consultation paper
















(LRC CP 65 - 2011)



© Copyright

Law Reform Commission




December 2011



ISSN 1393-3140




The Law Reform Commission is an independent statutory body established by the Law Reform Commission Act 1975. The Commission’s principal role is to keep the law under review and to make proposals for reform, in particular by recommending the enactment of legislation to clarify and modernise the law. Since it was established, the Commission has published over 160 documents (Consultation Papers and Reports) containing proposals for law reform and these are all available at Most of these proposals have led to reforming legislation.


The Commission’s law reform role is carried out primarily under a Programme of Law Reform. Its Third Programme of Law Reform 2008-2014 was prepared by the Commission following broad consultation and discussion. In accordance with the 1975 Act, it was approved by the Government in December 2007 and placed before both Houses of the Oireachtas. The Commission also works on specific matters referred to it by the Attorney General under the 1975 Act.


The Commission’s role also involves making legislation more accessible through three other related areas of activity, Statute Law Restatement, the Legislation Directory and the Classified List of Legislation in Ireland. Statute Law Restatement involves the administrative consolidation of all amendments to an Act into a single text, making legislation more accessible. Under the Statute Law (Restatement) Act 2002, where this text is certified by the Attorney General it can be relied on as evidence of the law in question. The Legislation Directory - previously called the Chronological Tables of the Statutes - is a searchable annotated guide to legislative changes. The Classified List of Legislation in Ireland is a list of all Acts of the Oireachtas that remain in force, organised under 36 major subject-matter headings.


The Law Reform Commission consists of a President, one full-time Commissioner and three part-time Commissioners.


The Commissioners at present are:



Vacant at the time of going to print (December 2011)


Full-time Commissioner:

Patricia T. Rickard-Clarke, Solicitor


Part-time Commissioner:

Professor Finbarr McAuley


Part-time Commissioner:

Marian Shanley, Solicitor


Part-time Commissioner:

The Hon Mr Justice Donal O’Donnell, Judge of the Supreme Court


Law Reform Research Staff

Director of Research:

Raymond Byrne BCL, LLM (NUI), Barrister-at-Law


Legal Researchers:

Kate Clancy, LLB (Hons) (TCD)

Conor Cunningham BCL (Clinical) (NUI), LLM (UCL)

Dannie Hanna BCL (NUI), LLM (Cantab)

Donna Lyons LLB (Dub), LLM (NYU), Attorney at Law (NY)

Tara Murphy BCL (Law with French Law) (NUI), LLM (Essex), Barrister-at-Law

Máire Reidy BCL (NUI), LLM (NUI), Barrister-at-Law



Statute Law Restatement

Project Manager for Restatement:

Alma Clissmann, BA (Mod), LLB, Dip Eur Law (Bruges), Solicitor


Legal Researcher:

Elaine Cahill, BBLS, LLM Eur Law (NUI), Dipl. IP & IT, Solicitor



Legislation Directory

Project Manager for Legislation Directory:

Heather Mahon LLB (ling. Ger.), M.Litt, Barrister-at-Law


Legal Researchers:

Aoife Clarke BA (Int.), LLB, LLM (NUI)

Barbara Brown BA (Int.), LLB, Attorney-at-Law (NY)

Rachel Kemp BCL (Law and German) LLM (NUI)

Aileen O’Leary BCL, LLM, AITI, Solicitor

Administration Staff


Head of Administration and Development:

Ciara Carberry


Executive Officer:

Ann Byrne


Legal Information Manager:

Conor Kennedy BA, H Dip LIS



Eithne Boland BA (Hons), HDip Ed, HDip LIS, LLB


Clerical Officers:

Ann Browne

Liam Dargan


Principal legal researchers for this CONSULTATION PAPER

Prof Robert Clark

Conor Cunningham BCL (Clinical) (NUI), LLM (UCL)

Gerard Sadlier BCL (NUI) (Oxon), LLM (NUI)



Further information can be obtained from:


Law Reform Commission

35-39 Shelbourne Road


Dublin 4



+353 1 637 7600



+353 1 637 7601







The Commission would like to thank the following people who provided valuable assistance:


Elizabeth Bothwell, Arthur Cox, Solicitors

Roddy Bourke, Solicitor, McCann FitzGerald, Solicitors

Gary Davis, Deputy Data Protection Commissioner

David Hertzell, Solicitor, Commissioner, Law Commission of England and Wales

Joe Meade, former Financial Services Ombudsman

Joseph Morley, Office of the Financial Services Ombudsman

Kevin Murphy, National Consumer Agency

Deirdre Norris, Office of the Financial Services Ombudsman

Adrian O’Brien, Office of the Financial Services Ombudsman

Eamon Shackleton, Insurance Institute of Ireland

Christina Sparks, Solicitor, Law Commission of England and Wales


Full responsibility for this publication lies, however, with the Commission.





Table of Key Legislation xv

Table of Key Cases xvii


Introduction 1

A Background: Insurance Contract Law 1

B Insurance Contract Law: Some Key Common Law Principles 1

C Insurance Contract Law: pre-1922 Legislation 1

D Regulation and Supervision of Insurance: pre-1922 Legislation 2

E Regulation and Supervision of Insurance during the 20th Century 2

F Regulation and Supervision of Insurance: the EU influence 2

G Statutory Regulation of Insurance Contracts 3

H Regulation and Oversight by the Financial Regulator and the Financial Services Ombudsman (FSO) 3

I The development of Principles of European Insurance Contract Law (PEICL) 4

J The Commission’s General Approach in this Consultation Paper 4

A Outline of Consultation Paper 5


A Introduction 9

B Overlapping regulation of Irish insurance contract law and commercial practices 9

(1) Regulatory overlaps – financial services legislation 9

(2) Regulatory Overlaps – Competition Law 9

(3) Regulatory Overlaps - Equality Legislation 10

(4) Regulatory Overlaps - The Data Protection Commissioner 11

(5) Regulatory Overlaps – Consumer Protection Agencies 13

(6) Financial Services and consumers 14

(7) The Jurisdiction of the Financial Services Ombudsman 14

(8) Merger of the Industry ADR Scheme with the Statutory Model 15

C European Union Initiatives on Insurance Regulation 17

(1) Single Market for Insurance 17

(2) Adverse comments on the proposed insurance contracts directive – the Law Commission for England and Wales 18

(3) Recent European Developments 18

(4) The Restatement of European Insurance Contract Law – The Project Group 20

D New Legal Norms and forms of Dispute Resolution 22

(1) The adjudications of the Insurance Ombudsman 1992-1998 22

(2) Decisions of the Financial Services Ombudsman 24

(3) The failure to legislate 24

E The need for contract law reform 25

(1) Sources of new rules 25

(2) Reform Proposals in the United Kingdom – support for legislative changes 26

(3) The Financial Regulator – consumer protection code 27

F Conclusions and Provisional Recommendations 27

CHAPTER 2 insurable interest 29

A Introduction 29

B The emergence of the insurable interest requirement 31

C Modern development of insurance interest and factual expectation in other jurisdictions 35

(1) Canada, Australia, the USA and South Africa 35

(2) The current British debate on Insurable interest 38

(3) Conclusions on the Bitish debate 40

D The insurable interest test in Irish Law 43

E Conclusion on the insurable interest test 45

F Insurable interest in Life Policies – common law and statute law 45

G Should a remodelled section 1 of the Life Assurance Act 1774 be re-enacted as a formalities provision? 47

(1) Natural Love and Affection 47

(2) A potential financial loss recognised by law which existed at the time of contracting 48

(3) Statutory obligations 48

(4) The Miscellaneous Category 49

(5) The limits of natural love and affection 49

(6) Debtors and creditors 52

(7) Property insurance 52

(8) Valuation Difficulties 53

H Reforming the insurable interest requirement in Ireland 54

(1) Proposals for Reform – A Broad or Narrow Approach? 55

(2) Non Indemnity Insurance and the Insurable Interest 56

(3) Moral hazard/deterrence 56

(4) Pleas of illegality 58

(5) Options for reform under the Law Commissions Issues Paper – the regulatory definition question 59

(6) Defining Insurance Contracts in Irish Law 60

(7) The insurance/gaming divide – current review of gambling legislation 60

CHAPTER 3 Duty of Disclosure 63

A Introduction 63

B The Duty of Disclosure in Insurance Contracts 63

C Constructive Knowledge and Non-disclosure 67

D Materiality and Inducement 70

(1) Materiality: decisive influence or “what the insurer would like to know” 71

(2) Examples of the Duty of Disclosure in Operation 72

E What the Proposer does not have to disclose 74

(1) Knowledge 74

(2) Factors reducing the risk 76

(3) Factors covered by any warranty 76

(4) Waiver 76

(5) The IIF Life Assurance Code of Practice and Ombudsman Adjudications on Non disclosure 78

(6) Non-Disclosure – the 1957 Reform Proposals in England and Wales 81

(7) The English Law Commission’s 1979 Working Paper 81

(8) The English Law Commission’s 1980 Report 83

(9) The general duty of disclosure in the 1980 Report 83

(10) Australia 85

(11) New Zealand 85

(12) The Principles of European Insurance Contract Law (PEICL) 86

(13) British Consumer Insurance (Disclosure and Representations) Bill 2011 87

F General Conclusions 88

CHAPTER 4 pre-contractual misrepresentation and insurance contracts 91

A Introduction 91

B Judicial approaches to limiting actionable misrepresentation 92

(1) “Reading down” the statement 92

(2) Honest belief 92

(3) Agent liability 92

(4) Ambiguous questions 92

(5) Interpretation of Ambiguous Answers 94

(6) Are questions asked presumed to be seeking to identify material facts? 94

(7) Is a failure to answer questions misrepresentation? 95

(8) Spent Convictions 97

C Misrepresentation – rescission as the primary remedy 97

(1) Marine Insurance Act 1906 and misrepresentation 98

(2) Limited reforms in Sale of Goods and Supply of Services Act 1980 99

(3) Should the right to rescind be lost in cases where the proposer makes a negligent misrepresentation? 100

(4) Fraudulent Misrepresentation 103

(5) Misrepresentation – the Insurance Ombudsman of Ireland Decisions 105

(6) Developments in the United Kingdom on misrepresentation 106

(7) Innocent misrepresentation 108

CHAPTER 5 warranties 109

A Introduction 109

B Warranties in General 109

(1) Warranties and Representations 110

(2) Warranties – Matters of substance not form 111

(3) The warranty must be a term of contract. 111

(4) The matter warranted need not be material to the risk 111

(5) It must be exactly complied with 112

(6) A breach discharges the insurer from liability on the contract, even if the loss has no connection with the breach or that the breach has been remedied before the loss 113

(7) Amelioration of the strict rules relating to warranties 113

(8) Statutory Intervention 114

(9) Warranties – Incorporation Requirements 115

(10) Limiting the scope of the warranty 116

(11) Basis of Contract Clauses 116

(12) Warranties in Irish Law: the IIF Codes of Practice 118

(13) United Kingdom Developments on Basis of Contract Clauses 119

(14) Basis of Contract Clauses – The British 2007 Consultation Paper 119

(15) The 2009 Report and Draft Bill – Basis of Contract Clauses 120

(16) Warranties in General – United Kingdom Developments 120

(17) Warranties in Consumer Contracts in UK Law (the 2007 Consultation Paper) 122

(18) Warranties in Business Insurance (the 2007 Consultation Paper) 123

(19) The 2009 Report and Draft Bill 123

(20) New Zealand Legislation 123

(21) Provisional Recommendations 124

C Non-Observance of Warranty after Conclusion of Contract 124

(1) Warranties and Causation 125

(2) Precautionary Measures under the PEICL and Promissory Warranties 130

(3) The Causation Problem and Promissory Warranties – Article 4:103 132

(4) Discussion on unfair terms and the relationship with promissory warranties 133

CHAPTER 6 Exclusions and Unfair Terms 137

A Introduction 137

B Rules on Incorporation 137

(1) Interpretation of the Exclusion 138

(2) General Principles to be added to Irish Law 139

(3) 1993 Unfair Contract Terms Directive and PEICL Abusive Clauses Provisions 139

(4) Core and Subsidiary Terms – An Irish View 141

(5) Non Core Terms and Exclusions – The Law Commissions Joint Consultation Paper 142

(6) The PEICL View on the Boundary Between Core and Non-Core Terms 144

(7) The 1995 Regulations and Insurance Adjudications in Ireland 146

(8) The PEICL Recommendation 147

(9) Discussion on the Adoption of Article 2:304 148

(10) Enforcement 149

CHAPTER 7 Formalities 151

A Introduction. 151

B Legislation, Case Law and Codes of Practice 151

(1) Limited legislative provisions 151

(2) Case law 152

(3) Self Regulation and Formalities 152

(4) EU law and Formalities 154

(5) EU Law – Cancellation Rights in relation to Life Assurance Contracts concluded by a Distance Contract 156

(6) Pre-Contractual Information and Formalities in incentivising Best Practice Standards 156

(7) A General Duty to Provide Pre-Contractual Information in PEICL 157

C Recommendations 158

(1) No written requirements 158

(2) The Provision of a Policy Document 159

(3) A Right of Withdrawal or Cooling Off Period 160

(4) The PEICL and Notices to be provided by and to the Insurer 160

(5) How Information is to be provided 161

(6) Information on Renewal: Information upon refusal of a proposal? 162

CHAPTER 8 the duty of utmost good faith - post contractual aspects 163

A Introduction 163

B Rationale for the duty of utmost good faith 164

C Post contractual duty of good faith – the duty not to make a fraudulent claim 167

