance Contract Law: A Joint Scoping Paper. The Law Commission and the Scottish Law Commission. Wilson, J. (2006). Life Insurance. Gale Encyclopedia of Everyday Law. In J. Wilson, 1, Detroit: Thomson Gale. Zevnik, R. (2004). The Complete Book of Insurance: Understand the Coverage You Really Need. 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