D Non payment of a fraudulent claim, not avoidance of the policy 168

E Other (contractual) remedies 169

F Effects of fraud 170

G Co-insurance and moral hazard 171

H Is there a duty in claims processing? 175

I Has an insurer a right to damages against the insured? 178

J Claims handling: An Alternative Approach? 179

K Recommendation on the duty of utmost good faith 180

CHAPTER 9 Third party rights 181

A Introduction 181

B The Problem in Context 182

C Third party recovery – What the Commission will not address 183

(1) Road traffic legislation 183

(2) Employers Liability 183

D Exceptions to the Privity Rule 184

(1) Exceptions via judge-made law 184

E Insurable Interest and Privity 186

F Recommendations of the Commission in the 2008 Report 187

G Variation or cancellation of the Third Party Right? 188

H Third Party Beneficiary – A definition? 189

I The Australian General Insurance Provision as a Model? 189

J The Australian Treasury Review and Section 48 190

K The Australian Insurance Contracts Amendment Bill 2010 – Breach of the Duty of Good Faith and Third Parties 191

CHAPTER 10 remedies 195

A Introduction 195

B Compensatory Remedies – Proportionality 195

(2) The Irish Experience 197

C Compensatory Remedies – Building on the 1980 Act 201

D Compensatory Remedies – damages for late payment of a claim 203

E Non-Pecuniary Loss and Damages 206

F Exemplary Damages and the 2000 Report 210

G Subrogation – Public Policy Exceptions 211

(2) Limitations on Subrogation Rights 213

(3) The Queensland Report on Vicarious Liability 216

(4) Canada – Lister 217

(5) Reform of Lister in the United Kingdom 218

(6) Discussion and Recommendation 218

H Recasting Conditions and Warranties as Innominate Terms 218

CHAPTER 11 PROVISIONAL recommendations 221







Assurance Companies Act 1909

9 Ed. 7 Ch.49


Civil Liability Act 1961

No 41/1961


Consumer Protection Act 2007

No 19/2007


Disablity Act 2005

No 14/2005


Employment Equality Act 1998

No 21/1998


Equal Status Act 2000

No 8/2000


Equality Act 2004

No 24/2004


Friendly Societies Act 1896

59 & 60 Vic. c. 25


Gaming Act 1845

8 & 9 Vict. c.109


Gaming and Lotteries Act 1956

No 2/1956


Industrial Assurance and Friendly Societies Act 1929

19 & 20 Geo Vic. 28


Insurance Act 1936

No 45/1936


Insurance Act 1989

No 3/1989


Insurance Act 2000

No 42/2000


Insurance Amendment Act 2009

SBC 2009 Chap 16

Can. BC

Insurance Contracts Act 1984

No 80 of 1984


Life Assurance Act 1774

14 Geo. 3 c.48


Life Assurance Companies Act 1870

33 & 34 Vict. c.61


Life Insurance (Ireland) Act 1866

29 & 30 Vict. c.42


Marine Insurance Act 1906



Misrepresentation Act 1967



Road Traffic Act 1961

No 24/1961


Sale of Goods Act 1893

56 & 57 Vict. C.71


Sale of Goods and Supply of Services Act 1980

No 16/1980


Unfair Contract Terms Directive 93/13/EC

SI 27 of 1995










Pg No.

Agapitos v Agnew (No 1)

[2002] EWCA Civ 247



Analog Devices BV v Zurich Insurance Company

[1950] IR 85



Anderson v Fitzgerald

(1853) 3 ICLR 475



Aro Road and Land Vehicles Ltd v Insurance Corporation of Ireland Ltd

[1986] IR 403



Aviva Insurance Ltd v Brown

[2011] EWHC 362



Axa General Insurance Ltd v Gottlieb

[2005] EWCA Civ 112



Bates v Hewitt

(1867) LR 2 QB 595



Bennett v Axa Insurance Plc

[2003] EWHC 86 (Comm)



Carna Foods Ltd v Eagle Star Insurance Co

[1997] 2 ILRM 499



Carroll v An Post National Lottery

[1996] 1 IR 443



Carter v Boehm

(1766) 3 Burr 1905



Chariot Inns v Assicurazioni General Spa

[1981] IR 199



City of Los Angeles Department of Water and Power v Manhart

(1998) 435 US 702



Coleman v New Ireland Assurance plc

[2009] IEHC 273



Condogianis v Guardian Assurance Co

(1923) 29 CLR 341



Constitution Insurance Company of Canada v Kosmopoulos

(1987) 34 DLR (4th) 208



Dalby v The India and London Life

(1854) 15 CB 365



Dalgish v Jarvie

(1850) 2 M&G 231



De Hahn v Hartley

(1786) 1 TR 343



Derry v Peek

(1889) 14 App Cas 337



Direct Line Insurance Plc v Khan

[2002] Lloyd's Rep 364



Director General of Fair Trading v First National Bank

[2002] 1 AC 481



Drake Insurance Plc v Provident Insurance Plc

[2003] EWCA Civ 1834



Economides v Commercial Union Insurance Ltd

[1997] 3 All ER 636



Fagan v General Accident Fire and Life Assurance Corp Plc

HC Unrep. 19 Feb 1993



Fargnoli V GA Bonus plc

[1997] CLC 653



Farrell v South East Lancashire Insurance Co

[1933] IR 297



Feasey v Sun Life Assurance of Canada

[2003] EWCA Civ 885



Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd

[1996] 1 Lloyd's Rep 614



Harney v Century Insurance

[1983] IEHC 16



Hartford Protection Insurance Co v Harmes

(1853) 2 Ohio St 452



Highlands Insurance v Continental Insurance

[1987] 1 Lloyd's Rep 109



HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co

[2001] EWCA (Civ) 735



Holt's Motors Ltd v South East Lancashire Insurance

(1930) 35 Com. Cas 281



Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd

[1988] 1 All ER 348



Investors Compensation Scheme Ltd v West Bromwich Building Society

[1998] 1 All ER 98



James v Royal Insurance Co

(1875) 9 ILTR 194



Joel v Law Union Insurance Co.

[1908] 2 KB 863



Johnson v Medical Defence Union

[2007] EWCA Civ 262



Jones v Welsh Insurance Corporation

[1937] 4 All ER 149



Keating v New Ireland Assurance Company

[1990] ILRM 110



Keenan v Shield Insurance Co

[1987] IR 113



Kelleher v Cristopherson

(1957) 91 ILTR 191



Lambert v Co-operative Insurance

[1975] 1 Lloyd's Rep 169



Leen v Hall

(1923) 16 2 ILR 100



Locker & Woolf Ltd v Western Australian Insurance Co

[1936] 1 KB 408



London Assurance v Mansel

(1879) 11 Ch 363



Lucena v Craufurd

(1808) 1 Taut 325



Macaura v Northern Assurance Co Ltd

[1925] AC 619



Mackay v London General Insurance Co

(1935) 51 LI.LR 201



Manifest Shipping Co. Ltd v Uni-Polaris Shipping Co. Ltd (The Star Sea)

[1997] 1 Lloyd's Rep 360 (CA)



Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd

[2009] 1 ILRM 190



Mark Rowlands Ltd v Berni Inns

[1986] QB 211



Mayne Nickless Ltd v Pegler

[1974] 1 NSWLR 228



McAleenan v AIG (Europe) Ltd

[2010] IEHC 128



McGeown v Direct Travel Insurance

[2004] 1 All ER (Comm) 609



Meisels v Norwich Union Insurance Ltd

[2007] 1 All ER 1138



Moran, Galloway & Co v Uzielli

[1905] 2 KB 555



New Zealand Insurance Co Ltd v Harris

[1990] 1 NZLR 10



Odyssey Cinemas Ltd v Village Theatres Three Ltd

[2010] NI Ch 1



Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd

[1994] 3 All ER 581



Parsons v Falmers Mutual Insurance Association

[1972] NZLR 966



Petrofina (UK) v Magnaload Ltd

[1983] 2 Lloyd's Rep 91



Peyman v Lanjani

[1985] Ch 157



PJ Carrigan Ltd and Carrigan v Norwich Union Fire Society Ltd

High Court 11 December 1987



Re Application of Butler

[1970] IR 45



Re Sweeney & Kennedy's Arbitration

[1986] ILRM 419



Regina Fur Co v Bossom

[1958] 2 Lloyd's Rep 425



Roberts v Avon Insurance Co

[1956] 2 Lloyd's Rep 240



Rohan Construction Ltd v Insurance Corporation of Ireland Ltd

[1986] ILRM 419



Roselodge Ltd v Castle

[1966] 2 Lloyd's Rep 113



Ross v Bradshaw

(1761) 1 Wm.Bl 312



Ryanair Ltd v GmbH

[2010] IEHC 18



Schoolman v Hall

[1951] 1 Lloyd's Rep 139



Scott v Wawanesa Mutual Insurance Co

[1989] 1 SCR 1445



Sharon’s Bakery (Europe) Ltd v Axa Insurance UK plc

[2011] EWHC 210 (Comm)



Sharp v Sphere Drake Insurance Ltd

[1992] 2 Lloyd's Rep 501



Sirius International Insurance Corp v Oriental Insurance Corp

[1999] 1 All ER (Comm) 699



The Mercandian Continent

[2001] EWCA Civ 1275



US Trading Ltd v AXA Insurance Co Ltd

[2010] Lloyd's Rep 505



Wall and Wall v The New Ireland Assurance Co.

[1965] IR 386



Widefree Ltd v Brit Insurance Ltd

[2009] Lloyd's Rep 505



Zeller v British Caymanian Insurance Co plc

[2008] UKPC 4








A                      Background: Insurance Contract Law

1.                This Consultation Paper forms part of the Commission’s Third Programme of Law Reform 2008-14[1] and involves an examination of insurance contract law. In the Consultation Paper, the Commission examines the following principles and rules concerning insurance contracts: the concept of “insurable interest,” the duty of disclosure placed on the insured; the nature and scope of pre-contractual misrepresentation by the insured; the nature and effect of “warranties” in insurance contracts, and their connection with “basis of contract” clauses; the relationship between exclusions in insurance contracts and the general law on unfair contract terms; formalities (including specific terms that need to be drawn to the insured’s attention); the duty of utmost good faith (uberrimae fidei) in insurance contract law; the rights of third parties; and remedies available for breach of the contract (including the scope of repudiation of the contract and monetary compensation). The Consultation Paper examines whether these principles and rules would benefit from statutory consolidation.

B                      Insurance Contract Law: Some Key Common Law Principles

2.                Insurance contract law in Ireland has not, until now, been the subject of any systematic review since the foundation of the State in 1922. As the discussion in this Consultation Paper makes clear, some of the key features of insurance contract law (in common with those of contract law in general) derive from long-established principles and rules of common law (judge-made law). This includes the important principle (which the courts in Ireland continue to affirm) that, at the pre-contractual formation of the insurance contract, there is a duty on the person taking out the policy of insurance (the proposer) to disclose material information that is relevant to the risk that the insurer is being asked to take on. The Irish judiciary have also been careful to point out that the common law imposes more obligations on the insurer than is commonly believed to be the case. Indeed, at the heart of any discussion on insurance contract law is the nature and extent of the obligation on both parties to act with utmost good faith, the concept of uberrimae fidei.

C                Insurance Contract Law: pre-1922 Legislation

3.                In addition to important common law rules of insurance contract law, in 1922 the State carried over a large body of pre-1922 insurance legislation, beginning with the Life Assurance Act 1774. The antiquity of the 1774 Act has created difficult issues of interpretation,[2] and even relatively modern legislation such as the Marine Insurance Act 1906 has been criticised as producing a legal context “so wholly inappropriate, in part at least, to the purpose of the transaction being effected.”[3] Nonetheless, Irish courts have, in general,[4] agreed with the view that the Marine Insurance Act 1906 is, in general, a codification of the common law rules on insurance that apply “across the board”. As the 1906 Act remains in force it has, by default, coloured the way in which even consumer insurance transactions are to be tested. As the Commission argues throughout the Consultation Paper, this approach requires reappraisal in the context of reform of insurance contract law, in particular bearing in mind the increased level of regulatory supervision that was enacted in the 20th Century and has accelerated in the 21st Century, including the influence of EU law.


D                Regulation and Supervision of Insurance: pre-1922 Legislation

4.                Ellis and Wiltshire[5] observe that “Government supervision of insurance companies in Ireland dates from the Life Assurance Companies Act 1870.” The 1870 Act required the deposit of £20,000 with the Accountant General of the Court of Chancery, a requirement to keep life funds separate from other business transacted by companies engaging in life assurance, as well as the preparation and filing of annual accounts of life and other assurance business. The Assurance Companies Act 1909 repealed the 1870 Act and extended the regulatory structure in relation to life assurance into fire insurance, accident insurance, employer’s liability and bond investment business, insofar as that business was not already the subject of a friendly society or trade union registration. The 1909 Act did not address industrial life assurance, that is, the activities of friendly societies and life assurance entities that granted life assurance via a mechanism for collecting premiums through collectors at periodical intervals of less than two months. The legislation in this area was consolidated in the Friendly Societies Act 1896[6] and the Collecting Societies and Industrial Assurance Companies Act 1896.[7] This was the key legislation in force in 1922 when the State was established.

E                Regulation and Supervision of Insurance during the 20th Century

5.                The Oireachtas first made provision in respect of motor insurance in the Road Traffic Act 1933, but it was the Insurance Act 1936 that ushered in general licensing and deposit-making requirements for Irish companies wishing to transact business in ordinary and industrial life assurance, fire, bond, employer’s liability, motor insurance, public liability, engineering, glass, guarantee and burglary insurance. Ellis and Wiltshire comment that, following the enactment of the 1936 Act, “it became almost impossible for foreign companies to enter the Irish market.”[8] Although a “reciprocity provision” was contained in the Insurance Act 1953 so as to facilitate limited entry to the Irish market by foreign companies, it was only through the market liberalisation provision of the EU regulatory regime (introduced from the 1970s onwards) that Irish insurance regulation lost its protectionist character. In addition to the 1936 Act, the other main legislative measures have been the Insurance Act 1989, the Investment Intermediaries Act 1995, and the Insurance Act 2000.

F                 Regulation and Supervision of Insurance: the EU influence

6.                These Acts have been supplemented by a significant number of Life Insurance Regulations and Non-Life Insurance Regulations made under the European Communities Act 1972 that have sought to implement requirements under various EU Insurance Directives. Together with the Acts already mentioned, these have enhanced the rules by which insurers are supervised, improving transparency requirements relating to insurers and intermediaries, as well as bringing intermediaries into a more rigorous regulatory environment.

7.                The regulatory significance of EU law in this area is also illustrated by its impact in the health insurance area. The monopoly afforded by the Voluntary Health Insurance Act 1957 to the State-owned Voluntary Health Insurance Board (VHI) was modified by subsequent legislation and thus facilitated the entry into the Irish market of private sector competitors. The European Court of Justice has ruled, however, in European Commisison v Ireland,[9] that the State has failed to comply with the provisions in various EU Non-Life Insurance Directives by not legislating to require VHI to comply with certain prudential conditions, specifically the establishment of a guarantee fund and compliance with a required solvency margin. This has had the significant effect of ending the associated derogation afforded to Ireland by Article 4 of the First Non-Life Insurance Directive, Directive 73/239/EEC.

G                Statutory Regulation of Insurance Contracts

8.                In addition to these significant regulatory legislative developments, the Insurance Acts have also affected individual insurance contract law, improving the protections and rights of proposers at the pre-contractual stage, as well as the protections and rights of insured persons after a contract of insurance has been agreed, the post-contractual stage. In so doing, the Acts have, in a number of respects, adjusted some of the common law rules of insurance contract law that have evolved through litigation. For example, the agency provisions in respect of tied brokers were adjusted in favour of the proposer by section 51 of the Insurance Act 1989. At a more general level, however, although section 61 of the Insurance Act 1989 grants sweeping powers to the Minister for Finance[10] to prescribe codes of conduct for insurance undertakings in respect of the duty of disclosure and warranties, this power has never been used. To some extent, these powers have been superceded by other regulatory developments, to which the Commisison now turns.

H                Regulation and Oversight by the Financial Regulator and the Financial Services Ombudsman (FSO)

9.                The legislative developments outlined briefly above have been supplemented in important respects through the establishment of the Office of the Financial Regulator[11] and of the Financial Services Ombudsman (FSO).[12] These statutory agencies were intended to improve the regulatory oversight of financial services (including insurance) and to provide for an inexpensive dispute resolution mechanism for consumers and small businesses.[13] A significant regulatory tool developed by the Financial Regulator has been the Consumer Protection Code 2012,[14] which sets out enforceable standards for financial services contracts, including insurance contracts, and which in many respects amount to a statutory statement of key contractual obligations. Along with these statutory innovations, voluntary Codes of Practice have also been developed by representative bodies suich as the Irish Insurance Federation (IIF), and the Commission considers that these have further potential.

10.             The establishment, in parallel, of the FSO has had equally signficant effects, because the FSO has considerable decision-making powers to resolve consumer disputes as well as those involving small and medium sized undertakings (SMEs). The establishment of the FSO indicated the need for a decision-making process to resolve disputes that would be less expensive than litigation. The FSO has the additional advantage that the Office can engage in mediation of disputes and, even when engaged in decision-making, can make determinations that depart from the precise requirements of the principles and rules of individual insurance contact law. This statutory discretion appears to reflect the view that these principles and rules may not reflect an appropriate calibration between the respective obligations and rights of the insured and the insurer. The Commission notes, nonetheless, that the published decisions of the FSO indicate that, in many instances, the existing principles and rules have played a significant part in these processes.

I                   The development of Principles of European Insurance Contract Law (PEICL)

11.             Another significant influence, certainly in terms of individual insurance contract law, has been the publication of the Principles of European Insurance Contract Law (PEICL), the outcome of a collaborative project between leading European experts in this area. The publication of PEICL mirrors comparable projects in other jurisdictions to set out key principles of the law, such as the Restatements of Law published by the American Law Institute (ALI). It remains to be seen whether the PEICL will have anything like the same influence on the development of law in EU member states as the ALI Restatements have had in the United States. In any event, from the Commission’s perspective, the publication of PEICL provides another reference point for this current review of insurance contract law.

J                 The Commission’s General Approach in this Consultation Paper

12.             The Commission considers that a review of insurance contract law in the early 21st century should have regard to all these developments. This allows the Commission to consider afresh long-established principles and rules in this area, in particular those based on principles of private autonomy and which were developed before the advent of statutory regulation. The regulatory landscape, evidenced by the Consumer Protection Code 2012, has a much more interventionist character in relation to contractual practices than was previously the case, or perhaps is even generally appreciated. Furthermore, the advent of the FSO has produced a body of norms and standards that indicate the need for a fundamental reappraisal of Irish insurance contract law.

13.             In approaching this Consultation Paper, therefore, the Commission considers that while existing common law principles and rules may be in some need of recalibrtation, a number of underlying key elements remain valid. The Commission is conscious that the existing law in this area includes long-established common law principles whose origins coincide with the still-extant Life Assurance Act 1774. It is equally conscious that the more recent case law in this area, and the recent legislation that established the Financial Regulator and the FSO, provide an important contemporary background against which propsoals for reform need to be considered. The Commission is also conscious that any proposals should take account of the EU setting, including proposals for the future development of insurance contract law at European level such as those indicated by the publication of the Principles of European Insurance Contract Law (PEICL).

14.             In addition, as with its other law reform projects, the Commisison has also had the advantage of reviewing comparable developments in insurance contract law in a number of other jurisdictions, including proposals for reform and enacted reforms in Australia, Canada and the United Kingdom. In this respect, the Commission is also fully conscious of the importance of insurance as a financial service in Ireland, that it does not operate in isolation, and that it is closely connected with leading centres of insurance (such as London) as well as the increasingly globalised market for financial services.

15.             The Commission now turns to outline the contents of the Consultation Paper.

A                      Outline of Consultation Paper

16.             In Chapter 1 (Regulatory Context), the Commission examines some detailed aspects of the current regulatory regime. The Commission acknowledges that the activities of existing non-statutory and statutory bodies have already had a significant impact on insurance contractual practice. The decisions of the FSO have also produced a body of principles, often informed by custom and practice within the industry as well as court decisions, that have led to more balanced outcomes in individual disputes. These developments are reflected in both the IIF voluntary Codes of Practice and the Financial Regulator’s statutory Consumer Protection Code 2012, which the Commission notes applies, at least in part, not just to insurance taken out by consumers but also by commercial undertakings.

17.             It is clear to the Commission that Codes of Practice can play a valuable role in resolving individual disputes. The Commission therefore concludes that regulatory bodies (in particular the Financial Regulator and the National Consumer Agency) should continue to liaise with each other in order to develop comprehensive statutory Codes of Practice setting out standards of best practice, building on the best practice standards developed by the Irish Insurance Federation and on the statutory model of the Financial Regulator’s Consumer Protection Code 2012.

18.             The Commission also provisionally recommends that legislation should provide that in any litigation or other dispute resolution process such statutory Codes of Practice setting out standards of best practice should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising in the litigation or other dispute resolution process, the provision may be taken into account in determining that question, but that this would be without prejudice to the substantive rights between the parties. In addition, the legislative framework being proposed in this Consultation Paper should, in general, apply to consumers as defined for the purposes of the jurisdiction of the Financial Services Ombudsman (FSO), namely natural persons and businesses with an annual turnover not exceeding €3 million.

19.             In Chapter 2 (Insurable Interest), the Commission notes that although Irish common law did not require an insurable interest to be present for a contract of insurance to be enforceable, subsequent statutory developments aimed at counteracting fraud, gambling and criminal destruction of lives and property did. Pre-1922 legislation was largely ineffective or unclear on the insurable interest question but it is clear that in relation to life policies Irish law retains an insurable interest requirement by way of the Life Assurance Act 1774. However, in relation to non indemnity insurance, there is significant judicial authority for the view that the 1774 Act does not apply to property insurance. The Commission sees no case for the introduction of an insurable interest requirement where no such requirement currently exists. In cases of indemnity insurance the need for an insured to show a loss, and the indemnity principle, achieve the same net result as the insurable interest requirement.

20.             In terms of reform, the Commission provisionally recommends that legislation should provide that an otherwise valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured and the subject matter of the insurance contract. The Commission provisionally recommends that, instead, insurable interest should, in the interests of certainty, be defined in legislation (to reflect current Irish case law) as an interest that subsists when a person may benefit from the continued existence or safekeeping of the subject matter of the insurance or may be prejudiced by its loss; and that this definition would apply both to non-life insurance (in particular property and liability insurance) and to life insurance. In connection with life policies, the Commission also recommends reform of the “natural love and affection” category of insurable interest insurable interest requirement to include civil partnership, cohabition and other familial relationships. This adjustment would also result in the repeal of the Life Assurance Act 1774. Finally, although the insurable interest requirement is not an essential element in defining insurance for regulatory purposes, the Commission considers it an important benchmark in assisting regulation of financial services, gaming and wagering. The Commission recommends that further regulatory steps be taken to distinguish insurance contracts from other financial or investment activities associated with risk.

21.             In Chapter 3 (Duty of Disclosure), the Commission notes that the duty of disclosure is mandated by both the common law and the Marine Insurance Act 1906 as being applicable to all insurance contracts. The duty is rooted in “special knowledge” of a risk as being likely to be solely in the possession of the proposer. Whether this remains the case is open to some doubt in the light of telecommunications and other advances. The duty has always been balanced by reference to the insurer’s duty to disclose and investigate circumstances within the insurer’s competence and expertise. In some jurisdictions the duty of disclosure has been offset or indeed removed altogether by an insurer’s obligation to ask specific questions.

22.             The Commission provisionally recommends that the pre-contractual duty of disclosure in insurance contract law should be retained, but that it should (in accordance with authoritative case law in Ireland) be restricted to facts or circumstances of which the person applying for insurance cover – the proposer – has actual knowledge; and that the duty of disclosure would not, therefore, extend to every fact or circumstance which ought to be known by him or her (constructive knowledge). The Commission provisionally recommends that this modified pre-contractual duty of disclosure should apply to all insurance, other than Marine, Aviation and Transport (MAT) insurance, which would continue to be regulated in this respect by the Marine Insurance Act 1906.

23.             The Commission also recommends that legislation should continue to provide that, because the proposer possesses more relevant information than the insurer, the pre-contactual duty of disclosure should continue to be the basis on which a contract of insurance is a contract of utmost good faith (uberrimae fidei). The Commission also provisionally recommends that the insurer should be under a statutory duty to explain to a proposer both the nature of the duty of disclosure and the consequences of non-disclosure.

24.             In Chapter 4 (Pre-contractual Misrepresentation and Insurance Contracts), the Commission discusses the duty in section 20 of the Marine Insurance Act 1906 to give “true” answers, and provisionally concludes that this should be replaced by a duty to answer specific questions honestly and carefully. This would apply to consumer insurance and mass market insurance products (including mass market insurance products to all businesses, not limited to the jurisdictional limit of the Financial Services Ombudsman). The Commission also considers that the insurer must ensure that any question posed in writing to the proposer is drafted in plain, intelligible language; that any such question should be specific as to the information being sought by the insurer; and that where there is doubt about the meaning of a question, it should be interpreted by reference to a standard of what is fair and reasonable.

25.             The Commisison also suggests that the misrepresentation provisions in the Sale of Goods and Supply of Services Act 1980 could be modified so as to reflect the needs of the insurance contract. The Commission also provisionally recommends that rescission of a contract of insurance for non fraudulent misrepresentation should no longer be the primary remedy. This reflects in practice what Irish courts and the FSO have been doing in recent years.

26.             The Commission accepts that questions asked by an insurer should be answered, but that the failure of an insurer to follow up on an obviously incomplete answer should be regarded as a waiver of the duty of disclosure in appropriate cases. This would involve the adoption of section 27 of the Australian Insurance Contracts Act 1984.

27.             In Chapter 5 (Warranties), the Commission acknowledges that contractual warranties may, in a passive sense, be unobjectionable because the warranty may help to identify or define the risk being underwritten. Warranties may also, however, act as “traps for the unwary”, giving insurers wide-ranging grounds for avoiding a policy. The Commission recommends a number of measures to deal with abusive provisions of this kind. The Commission provisionally recommends that the entitlement of an insurer to avoid a policy or a claim for breach of warranty should depend on whether the insured was provided at the pre-contractual stage, or contemporaneously with the conclusion of the contract, with the information required by the duty of disclosure (as already defined in this Consultation Paper).

28.             The Commission also provisionally recommends that, in respect of promissory or continuing warranties that arise after the contract has been agreed, the insurer must provide the proposer with a clear statement prior to the formation of the contract about the scope of the continuing obligations imposed upon the proposer when he or she becomes insured. The Commission also concludes that statements of fact or opinion shall not be converted into a contractual warranty by anything stated in the contract. This means that “basis of contract” clauses will cease to be effective through the law of contract, the insurer’s remedies being available in tort or under specific legislation. This recommendation is in line with best practice standards in the industry.

29.             The Commission also provisionally recommends that, if the insured can show that there was no causal link between the failure to observe a promissory warranty and the loss, the insured should be able to recover on the claim. The New Zealand approach to this difficult issue provides a significant improvement to existing Irish law and the Commission provisionally recommends the adoption of the approach that has been in place there since 1977.

30.             In Chapter 6 (Exclusions and Unfair Terms), the Commission notes that existing judicial approaches to unusual terms, in both consumer and commercial contracts, require the party who drafted such terms to draw attention to them. Legislation such as the Consumer Protection Act 2007 also gives additional protection to consumers, but Irish law does not have specific protection for businesses contracting on another’s standard terms. The Commission accordingly recommends that there should be a general statutory duty on an insurer to draw attention to unusual terms. The Commission also provisionally recommends that a good faith provision, based on section 14 of the Australian Insurance Contracts Act 1984, should be enacted. The Australian provision is an updated version of section 17 of the Marine Insurance Act 1906, with the specific focus being drawn to instances of unfairness at the time of conclusion of the contract. This reform would provide greater transparency and accountability in contractual negotiations.

31.             The Commission also provisionally recommends that Regulation 4 of the Unfair Terms in Consumer Contracts Regulations 1995 (which deals with specific circumstances in which a contract term shall not of itself be considered to be unfair) should be clarified in the context of insurance contracts so that it is provided, to avoid any doubt, that: (a) a term in an insurance contract shall not in itself be regarded as unfair where the subject matter of the term has actually been considered by the insurer in the calculation of the premium (price); (b) that this has been drawn to the attention of the proposer; and (c) that this clarification to Regulation 4 should apply to consumers as defined for the purposes of the jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an annual turnover not exceeding €3 million. This reform would be in line with the suggestions in Article 2:304 of the Principles of European Insurance Contract Law (PEICL) and, in turn, reflects insurance legislation in a number of other EU states (including Germany).

32.             In Chapter 7 (Formalities), the Commission examines contractual formalities, but is conscious in this respect that the regulatory bodies have issued specific requirements to insurance companies, often on foot of EU or other statutory compliance provisions. The Commission’s recommendations should be seen in this context.

33.             On the general question of the need for an insurance contract to be in writing, the Commission provisionally recommends that this should not be a necessary pre-condition to the validity of an insurance contract. The Commission is also aware that many insurance contracts are the subject of extensive requirements of notice and form under EU law. The Commission concludes that these requirements should be consolidated and set out in primary legislation, using the requirements in the European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 as a model.

34.             The Commission also provisionally recommends that legislation should include a statutory duty on insurers to provide a proposer with the prescribed requirements of notices, notification and forms. The Commission provisionally recommends that, subject to a cooling-off period (if any), the insurer should transmit the insurance policy document to the insured within 15 working days of the contract being agreed.

35.             In Chapter 8 (The Duty of Utmost Good Faith: Post-Contractual Aspects), having reviewed the case law concerning a suggested post-contractual duty of utmost good faith, the Commission concludes that there is very little support for the existence of any expansive duty of this kind. The Commission provisionally recommends, therefore, that legislation should set out the mutual duties on the insured and the insurer in respect of claims handling, so that the principle of good faith would then remain relevant only to pre-contractual formation of the contract, as discussed in Chapter 3, above.

36.             The Commission also provisionally recommends that the law should continue to provide that an insured should be prohibited from recovering on a claim by submitting a fraudulent claim or fraudulent evidence to support a claim; but that it should also provide that an innocent co-insured or beneficiary may recover on a proportionate basis; provided that the fraudulent insured cannot benefit from the policy.

37.             In Chapter 9 (Third Party Rights), the Commission concludes that in the context of third party rights in insurance contracts, it would, in general, be sufficient to protect such rights if the Oireachtas enacted legislation based on the draft Contract Law (Privity of Contract and Third Party Rights) Bill in the Commission’s 2008 Report on Privity of Contract and Third Party Rights. In addition, the Commission invites submissions as to whether additional specific provisions should be enacted in the context of the operation of insurance contracts in specific settings, for example, in insolvency, on the death of an insured person and during the completion of a contract for the conveyance of land.

38.             The Commission also provisionally recommends that section 62 of the Civil Liability Act 1961 should be extended to allow a third party to proceed against the insurer where the insured cannot be located; this would reflect the approach in section 51 of the Australian Insurance Contracts Act 1984.

39.             In Chapter 10 (Remedies), the Commission considers that, under current law, there is an excessive emphasis on repudiation of liability under an insurance policy as a remedy for the insurer. The Commission has, accordingly, provisionally concluded that repudiation should no longer be the main remedy, and that in cases of non-disclosure and misrepresentation the principal remedy should be one of damages in proportion to the failure by the insured.

40.             The Commission also provisionally recommends that any damages awarded to an insured arising from the insurer’s failure to comply with the proposed post-contractual duties of the insurer (set out in Chapter 8) should reflect: (a) general principles of damages in contract law, namely whether the loss is a reasonably foreseeable consequence of the breach of contract (and in particular, damages that are reasonably foreseeable from a refusal in bad faith to meet a valid claim); and (b) emerging principles of restitution.

41.             The Commission also provisionally recommends that legislation should provide that subrogation rights should be limited in two situations: (a) claims between family members and (b) the employer-employee relationship. The Commission invites submissions as to the precise form these restrictions should take.

42.             Chapter 11 contains a summary of the provisional recommendations made in this Consultation Paper.

43.             This Consultation Paper is intended to form the basis of discussion and therefore all the recommendations are provisional in nature. The Commission will make its final recommendations on the subject of insurance contract law following further consideration of the issues and consultation. Submissions on the provisional recommendations included in this Consultation Paper are welcome. To enable the Commission to proceed with the preparation of the Report, which will contain the Commission’s final recommendations in this area, those who wish to do so are requested to make their submissions in writing to the Commission or by email to by 31 March 2012.




A                      Introduction

1.01                In this Chapter the Commission examines some detailed aspects of the current regulatory regime, with a focus on four matters in particular. In Part B, the Commission dsicusses overlapping regulation of Irish insurance contract law and commercial practices. In Part C the Commission examines European Union initiatives on insurance regulation and the related development of the Principles of European Insurance Contract Law (PEICL). In Part D, the Commission discusses new legal norms and forms of Dispute Resolution, in partyocular those arising from the role of the Financial Services Ombudsman (FSO). In Part E, the Commission discusses the need for insurance contract law reform. Agaisnt this background, in Part F the Commission sets out its conclusions and provisional recommendations for reform, acknowledging that the activities of existing non-statutory and statutory bodies have already had a significant impact on insurance contractual practice. The decisions of the FSO have also produced a body of principles, often informed by custom and practice within the industry as well as court decisions, that have led to more balanced outcomes in individual disputes. These developments are reflected in both the IIF voluntary Codes of Practice and the Financial Regulator’s statutory Consumer Protection Code 2012, which the Commission notes applies, at least in part, not just to insurance taken out by consumers but also by commercial undertakings.

B                      Overlapping regulation of Irish insurance contract law and commercial practices

(1)                   Regulatory overlaps – financial services legislation

1.02                The most important regulatory agency that has a significant impact upon the law relating to insurance contracts is the Financial Services Ombudsman (FSO) insofar as the FSO has a broad jurisdiction to investigate complaints about the conduct of a regulated financial service provider in relation to the provision of, or an offer to provide, or a failure to provide, a financial service.[15] The creation of a Financial Regulator was a core recommendation of the 1999 Implementation Advisory Group on the Establishment of a Single Regulatory Authority for the Financial Services Sector,[16] the McDowell Report. The McDowell Report also recommended the creation of a statutory Financial Services Ombudsman to replace the non-statutory Ombudsman schemes.

1.03                While the Statutory Financial Services Ombudsman model of alternative dispute resolution is the most obvious regulatory agency, there are other statutory bodies that have significant roles to play in the way in which the insurance industry conducts business in Ireland. Some of these agencies have the power to regulate information gathering practices and the way in which insurance contracts can be structured, so it is no longer possible to see the process of negotiating an Irish insurance policy as being predominantly governed by principles of private autonomy and freedom of contract.

(2)                   Regulatory Overlaps – Competition Law

1.04                Competition law principles and objectives such as the desire to regulate levels of market concentration, facilitation of the ability of new suppliers to enter into the Irish insurance market (and thus avoid anti-competitive levels of market power in both the insurance and intermediary markets) have an important part to play in Irish economic life. Competition law may also ensure that insurance companies do not share or aggregate pricing data in ways that undermine consumers. The Competition Authority has undertaken a number of studies on the Irish insurance landscape, the most noteworthy being the 2005 Final Report and Recommendations, Competition Issues in the Non-Life Insurance Market. After investigating motor insurance, employer’s liability insurance and public liability insurance, the Competition Authority made a number of recommendations aimed at improving competitiveness within each sector. Some recommendations involved providing proposers and insureds with contractual rights to a statement on claims history, timely and detailed renewal notices so as to facilitate switching to competitors; other recommendations such as a requirement that intermediary fees should be disclosed to insureds have been subsequently diluted so as to avoid “consumer information overload.” The Competition Authority, in its 2009 Annual Report, noted that the Financial Regulator requires such disclosure of intermediary fees if the consumer makes a request for such information. The Competition Authority clearly has an important role to play in improving the rights of Irish consumers by promoting competition and making recommendations to the Financial Regulator. Other State agencies are also expected to respond to the views expressed by the Competition Authority.[17]

(3)                   Regulatory Overlaps - Equality Legislation

1.05                The provisions of the the Employment Equality Acts 1998 and 2004 and the Equal Status Acts 2000 and 2004 clearly have an impact upon the Insurance Industry. Both pieces of legislation prohibit discrimination based upon

·         gender

·         marital status

·         family status

·         sexual orientation

·         religion

·         age

·         disability

·         race

·         membership of the traveller community status.

1.06                While most of the complaints made to the Equality Authority relate to discrimination in the provision of public sector services, and in particular discrimination based on race, gender and traveller status, there are pertinent examples involving insurance.

1.07                For example, Brother Anthony White[18] was able to use the services of the Equality Authority to challenge a practice of loading a surcharge onto the cost of hiring a motor vehicle because the driver was aged over 70, no account being taken of the individual circumstance of the driver. The service provider agreed to withdraw this automatic loading. The then chief executive of the Authority was quoted on the Authority’s website as remarking:

“the use of lower and upper age limits to govern access to insurance products and financial and other services is a widespread problem. Age limits exclude people without any consideration of their individual circumstances”

1.08                There are decisions of Equality Officers that also address disability issues. In Mr A v A Life Assurance Company[19] the Equality Officer found that a refusal to top up an income protection policy for an insured with diabetes was a prima facie case of disability discrimination. The insurer however was able to come within the exemption provide by section 5(2)(d) of the Equal Status Act 2000, that is, the decision not to extend cover was reasonable having regard to underwriting and commercial factors.

1.09                In the more general context of discrimination, complaints brought against bodies that exist outside the public sector have been lodged. The press release accompanying the 2006 Annual Report of the Equality Authority stated that:

“Access to education (57 casefiles), access to accommodation (41 casefiles), access to insurance (17 casefiles) and access to banking and financial services (15 casefiles) are the main issues raised under the Equal Status Acts after public sector services.”

1.10                The database of decisions reached by the Equality Tribunal shows that a number of complaints have been made in relation to the charging of differential premiums, most decisions being arrived at on factual grounds such as whether the loading was based upon actuarial modelling or statistical data.[20] Complaints about discrimination in relation to preferential premiums and gender or marital status have also been upheld by the Equality Tribunal.

(4)                   Regulatory Overlaps - The Data Protection Commissioner

1.11                The constraints that data protection and privacy considerations place upon the proposer and the insurer also contribute to undermining the traditional view that “the proposer knows everything and the insurer nothing.” Far from requiring the proposer to disclose anything that the proposer knows or is deemed to know concerning the risk, contemporary privacy principles and rules on data protection may impose obligations to withhold personal data about third parties who have not explicitly consented to disclosure. Similarly, the idea that an insurer may be free to either use or ignore information provided, for any particular purpose, may not accord with data privacy rules. This conflict between data protection principles, and pre-contractual and post-contractual data capture and use practices, has not been widely appreciated: it is nevertheless a cause of some uncertainty in relation to the approach to be adopted by proposers and insurers to information gathering.

1.12                The data protection principles consist of 8 guideline rules that must be followed by any data controller engaged in the collection and use of personal data, whether that data is recorded on paper or some other format, for example, electronically. The 8 rules require a data controller to

(1)   obtain and process information fairly;

(2)   keep information only for one or more specified, explicit and lawful purposes;

(3)   use and disclose the information only in ways compatible with those purposes;

(4)   keep the information safe and secure;

(5)   keep the information accurate, complete and up-to-date;

(6)   ensure the information is adequate, relevant and not excessive;

(7)   retain the information for no longer than is necessary for those purposes;

(8)   give the individual data subject a copy of their personal data, on request.

1.13                Within the specific context of the insurance sector there are a number of instances where Irish data protection law may inform pre-contractual information gathering practices. For example, there are specific rules in place when personal data is collected from a data subject following on from a medical examination. The Data Protection (Access Modification) (Health) Regulations 1989 (SI No 82 of 1989) provide that, even if the data subject requests a copy of this personal data under rule 8 above, the relevant health professional investigating or treating the data subject is entitled to withhold the personal data in the event that such a professional forms the view that disclosure would be harmful to the data subject/patient. It may be that considerations of this kind were behind the decisions of the clinicians treating Ms Coleman in Coleman v New Ireland Insurance Plc.[21] While the decision reached by Clarke J in Coleman accords with data protection law, there are other situations where the ‘disconnects’ between privacy considerations and contract law are more evident.

1.14                Take the possible dilemma facing Mrs Lambert in the English case Lambert v Co-operative Insurance[22]. While on the facts of Lambert the issue of disclosure did not arise because Mrs Lambert did not consider it relevant, the point is this: should the disclosure be made, even if the personal data relates to a third party? Data protection law, especially rules 1 to 4, are probably relevant but, at an intuitive level, one could be excused for seeing the privacy consideration as being somewhat artificial. Nevertheless, it is possible to envisage cases where a previous conviction would not be disclosed, on privacy grounds, the effect being that the insurance policy might be avoided. While a Spent Convcitions Act[23] might answer this situation, the same may not be true of other sensitive personal data material such as health conditions or sexual history. The leading English decision on this is undoubtedly Horne v Poland,[24] in which an insurer was able to avoid payment on a burglary insurance policy on the basis that the proposer had failed to declare that he was born in Romania and had lived there until his teens, matters of importance to an underwriter assessing risk apparently.

1.15                The decisions of the Data Protection Commissioner also demonstrate how the data protection principles may cut across insurance contract law. Case Study 2 of 1999 for example[25] illustrates the fact that breach of any implied contractual duty of confidence in relation to personal data will also constitute a breach of the security principle (rule 4 above). Case Study 1 of 2001 also censored an insurer that collected irrelevant data on the marital status of a person seeking motor insurance,[26] and Case Study 8 of 2009 also drew attention to an insurer collating excessive information on penalty points imposed on drivers. There are also situations where the sharing of personal data with trade bodies or other insurers may be problematical. Such practices were held by the Data Protection Commissioner, in a decision relating to disclosure to the Insurance Industry Federation (IIF) of personal data on health insurance applicants, to be understandable from the insurer’s perspective, but the Commissioner felt that “explicit consent” to disclosure of medical data should be the necessary standard, albeit at the cost of having any proposal declined or the contract avoided, should the proposer fail to make the disclosure. [27]

1.16                These matters have led the Data Protection Commissioner, in consultation with the insurance industry, to formulate the Code of Practice on Data Protection for the Insurance Sector. Many of the requirements set by the code have a direct impact on data capture requirements and recalibrate the existing balance vis-à-vis the duty of disclosure, for example, further undermining the notion that the onus lies upon the proposer to volunteer information unprompted by the insurer.

1.17                The fair obtaining and processing principle (rule 1) is said to require the insurer, on an application form, to, inter alia, advise the “applicant” about the purpose of collecting the data, to whom it may be disclosed and any other relevant information necessary to ensure that all processing meets the requirements of fair processing. This obligation is reinforced by a requirement that insurers have a written privacy policy “setting out clearly for what purposes personal data is processed”, a privacy statement also being required for any insurer website. Rule 1 also has further implications should an insurance company as a matter of course seek personal data about an applicant from a third party, such as another insurance company or a database. The documentation provided to the customer must refer to this practice. Clearly, any such reference could convey to a proposer the impression that information held on any database will become known to the insurer and may therefore constitute information that the insurer knows or ought to have known, thus abridging the proposer’s duty of disclosure. Rule 1 will also complicate the process of obtaining sensitive personal data – this includes moral hazard issues such as criminal convictions, as well as medical data – because explicit consent to capture and use is the required standard.

1.18                The use and disclosure principle (rule 3) similarly constrains an insurance company in relation to disclosure to other companies (as distinct from disclosure to the IIF): the Code states that disclosure may only be made to “other insurance companies, where this is clearly stated on the application or claim form or in other correspondence with a claimant”. Similar situations also arise in the context of rule 6 which provides that an insurer who requests information about a proposer’s family history may only use that information in order to underwrite the proposer’s application. The information “will not be used in underwriting the application of any third party who is related to the applicant”. Clearly one might envisage cases where this principle could cause difficulties where members of the same family seek medical insurance from the same company at different times, and one applicant, perhaps not unreasonably, believes that the insurer has been put on notice about the family medical history. The Code also contains specific provisions that prohibit genetic testing, the prohibition being, in furtherance of s.42(2) of the Disability Act 2005; in particular the code provides that should an insurer acquire a genetic test result, the result “must be ignored and not taken account of by the insurer in any way whatsoever. This applies both to positive and negative test results.”

1.19                The Code of Practice has not resolved all of the contentious data collection and processing issues that arise in relation to private insurance. Press Reports in recent months[28] relate to a number of instances in which personal data held by the Department of Social Protection has been wrongfully disclosed by a staff member to a private investigator who then in turn sold the data on to insurance companies and other financial institutions. This seems to be a straightforward example of unfair data collection. More difficult issues of law are raised by an industry database, Insurance Link. This database holds data relating to individuals who seek quotations for insurance, even if no cover or claim is obtained. Concerns about the retention of this data and third party access are under investigation by the Office of the Data Protection Commissioner and some practices have been ruled illegal.[29]

(5)                   Regulatory Overlaps – Consumer Protection Agencies

1.20                National consumer protection agencies have had a role to play in intervening on behalf of consumers for many years. Insurers are of course bound by general principles of contract and tort law and the corpus of Irish consumer protection legislation will apply to service providers, for example Part V of the Sale of Goods Act and Supply of Services Act 1980.

1.21                In 2006, the last year in which the Office of the Director of Consumer Affairs was in existence, the Office received 43,142 queries or complaints, of which 1,500 involved the Financial/Insurance sectors.[30] The National Consumer Agency does not provide statistics in this way but the 2008 Annual Report indicated that multi-year insurance plan cover for goods constitutes a source of numerous consumer complaints[31] and that insurance issues in relation to home construction and multi-unit accommodation are very much “live” matters.

1.22                However, the provisions of the Consumer Protection Act 2007, which implemented the 2005 EU Unfair Commercial Practices Directive,[32] suggest that the National Consumer Agency (whose functions may in the future be merged into a new body incorporating the Competition Authority) will have a significant role to play in the resolution of consumer insurance complaints relating to general practices within the insurance industry. Recital 9 of the 2005 Directive provides that the directive is “without prejudice to Community and national rules on contract law... [f]inancial services and immovable property, by reason of their complexity and inherent serious risks, necessitate detailed requirements, including positive obligations on traders. For this reason, in the field of financial services and immovable property, this directive is without prejudice to the right of Member States to go beyond its provisions to protect the economic interests of consumers”. Article 3(9) of the Directive allows Member States to impose requirements that are either more restrictive or prescriptive than those found in the directive. The financial services that were brought within the remit of the Consumer Protection Act 2007 include services or facilities for insurance, and the 2007 Act goes on to prohibit unfair commercial practices, misleading commercial practices and aggressive commercial practices that are prejudicial to consumers.

(6)                   Financial Services and consumers

1.23                In introducing to the Oireachtas what became the Consumer Protection Act 2007 the then Minister for Enterprise, Trade and Employment said that its provisions “add to all sectors of the economy and offer protection to consumers whether they are buying a loaf of bread or taking out a mortgage with the local bank”.[33] As the Act went through the Oireachtas it was the subject of amendments to ensure that the jurisdiction to investigate complaints was vested in the Consumer Director of the Financial Services Authority, this being transferred to the Financial Services Ombudsman at a later date. Periodic reviews and investigations by the Financial Regulator into sectors of the insurance industry were seen as an important part of the role of the Financial Regulator as a consumer advocate. In June 2010 investigations into home insurance centred on a few failures to process claim cheques within 10 business days. The Financial Regulator also questioned an increasingly standard practice whereby home insurance providers resort to using an “approved builder” panel to effect home repairs. Both the Financial Regulator and the Consumers Association of Ireland questioned this practice vis-à-vis compliance with the Financial Regulator’s 2006 Consumer Protection Code (since superceded by the Consumer Protection Code 2012), transparency requirements and competition law. Problems identified in relation to motor insurance included failures in relation to the statutory renewal timelines and inadequacy of renewal documentation.

1.24                The Central Bank Reform Act 2010 has vested responsibility for banking and financial services regulation in the Central Bank of Ireland. The Central Bank thus replaces the three previous statutory agencies, the Central Bank, the Financial Services Authority of Ireland and the Financial Regulator. The directorate within the Central Bank of Ireland responsible for Financial Regulation has oversight over six divisions, two of them being insurance supervision and consumer protection. In 2011, the Consumer Protection Division released the findings of a Complaints Handling Inspection in Insurance Firms.[34] The inspection matched up the Consumer Protection Code and compliance levels attained within twelve insurance providers. Despite the prescriptive nature of the Code, high levels of non-compliance were found in regard to provision of initial point of contract data to the consumer, information on the Financial Services Ombudsman and rules requiring the acknowledgement of a complaint, in writing within five days of receipt of the complaint.

(7)                   The Jurisdiction of the Financial Services Ombudsman

1.25                The non-statutory Insurance Ombudsman of Ireland ADR Scheme, operative between 1992 and 2004, was confined to complaints in which the proposer/insured acted “in a private and personal capacity only”. While the initial definition of “consumer” in the Central Bank and Financial Services Authority of Ireland Act 2004 identified a consumer as a natural person not acting in the course of, or in connection with, carrying a business, the 2004 Act contained an enabling provision allowing the Financial Services Ombudsman Council to prescribe persons, or groups of persons to be designated as consumers. The Central Bank Act 1942 (Financial Services Ombudsman Council) Regulations 2005 (SI No. 190 of 2005) prescribe two classes of person:

“(a) a person or group of persons, but not an incorporated body with an annual turnover in excess of 3 million euro. For the avoidance of doubt a group of persons includes partnerships and other unincorporated bodies such as clubs, charities and trusts, not consisting entirely of bodies corporate;

(b) incorporated bodies having an annual turnover of 3 million euro or less in the financial year prior to the year in which the complaint is made to the Ombudsman (provided that such body shall not be a member of a group of companies having a combined turnover greater than the said 3 million euro).”

1.26                The 2005 Regulations also prescribe the maximum amount of compensation that the Financial Services Ombudsman may award: for insurance complaints this is set at €250,000.

1.27                The creation of a statutory agency marked the end of the system of the ADR model of adjudication that the Irish Insurance Federation (IIF) had promoted through their sponsorship of the Office of the Insurance Ombudsman of Ireland. The terms of reference of the Insurance Ombudsman of Ireland, fixed by IIF in 1992, gave the Insurance Ombudsman the right to act as, “counsellor, conciliator or adjudicator” in relation to “complaints, disputes and claims.” The Insurance Ombudsman however did not have the right to entertain complaints other than those emanating from natural persons who took out insurance in a private and personal capacity only. The Insurance Ombudsman Scheme had a limitation on certain kinds of matter that could be entertained in a complaint such as a reference that “relates to the rating or underwriting of a risk.” Furthermore, the Insurance Ombudsman was required, when adjudicating on the merits of a complaint to:

“(a) exercise his discretion in a fair and reasonable manner;

(b) have regard to the terms of the insurance contract, these Terms of Reference, all applicable rules of law and relevant judicial authority and general principles of good insurance practice.”

1.28                These requirements stand in sharp contrast to the considerations that attend the adjudication powers of the Financial Services Ombudsman. The parameters set by the IIF in these terms of reference were distinctly legalistic, tempered as they were by the requirement to exercise the discretion in a fair and reasonable manner and act by reference to general principles of good insurance practice. Nevertheless, the decisions of the Insurance Ombudsman of Ireland reflect the fact that, in practice, the Insurance Ombudsman demonstrated a significant degree of independence. As the 1999 McDowell Report indicated, the Review Group was satisfied that the structure of the Insurance Ombudsman Scheme – a private company controlled by the Ombudsman Council interacting with the Department of Enterprise, Trade and Employment – was such as to guarantee the independence of the Scheme. Nevertheless, the Review Group opted for a “one-stop shop”[35] statutory financial services ombudsman model rather than retention of the voluntary scheme.

(8)                   Merger of the Industry ADR Scheme with the Statutory Model

1.29                Although the Insurance Industry lobbied for the Insurance Ombudsman of Ireland ADR model to be retained, the Oireachtas ultimately decided to provide for a statutory complaints procedure under which a new entity, the Financial Services Ombudsman, would mediate, investigate and adjudicate upon a complaint made by an eligible consumer. A degree of continuity was provided in that “the Financial Services Ombudsman shall have regard to the existing Terms of Reference of the Insurance Ombudsman of Ireland for complaints regarding insurance”, save when they have been superseded by the 2004 Act.

1.30                Section 16 of the Central Bank and Financial Services Authority of Ireland Act 2004 amends the Central Bank Act 1942 by inserting a new Part VIIB into the 1942 Act. While these provisions contain restrictions on the ability of the Ombudsman to hear some complaints, the Ombudsman is directed “as far as possible, [to] try to resolve the complaint by mediation”[36] The Ombudsman must, following investigation of a complaint, make a finding in writing (save where the complaint has been settled or withdrawn) that the complaint is substantiated, in whole or in part, or is not substantiated. Section 57 CL(2) provides that:

“(2) A complaint may be found to be substantiated or partly substantiated only on one or more of the following grounds:

(a)   the conduct complained of was contrary to law;

(b)   the conduct complained of was unreasonable, unjust, oppressive or improperly discriminatory in its application to the complainant;

(c)   although the conduct complained of was in accordance with a law or an established practice or regulatory standard, the law, practice or standard may be, unreasonable , unjust or oppressive or improperly discriminatory in its application to the complainant;

(d)   the conduct complained of was based wholly or partly on an improper motive, an irrelevant ground or an irrelevant consideration;

(e)   the conduct complained of was based wholly or partly on a mistake of law or fact;

(f)     an explanation for the conduct complained of was not given when it should have been given;

(g)   the conduct complained of was otherwise improper.”

1.31                For present purposes the most noteworthy of these grounds is (c): the Financial Services Ombudsman may uphold a complaint, notwithstanding that the conduct was compliant with the law, established practice or a regulatory standard, because of the unreasonable, unjust, oppressive or improperly discriminatory impact that the law, practice or standard had on the individual complainant.

1.32                There are signs that even the FSO complaints mechanism is becoming increasingly caught up in litigation. Applications for judicial review[37] and declarations that the Ombudsman has acted ultra vires his legislative powers[38] have become a feature of the regulatory landscape, undermining what MacMenamin J, in Hayes v Financial Services Ombudsman,[39] described as a legislative model which is “an informal expeditious and independent mechanism for the resolution of complaints. The respondent seeks to resolve issues affecting consumers. He is not engaged in resolving a contract law dispute in the manner in which a court would engage with the issues.” In contrast, Hogan J, in Koczan v Financial Services Ombudsman[40] seems to have viewed the task of the Financial Services Ombudsman as much more difficult than merely resolving contract disputes: the task “runs well beyond that of the resolution of contract disputes in the manner traditionally performed by the courts… the Ombudsman must, utilising his or her specialist skill and expertise, resolve such complaints according to wider conceptions of et aegus et bono which go beyond the traditional limitations of contract law.” The Supreme Court decision in Davy[41] does little to resolve this paradox.

C                      European Union Initiatives on Insurance Regulation

(1)                   Single Market for Insurance

1.33                The creation of a single European Market for insurance has been on the agenda of the European Union for nearly 50 years. In 1961 the European Commission document, General Programme on the abolition of restrictions on the freedom of establishment and the freedom to provide services[42] set as objectives the creation of a single European insurable market by way of the coordination of rules relative to the supervision of insurance companies and insurance contract law rules. An ambitious deadline was set for the end of 1969 but no progress was made on either front. The European Commission however succeeded in pushing through a number of directives that have progressively addressed the supervision and licensing issues. A full consideration of EU insurance regulation lies outside the scope of this Consultation Paper.

1.34                The experience of the European Commission in setting out a harmonisation programme was not a happy one. While the General Programme in 1961 had argued that without harmonisation of insurance contract law a single market could not emerge, to the detriment of the insured and third party beneficiaries, the European Commission approached this topic in the late 1970s with a proposal for a directive in 1979.[43] The explanatory memorandum accompanying the proposal explained the objective of the directive in the following terms:

“The harmonization of contract law in connection with freedom to provide services and freedom of choice of applicable law has a twofold objective. Firstly, to guarantee the policyholder that whatever the choice of applicable law, he will receive identical protection as regards the essential points of the contract. Secondly, to eliminate as competition factors for undertakings the fundamental differences between national laws.”

1.35                The proposed 1970s draft insurance contracts directive did not seek to operate across insurance generally: life and health insurance were excluded, as was MAT insurance and some others. The reaction of the British insurance industry in particular to the proposed directive was generally hostile. Eventually, the proposal was withdrawn in 1993.[44]

1.36                Viewed at this juncture, the proposed directive was a rather curious text. Articles 3 and 4 set out provisions on the duty of disclosure with the insurer’s right to terminate for non-disclosure being abridged by provisions in which the insured made a proposal to amend the cover; termination could follow if the policyholder “may be considered to have acted improperly.” A duty to notify the insurer of changed circumstances was required, a provision that was difficult to operate in the British or Irish context where policies are concluded annually and where the duty of disclosure is normally spent when cover commences. Most controversially of all, the draft directive provided that if a claim arises before the amendment or termination of the contract, “the insurer shall be liable to provide any such cover as is in accordance with the ratio paid between the premium paid and the premium that the policyholder should have paid if he had declared the risk correctly.” Other provisions in the proposal dealt with the return of unjustified payments, premium reductions in the event of risk reduction, contract termination and third party beneficiaries.

(2)                   Adverse comments on the proposed insurance contracts directive – the Law Commission for England and Wales

1.37                The English Law Commission subjected the draft insurance contracts directive to a devastating critique in its 1980 Report, Insurance Law: Non Disclosure and Breach of Warranty.[45] At the onset of the Report the Law Commission said that it saw the proposed directive as doing little or nothing to repair existing defects in English law in relation to the duty of disclosure and breach of warranty. The draft directive was said to involve the creation of “complex machinery” that would engender uncertainty and perhaps allow insurers to use their superior bargaining position in a manner adverse to the interests of the insured. The Law Commission also considered that if the draft directive was to be adopted English law would be frozen indefinitely in an unsatisfactory state.[46] More detailed criticisms related to the proportionality principle in Article 3 insofar as the Commission saw the principle affording no guidance on how calculations were to be made, and that the principle raised difficult issues of proof in relation to the notional premium.[47] The provisions in Articles 4 to 6 (which related to adjustment to the terms of the contract due to changes in circumstances) were also attacked on the basis that they were riddled with ambiguity, were unfamiliar to the common law tradition and “inappropriate to English law and practice.”[48]

1.38                When viewed even at this distance the criticisms in the Law Commission Report retain some degree of force, particularly in relation to the details found in Articles 4 to 6 of the draft directive. While the draft directive did not address some of the issues that were of concern to those who saw English law as defective – for example breach of warranty and causation problems – the Law Commission can be itself criticised for overstating the chilling effect that adoption of the draft directive would have had on the wider task of securing insurance contract law reform in England and Wales. More significantly still, the attack on the proportionality principle[49] raised issues of definition and operational complexity without, it may be argued, the Law Commission dealing adequately with the arguments of some supporters of the directive who felt that the Commissioners were exaggerating those practical difficulties[50] and pointed out that the courts had experience of making similar decisions or adjustments in other situations. As discussed below, in the more recent studies and reports the English and Scottish Law Commissions have recommended the use of proportionality, sweeping aside the views of the Law Commission from 1980 on this point rather unceremoniously.

(3)                   Recent European Developments

1.39                A significant amount of academic literature on this subject[51] suggests that the European dimension to the insurance contact law reform debate should not be underestimated. Market conditions demonstrate that while insurance products in Member States are generally sold by multinationals, through branches or subsidiary companies established in each jurisdiction for those purposes, there is said to be a significant body of support by insurers and purchasers for cross border insurance services. Several of these enthusiasts for a more integrated European insurance market point to the increasing number of “euro-mobile citizens” who move to and live in Member States other than their country of birth and who cannot easily bring their insurance cover with them in many instances. On the supply side the jurisdiction-specific nature of insurance products means that there is no internal market, with anti competitive consequences and purchasers being denied new or innovative insurance products and services. The conventional wisdom is that the rules of private international law are incapable of providing a satisfactory solution to this situation.

1.40                The insurance directives themselves provide that the applicable law is the place where the consumer has his or her habitual residence.[52] This situation has recently been reaffirmed in Regulation EC No. 593/2008 on the law applicable to contractual obligations (“Rome I”), which provides specific rules on choice of law in insurance contracts, but in relation to most mass insurance contracts[53] the applicable law will generally be the law of the country where the policy holder has his or her habitual residence.[54] It is also to be expected that any litigation will take place in the courts situated in the place where the policyholder will be habitually resident because Council Regulation (EC) No. 44/2001 (“Brussels I”) provides that an insurer may be sued by the policyholder, insured or beneficiary “in the courts or the place where the plaintiff is domiciled.” These rules on choice of law and jurisdiction make it very difficult for an insurance product supplier to trade abroad other than through subsidiary companies or branch offices; those companies or offices may be expected to know and comply with national insurance contract rules, whereas a parent company cannot reasonably be familiar with such contract rules (most of which are mandatory) in a multiplicity of countries. Basedow and others[55] have pointed out that the solution does not lie in allowing the parties to select the law of the insurer’s domicile as the applicable law. The Principles of European Insurance Contract Law (PEICL) explain why such an approach would be both undesirable in policy terms and ineffective from a competition law perspective:

“the argument turns out to be mistaken. First of all, the approach would deprive the policyholder of protection by private international law which appears not to be acceptable as a matter of legal policy. Secondly, the shift mentioned in the rules of private international law would be followed by a switch in behaviour on the part of insurers and policyholders. Whereas under the current private international law regime it is chiefly the insurer who hesitates to provide cross-border services it would be the policyholder who would be reluctant to acquire foreign insurance products in the absence of private international legal protection. The internal market would remain incomplete.”[56]

1.41                The European Commission’s Action Plan[57] has singled out insurance contract law as a critical area in need of reform, arguing that in the absence of harmonised contract rules, mandatory laws formulated on a jurisdiction-specific basis means that “firms are unable to offer, or are deterred from offering, financial services across borders, because products are designed in accordance with local legal requirements,”[58] the Commission stressing that these problems are especially problematic in relation to insurance contracts.[59] The European Commission Action Plan was followed by the opinion of the European Economic and Social Committee (EESC) on the European Insurance contract.[60] In the EESC, after drawing attention to a wide body of opinion (including the European Federation of National Insurance Associations which opined that diversity of national insurance contract law “acts as a brake on the development of cross border transactions in the insurance sector”) the EESC called for the full harmonisation of insurance contract law rules on a staged basis.[61] The first stage of this process, it was suggested, would address:

(a)   pre-contractual duties, mainly information;

(b)   formation of the contract;

(c)   insurance policy, nature, effects and formal requirements;

(d)   duration of the contract, renewal and termination;

(e)   insurance intermediaries;

(f)     aggravation of risk;

(g)   insurance premium;

(h)   insurance on account of third party.

1.42                The conclusions and recommendations reached by the EESC included a reference to unanimity of views by all interested parties and a need for gradual harmonisation, to take account of the Commission’s 1979-80 proposed Directive.[62]

(4)                   The Restatement of European Insurance Contract Law – The Project Group

1.43                The task of formulating the rules that will seek to harmonise European insurance contract law has fallen to the Project Group entitled Restatement of European Insurance Contract Law. This group of academics, each with considerable expertise in insurance contract law, has been active since 1999 and, in 2005, the Project Group was included in the European Commission sponsored Network of Excellence on European Contract Law (CoPECL). As two of the leading lights in the Project Group have acknowledged,[63] the Project Group has followed the EESC suggestion that harmonisation of the General Part of Insurance Contract Law is to be a starting point, the focus being on mandatory rules for use in mass-risk insurances. However,[64] the Principles of European Insurance Contract Law (PEICL)[65] that have emerged are envisaged as a semi-mandatory code that may serve the parties to an insurance contract as an optional instrument, a 28th regime of insurance contract law in Europe. The Project Group however see the PEICL as mandatory in the sense that, once selected, the PEICL provides all the relevant contractual rules: the parties are not to be free to cherry-pick individual rules. The Project Group explain some of the advantages of an optional instrument thus:

“An optional instrument would allow parties to conclude their contract on the basis of European law instead of national law. This option would offer advantages particularly to “multiple players”, such as entrepreneurs doing business in the European internal market, who would not have to be concerned with the impact of diverging national contract law regimes on their transactions. The costs of legal research and adaptation of the contract to each national system of contract law would disappear. Moreover, an optional instrument would allow for efficient cross-border use of the Internet in order to sell standard policies. For euro-mobile policyholders an optional instrument would provide a stable contractual framework that is not subject to the changing national law of their domiciles.”[66]

1.44                The Commission has found the work of the Project Group to be of considerable assistance in elaborating proposals in this Consultation Paper on how Irish law should be reformed. Some of the provisional recommendations are based on the PEICL but the Commission is conscious of the need to strike a balance between recommending a radical reform of insurance contract law and adjusting some outmoded or inappropriate contract rules that are unfair or do not reflect contemporary market practices.

1.45                The work of the Project Group is based on an appreciation that the way forward can best be chartered through comparative research into substantive law rules developed by national parliaments and national courts. In one recent comparative study of German and English law, Giesela Rühl argued that the “common law and civil law are in fact not as far apart from another as is commonly assumed.” [67] Rühl suggests that while German law and English law have significantly different formal rules[68] on essential matters such as the duty of disclosure, the role of causation in relation to the insurer’s ability to avoid the contract, as well as the effect of non-disclosure, in practice these differences do not lead to radically different results for the insured. Her argument turns upon the ability and or willingness of the English judiciary, and the adjudications of the Financial Ombudsman Service (often using good practice guidelines) to temper the more extreme results of the common law and the Marine Insurance Act 1906.

1.46                The difficulty with this approach is immediately apparent if one were required to apply English case law.[69] Decisions that favour the insured/proposer may just as easily be contrasted with decisions that go the other way.[70] While Rühl is not suggesting that formal or theoretical differences do not matter – on the contrary, she puts forward the view that English practical results, especially in consumer insurance cases make harmonisation of English rules in line with German law less problematical than is generally thought – her study serves to underline a number of points. Firstly, the contrast between German law and English formal rules is stark. Rühl in particular characterises English law as having (to a civil lawyer) “a perceived consumer – hostile attitude” that stands as “a major obstacle towards more unity in the law of insurance contracts”.[71]

1.47                Secondly, on some of the differences that exist as between English law and German law, the Irish position is in some respects closer to German law – the deemed knowledge provisions that emerge from English case-law stand in sharp- contrast to recent Irish decisions and McCarthy J’s observation in Aro Road and Land Vehicle Ltd v Insurance Corporation of Ireland[72] that good faith in the context of disclosure “requires candour and disclosure, not, I think accuracy in itself, but a genuine effort to achieve the same using all reasonably available resources.”

1.48                Thirdly, Rühl’s very insightful analysis points up the level of the difficulty facing any insurance contract law reformer. Is the task one in which efforts are to be made to minimise the differences between (formal) rules and (informal) custom and practice? Which set of norms is to be dispositive? Can covert methods such as judicial subversion of an inappropriate rule ever to be an acceptable substitute for legislative action to reform substantive law rules?

1.49                Before leaving the general issue of how European law and developments within the EU may impact on insurance law and practice in Ireland, it is useful to note that the ECJ may, from time to time, provide rulings that will constrain the freedom of “the Market” to set contractual terms. The highly controversial 2011 decision of the Court in Association Belge des Consommateurs Test-Achats ASBL v Charles Basselier[73] makes it clear that even if actuarial factors can justify using gender as a basis for fixing a premium, Community law may invalidate such practices. The narrow view of this case is that a limited derogation in Belgian legislation was incompatible with the principle of equality as between men and women on the basis that the derogation permitted in Directive 2004/113/EC was transitional whereas the Belgian legislation was unlimited in duration. The opinion of Advocate General Kokott addressed wider concerns, highlighting the fact that society will not permit differential premiums to be charged in relation to race, even if actuarial or statistical data would justify such distinctions from being drawn. As insurance involves a system whereby risks are pooled with the consequence that the unfit or unhealthy are subsidised in relation to health insurance by the rest of the population, public policy requires a general shift towards unisex premiums in certain categories of insurance. These issues were explored by the United States Supreme Court in their landmark 1978 decision in City of Los Angeles Department of Water and Power v Manhart[74] :this decision broadly corresponds with the same process of reasoning and outcome demonstrated by the ECJ in its 2011 Charles Basselier decision.

D                      New Legal Norms and forms of Dispute Resolution

(1)                   The adjudications of the Insurance Ombudsman 1992-1998

1.50                Between 1992 and 1998, the then Insurance Ombudsman of Ireland, Paulyn Marrinan Quinn, produced a number of adjudications and settlements that provide extremely valuable insights into how an effective system of alternative dispute resolution may be allowed to develop outside of the court system. In the collected decisions for the period in question, the Ombudsman (while noting that the method of dispute resolution adopted by her office was inquisitorial in nature) stressed that the results of the Insurance Ombudsman’s adjudications are to be “fair and reasonable in the circumstances.”[75] However, the Insurance Ombudsman also placed an emphasis on the need to ensure that:

“like cases should be treated as alike and be determined on similar principles. Consistency is exercising judgment and discretion has been my stated aim, from the onset, and of course, this requires awareness of previous decisions as well as the development of the principles, practices and jurisprudence over time”.[76]

1.51                It is clear that in developing this jurisprudence, the Insurance Ombudsman was in many situations being guided by the decisions of the High Court and Supreme Court, with decisions such as Kelleher, Aro Road and Fagan being cited and applied insofar as judicial statements could provide guidance to the Insurance Ombudsman. References to Principles of Good Insurance Practice also informed many of the adjudications (and settlements) made during this period. It appears to the Commission that the jurisprudence of the Insurance Ombudsman in this six year period strikes a very good balance between the traditional approach taken by the courts to issues of pre contractual disclosure and information gathering exercises, and the more nuanced requirements of consumer protection principles.

1.52                While the details of the more important adjudications of the Insurance Ombudsman will be considered more fully later in this Consultation Paper, the Commission would like to make the following observations on how the Insurance Ombudsman applied the relevant legal principles in the 1992-1998 period:

·         In relation to non-disclosure disputes where material facts were withheld or a pre-existing condition was not disclosed, the Insurance Ombudsman frequently upheld the insurer’s right to repudiate the contract.[77] There were decisions however which reflect the view that if a proposal form does not ask a question about a medical condition vis-á-vis critical illness cover, the insurer may be deemed to have dispensed with the need of the proposer to volunteer other information.[78] Decisions on what is a material fact also incline towards the view that the test is what a reasonable insured would consider to be material, in situations where no proposal form is used.[79]

·         Situations in which the duty to disclose was not explained to a proposer, contrary to the relevant code of practice, generally led to a finding against the insurer, especially if there was some additional factor present such as the policy being a poor match for the needs of the proposer.[80]

·         In some non disclosure decisions the fact that the proposer failed to disclose a material fact, inadvertently or innocently, led to the claim being upheld,[81] or the application of proportionality,[82] or a recommendation that an ex gratia payment be made.[83]

·         Where there were instances of non-disclosure, the fact that there was no causal link between the facts not disclosed and the risk that materialised did not prevent the insurer from having a right to avoid the policy.[84]

·         The decisions of the Insurance Ombudsman on misrepresentation (as well as non disclosure of material facts) tended to follow the same patterns as in the non disclosure cases. In the case of an innocent misrepresentation as to the age of an insured, the insurer was held not to be entitled to repudiate the policy because a proportionality remedy was actually contained in the policy.[85] While the Insurance Ombudsman clearly distinguished cases of non disclosure from those of misrepresentation,[86] the insurer was often restricted to a proportionality remedy where the misrepresentation was not fraudulent.[87]

·         In relation to promissory warranties, cases involving the failure to maintain security measures tended to lead to a finding that the warranty, if not strictly observed, would allow the insurer to refuse to meet the claim.[88]

·         The Case Studies reveal also that the Insurance Ombudsman often found against the insurer on the basis that some contractual practices were unsatisfactory (eg exclusions were not communicated clearly)[89] and that rights to avoid had been waived.[90]


(2)                   Decisions of the Financial Services Ombudsman

1.53                Since 2005, the Financial Services Ombudsman has exercised the statutory jurisdiction to adjudicate on complaints made to his Office. While the decisions handed down in this period reflect many of the same approaches to legal issues that are evident in the adjudications of the Insurance Ombudsman, the summaries provided by the Financial Services Ombudsman suggest a more ad hoc approach has been taken in resolving complaints. The Financial Services Ombudsman has stressed the duty of disclosure and the need for proposers to avoid making misrepresentations as “fundamental principles of insurance”[91] and has also found against proposers for a failure to carefully read documentation unless mitigating factors are present.[92] The insurer who finds that his agents do not ask for information from proposers that is sought in a proposal form may have an award made against the insurer while being able to avoid payment of the sum insured.[93] “Proportionality” awards may be given, although such an award sometimes looks more like an award of a “fair and reasonable” amount rather than proportionality in the strict sense of being an informed decision on what the premium should have been had the true facts been known or disclosed.[94] The decisions in Aro Road and Kelleher have been cited and have been extended into business to business insurance providing group cover to employees[95] but those two court decisions were distinguished on the facts and a waiver of rights was held not to have occurred. In this decision the Financial Services Ombudsman wrote that:

“All complaints received by the Ombudsman are unique and each is considered on its own merits having regard to the particular facts of the complaint.”

1.54                This view, which reflects the statutory basis of the Financial Services Ombudsman’s jurisdiction, stands in contrast to the more ‘judicial’ approach of the first Insurance Ombudsman, Paulyn Marrinan Quinn, who stressed a need for consistency in decision making.

(3)                   The failure to legislate

1.55                The 1976 Final Report of the Committee of Inquiry into the Insurance Industry[96] provided the basis for legislative adjustments to insurance law in the form of the Insurance Act 1989. While the 1989 Act addressed many of the concerns raised by the Committee of Inquiry (eg the supervision of insurers, payment of commissions, the regulation of intermediaries) the failure of the 1989 Act to address all of the concerns of the Committee of Inquiry in relation to consumer protection is a matter of some regret. The Committee pointed to a need for legislation to provide for full disclosure to be made in relation to disclosure and warranties, but the Oireachtas was content to provide for a power to prescribe codes of conduct. Section 61 of the 1989 Act provides:

“Where the Minister [for Finance][97] considers it necessary in the public interest and following consultation with the insurance industry and consumer representatives, he may by order prescribe codes of conduct to be observed by undertakings in their dealings with proposers of policies of insurance and policyholders renewing policies of insurance in respect of duty of disclosure and warranties.”

1.56                Voluntary codes of conduct evolved through an understanding reached between the Government and the Industry and these codes have proved effective in dissuading various governments from using the section 61 power. However, the precise status of these codes of practice remains uncertain and it has been pointed out by Buckley[98] that the Circuit Court decision in CB Justice v St Paul Ireland[99] undermined these codes in a fundamental way. Here the insurer was held to be able to rely on a proposer’s breach of warranty even though the non fraudulent breach of warranty had no link with the loss; the code indicated that an insurer would not repudiate a policy in such circumstances. Buckley is scathing in his criticisms of the Oireachtas:

“a Code of Conduct, or Statement of Self-Regulatory practice, is not a substitute for reform of the law. The need for reform is confirmed by the very existence of the Code and by the recent repudiation of it in open court by a major insurer. Why should a Code of Conduct or a Statement of Insurance Practice be a substitute for legislation rather than a supplement to it? If Insurers are prepared, under threat of legislation, to adopt a Code of Conduct that substantially replicates in unenforceable form the broad principles which might have been enacted, why are they so concerned with avoiding statutory legislation? Why should the Code be restricted to policies effected by persons in their private capacity only? Why should not the principle of utmost good faith and its associated duty of disclosure be abolished and allow legislation to place the onus on insurers to prove fraudulent misrepresentation or fraudulent non-disclosure in those cases they wish to repudiate?”[100]

E                      The need for contract law reform

(1)                   Sources of new rules

1.57                The Chapters that follow provide an overview of how Irish insurance contract law is currently structured, particular attention being paid to the duty of disclosure, insurable interest, misrepresentation, warranties and basis of contract clauses, as well as the duty of good faith and third party issues. The Commission’s general conclusion is that the present rules, which have built up around the specialised area of marine insurance and have been extended horizontally by judicial pronouncements, are unsuitable to consumer insurance and most forms of mass market business to business insurance in the 21st Century. The Commission notes in particular that the Irish judiciary has been generally extremely critical of what may be described as less that rigorous business practices in dealings with proposers, and have adopted a pro-insured position vis-à-vis disclosure, misrepresentations and warranties. Indeed, many of the provisional recommendations made in this Consultation Paper have been prompted by the need for Irish statute law to more closely reflect judicial attitudes on these issues. In addition, the impact of the decisions of the regulatory agencies that have been discussed earlier in this Chapter require some adjustment of contract law if a diverse range of legitimate interests – from privacy and equality concerns, consumer protection and the need to ensure that the law meets the reasonable expectations of business proposers – are to be realised.

1.58                Particular emphasis will be placed on legislative developments and reform proposals in other countries, particularly, where the common law tradition has shaped insurance law. Wider European considerations and the work of the Project Group, in the form of the Principles of European Insurance Contract Law (PEICL), will also be highly relevant. The Commission also believes that the way in which general contract law has evolved provides considerable room for manoeuvring insurance contract rules into alignment with ‘ordinary’ contract law principles and remedies. At the same time, the Commission seeks to build upon values such as transparency and fairness, as encapsulated in the principle of uberrima fidei, regulatory requirements under Irish financial services regulation, and best practice requirements as they have developed with the Irish Insurance industry.

(2)                   Reform Proposals in the United Kingdom – support for legislative changes

1.59                While the issue of insurance contract law reform has been under review in the United Kingdom since 1954, it is a remarkable fact that until 2011 no Bill had been presented to Parliament by any Government. The Law Reform Committee, following its appointment in 1954, expressed a general view that legislative intervention to improve the position of insureds constituted an interference with freedom of contract but the Committee still felt able to recommend that the duty of disclosure should be adjusted to replace the prudent insurer test of materiality with a reasonable insured test. The Committee also suggested that warranties of fact should not be allowed to be effective when a proposer was able to show that any misstatement made was true to the best of his knowledge and belief. When the Law Commission of England and Wales revisited these matters in 1980 the arguments by the insurance industry favouring self regulation via statements of practice were swept aside on the ground that the duty of disclosure was unfair and that statements of practice lack the force of law. “Basis of contract” clauses and warranties of fact set out in proposal forms were also the subject of recommendations that would have reduced the insurer’s rights to avoid policies. It is particularly interesting to note that in its 1980 Report the Law Commission specifically rejected the arguments that any reforms should be limited to consumer insurance.

1.60                In the period between January 2006 and December 2009, the Law Commissions of England and Wales, and of Scotland, have issued a number of documents, a scoping paper, Issues Papers, and a Consultation Paper with summaries of responses thereto, and, most recently, a final report and draft bill. These documents have ultimately led the Law Commissions to reformulate both their agenda and reform timetable and several of their initial legislative proposals. In particular, the Final Report sets out a rather modest number of measures that are confined to the consumer insurance duty of disclosure, remedies for misrepresentation and basis of contract clauses. Nevertheless, the Law Commissions have remained consistent in arguing for legislative reform of insurance contract law on the basis that:

·         the law should be brought into line with both the Financial Ombudsman Service decisions and industry practice which requires an insurer to have asked clear questions before the insurer may avoid a policy for non-disclosure; indeed the Law Commissions go so far as to recommend the abolition of the residual duty of disclosure in consumer insurance;

·         codification of best practice would simplify the law and improve consumer confidence in the insurance industry

·         reform should also seek to align the position of small businesses with the reform proposals outlined in relation to consumer insurance;

·         proposed reforms should include revision of the right of an insurer to avoid policies on the basis of misrepresentation and breach of warranty, with an insurer’s rights of avoidance being replaced in certain instances by financial remedies;

·         in cases of fraud however, the position of an insurer should remain as it currently is.

1.61                In 2011, the UK Government introduced into the House of Lords the Consumer Insurance (Disclosure and Representations) Bill 2011. This Bill is to be processed by reference to the speedy procedures available in respect of non controversial Bills that involve implementation of Law Commission proposals. The Bill is the first legislative text to emerge from a detailed and schematic set of insurance contract law topics that have been the subject of issues papers and consultations. These include subjects relating in particular to sections 22 and 53 of the Marine Insurance Act 1906 as well as general topics such as insurable interest, the insured’s post-contract duty of good faith, damages for late payment and warranties.[101] In this Consultation Paper the Commission seeks to provide a set of reform proposals that will cover many of the topics that have occupied the English and Scottish Law Commissions.

(3)                   The Financial Regulator – consumer protection code

1.62                The Commission is of the view that the Financial Regulator, in the revised Consumer Protection Code 2012,[102]which takes effect from 1 January 2012, has provided the basis for a new set of principles that should inform the way in which Irish contract is reformed.[103]

1.63                It is important to stress that the Financial Regulator’s Consumer Protection Code 2012 applies to all regulated entities and that the content of Chapter 2 of the Code, entitled General Principles, operates horizontally across the financial services sector: specifically, Chapter 2 applies to all customers and not just consumers. The 12 General Principles include two principles that the Commission considers to be highly relevant in framing any recommendations for reform.

·         Rule 2.5 provides a regulated entity “seeks from its customers information relevant to the product or service requested.”

·         Rule 2.6 requires that a regulated entity “makes full disclosure of all relevant material information, including all charges, in a way that seeks to inform the customer.”

1.64                Furthermore, the Consumer Protection Code 2012 contains detailed rules on disclosure, formalities, and claims processing.

F                       Conclusions and Provisional Recommendations

1.65                Bearing in mind these developments, the Commission has concluded that regulatory bodies (in particular the Financial Regulator and the National Consumer Agency) who currently have statutory responsibilities in connection with the insurance industry should continue to liaise with each other, and with representatives of the insurance industry, in order to develop comprehensive statutory Codes of Practice setting out standards of best practice, building on the best practice standards developed by the Irish Insurance Federation and on the statutory model of the Financial Regulator’s Consumer Protection Code 2012. The Commission has also concluded that these statutory Codes of Practice should form the basis for the content of insurance contracts.

1.66                The Commission has also concluded, consistently with the approach in its Interim Report on Personal Debt Management and Debt Enforcement,[104] that legislation should provide that in any litigation or other dispute resolution process statutory Codes of Practice setting out standards of best practice should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising in the litigation or other dispute resolution process, the provision may be taken into account in determining that question, but that this would be without prejudice to the substantive rights between the parties.

1.67                The Commission has also concluded that the legislative framework being proposed in this Consultation Paper should, in general, apply to consumers as defined for the purposes of the jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an annual turnover not exceeding €3 million.

1.68                The Commission provisionally recommends that regulatory bodies (in particular the Financial Regulator and the National Consumer Agency) who currently have statutory responsibilities in connection with the insurance industry should continue to liaise with each other, and with representatives of the insurance industry, in order to develop comprehensive statutory Codes of Practice setting out standards of best practice, building on the best practice standards developed by the Irish Insurance Federation and on the statutory model of the Financial Regulator’s Consumer Protection Code 2012. The Commission also provisionally recommends that these statutory Codes of Practice should form the basis for the content of insurance contracts.

1.69                The Commission provisionally recommends that legislation should provide that in any litigation or other dispute resolution process statutory Codes of Practice setting out standards of best practice should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising in the litigation or other dispute resolution process, the provision may be taken into account in determining that question, but that this would be without prejudice to the substantive rights between the parties.

1.70                The Commission provisionally recommends that the legislative framework being proposed in this Consultation Paper should, in general, apply to consumers as defined for the purposes of the jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an annual turnover not exceeding €3 million.



CHAPTER 2             insurable interest

A                      Introduction

2.01                In this Chapter, the Commission notes that although Irish common law did not require an insurable interest to be present for a contract of insurance to be enforceable, subsequent statutory developments aimed at counteracting fraud, gambling and criminal destruction of lives and property did. Thus, while the common law did not distinguish a contract of insurance from other kinds of transaction that revolved around contingent events, in particular wagers that concerned the question about how long an individual would live,[105] Parliament intervened in order to discourage gaming as a socially and morally destructive activity in the Life Assurance Act 1774,[106] which was applied to Ireland by the Life Insurance (Ireland) Act 1866.[107] However, the 1866 Act is ambiguous in terms of its scope of application and there is a clear line of authority in Ireland holding that the 1774 Act does not apply in relation to the sale of goods and that the Act does not apply to fire insurance – indeed, the 1774 Act is confined to life assurance.[108] If this is correct then the statutory rule that the contract of insurance requires the person on whose account the contract is made to have an interest[109] will not prevent such a contract from being enforceable. While legislation in the form of the 1774 Act, the Gaming Act 1845 and section 36 of the Gaming and Lotteries Act 1956 render wagering contracts void, it does not follow that a contract involving insurance, for which no insurable interest can be shown, is a gaming or wagering contract. Section 3 of the 1774 Act and the indemnity principle in indemnity insurance require the claimant in an insurance contract to prove a loss. The loss recoverable under the policy is correlated to that loss, although this is not so in the case of contingency insurance, as distinct from indemnity insurance.[110] This chapter is concerned with the nature of the insurable interest test, whether the test should be reformed and/or the requirement abolished altogether.

2.02                The purpose of property insurance is to shift the risk of loss from the insured to the insurer. It is, therefore, axiomatic that the insurer should only be liable to indemnify the insured for the loss suffered.[111] Superimposed on this principle of indemnity is the requirement of insurable interest. This produces the result that two apparently separate and distinct fundamental principles of insurance law are harnessed in order to serve one objective, namely, to determine the existence and scope of liability of the insurer for the loss suffered.

2.03                In contrast, a non-indemnity “valued” policy pays a set or specified amount to the insured upon the materialisation of the event or risk specified in the insurance contract. Indemnity insurance, on the other hand, will only indemnify the claim up to and to the extent of the loss. This distinction is of critical importance as most life policies are contracts paying a fixed amount on the death of the assured. Life assurance policies were considered to be contacts of indemnity until the 1807 case of Godsall v Boldero[112] was held to have been wrongly decided by the Court of Exchequer Chamber in Dalby v The India and London Life Assurance Company.[113] Parke B said that:

“The contract commonly called life-assurance, when properly considered, is a mere contract to pay a certain sum of money on the death of a person, in consideration of the due payment of a certain annuity for his life, - the amount of the annuity being calculated, in the first instance, according to the probable duration of the life: and when once fixed it is constant and invariable. The stipulated amount of annuity is to be uniformly paid on one side, and the sum to be paid in the event of death is always (except where bonuses have been given by prosperous offices) the same on the other. This species of insurance in no way resembles a contract of indemnity.”[114]

2.04                Parke B specifically followed The British Insurance Co v Magee in holding that contracts against fire and marine risks were contracts of indemnity that were enforceable at common law to the extent of “the losses sustained by the assured in their buildings, ships and effects.”[115]

2.05                In the mid-18th century there seems to have been some uncertainty as to whether an insurable interest was, indeed, required for an enforceable policy. Certainly the courts were enforcing not just contracts in which the insurer agreed to be liable, 'interest or no interest', but, more generally, wagering agreements.[116] However, anxieties about the perceived evils inherent in wagering together with “moral hazard”, ie, the concern that allowing those who lack interest to insure might encourage them to bring about the loss, led to legislative intervention in England. While these Acts never applied to Ireland, the Life Assurance Act 1774, as applied to Ireland in 1866, and the Marine Insurance Act 1906 carried the definition of insurable interest developed in this context into Irish insurance practices.

2.06                This process of creating an insurable interest requirement began in England with the Marine Insurance Act 1745,[117] which laid down as a prerequisite to the validity of certain insurance contracts that the insured possess an insurable interest in the subject matter of the policy.[118] This left the question open as to how insurable interest was to be defined.

2.07                The opening part of this chapter considers the competing tests for determining the requirement of insurable interest in the context of indemnity insurance. On the one hand, there is a broad conception, which has come to be known as the factual expectation test, whereby the determinative question is whether or not the insured in fact suffered some loss from damage to the subject matter, or stood to gain some advantage from its continued existence. On the other hand, there is a narrower conception, referred to as the legal interest test, whereby the insured is required to demonstrate not only that he has as a matter of fact suffered loss but that his indemnification arises from some legally enforceable right in the insured property, which justifies recovery. After some uncertainty, the legal interest test emerged in England as the orthodox approach. Yet, it is arguable that the policy concerns which serve to underpin the legal interest test no longer prevail. Indeed, it will be argued that insistence on this test can operate as a trap for the unwary, insofar as it renders an otherwise unobjectionable policy void thereby frustrating reasonable commercial expectations.[119]

2.08                Further, it is questionable whether modern insurance law should facilitate the evasion of obligations freely entered into by insurers with full knowledge and or the opportunity to establish what legal or equitable interest exists or existed at the relevant time.

B                      The emergence of the insurable interest requirement

2.09                In this Part, the Commission considers the emergence of the principle of insurable interest culminating in the decision of the House of Lords in Macaura v Northern Assurance Co.[120] The Commission then examines the rather different approach taken by judges in other common law jurisdictions. The Commission discusses how modern English courts have reassessed insurable interest in a series of subrogation cases and the recent discussion and proposals for reform undertaken by the English and Scottish Law Commissions. The Commission then moves on to consider what should be done within this jurisdiction to clarify the insurable intrest requirement. The Commission suggests in what follows that, if it is accepted both that the original policy reasons for insurable interest no longer apply and that the underlying purpose of insurance is to shift the risk of pecuniary loss, then the requirement for insurable interest can be dispensed with altogether because its functions are effectively discharged by the principle of indemnity.

2.10                Like many other 18th century statutes, the preamble to the Marine Insurance Act 1745, in which its purpose is set out, is somewhat obscure:

“the making of assurances, interest or no interest, or without further proof of interest than the policy, hath been productive of many pernicious practices, whereby great numbers of ships, with their cargoes, have either been fraudulently lost and destroyed, or taken by the enemy in time of war; and such assurances have encouraged the exportation of wool, and the carrying on many other prohibited and clandestine trades, which by means of such assurances have been concealed, and the parties concerned secured from loss, as well to the diminution of the public revenue, as to the great detriment of fair traders: and by introducing a mischievous kind of gaming of wagering, under the pretence of assuring the risque on shipping, and fair trade, the institution and laudable design of making assurances, hath been perverted; and that which was intended for the encouragement of trade and navigation, has in many instances, become hurtful of, and destructive to the same.”[121]

2.11         Section 1 of the 1745 Act states that all insurance contracts on British ships and their cargoes are declared “null and void” where made “interest or no interest, free of average, or without benefit of salvage to the assurer”.[122] In a series of cases in which the scope of the 1745 Act was considered, Lord Mansfield CJ expressed the view that it made “insurance a contract of indemnity”.[123] For instance, in Lowry v Bourdieu,[124] the claimants, who had lent money to a ship’s captain, took out an insurance policy which would compensate them if the ship failed to arrive. Lord Mansfield held the policy to be a wager and, therefore, void: “it was a hedge. But they had no interest; for, if the ship had been lost and the underwriters had paid, still the plaintiffs would have been entitled to recover the amount of the bond.”[125] He went on to observe that:

“There are two sorts of policies of insurance; mercantile and gaming policies. The first sort are contracts of indemnity, and of indemnity only... The second sort may be the same in form, but in them there is no contract of indemnity, because there is no interest upon which a loss can accrue. They are mere games of hazard; like the cast of a die.”

2.12                Significantly, Lord Mansfield was not denying the enforceability of wagering contracts generally, but merely acknowledging that the 1745 Act made them unenforceable in relation to marine adventures by introducing the requirement that the insured demonstrate an insurable interest. [126]

2.13                A general definition of insurable interest proved elusive. In Le Cras v Hughes,[127] Lord Mansfield, perhaps unhelpfully, stated that an interest is necessary, but no particular kind of interest is required. He did go on to stress, however, that it was not necessary to possess a legal interest in the insured property. The issue in this case was whether the crews of a Royal Navy squadron had an insurable interest in two enemy ships they had seized. Lord Mansfield decided that they had for two reasons. The first was that the crews had rights vested in them by the Prize Acts which gave them a sufficient interest to support the insurance. This was uncontroversial, but he went on to justify the decision on the separate ground that there was a moral certainly that the crew would acquire rights over the seized vessels:

“[w]herever a capture has been made, since the Revolution, by sea or land, the Crown has made a grant [of the prize ships]: there is no instance to the contrary.”[128]

2.14                The late 18th century case law on insurance contracts not covered by the 1745 Act seems principally to have been driven by the concept that agreements should be enforced rather than be defeated by the anxiety over wagering.[129] The view was taken that insurance should be encouraged because it played a key role in commerce by enabling people with little capital to engage in business by reducing their exposure to risk and ruin. As Marshall observed in his textbook of 1802: 'insurances are made for the encouragement of trade'.[130] This emphasised the importance of focusing on the social and commercial benefits of insurance rather than on the restrictions imposed by legislation on wagering. Nevertheless, it was the policy against wagering underlying the 1745 Act that proved to be the decisive issue in the leading decision of Lucena v Craufurd.[131] Briefly, the facts were that commissioners had been given statutory authority to take charge of Dutch ships and cargoes in England. Acting under the orders of the Admiralty, a Royal Navy ship took several Dutch ships at sea. The commissioners then arranged to insure the ships while they were on their way to England. They were lost before arrival. While the provisions of the legislation meant that the commissioners would clearly have had an insurable interest in the ships if they reached these shores, the issue was whether such an interest existed before their arrival. The case was first argued before Lord Kenyon CJ and a special jury at the Guildhall in 1799; it was then appealed through the Court of King's Bench and the Exchequer Chamber, and finally reached the House of Lords in 1802.

2.15                The overwhelming majority of the judges in the lower courts referred to the second ground given by Lord Mansfield for his decision in Le Cras as support for their view that the commissioners possessed an insurable interest, that is, the Crown had previously and invariably obtained and granted prize rights to the crew. Seizure of the Navy gave the Crown an interest that could produce inchoate interests in others. Similarly, the majority of the judges called to give their advice to the House of Lords argued that `a vested interest is not necessary to give the right of insuring. The commissioners had a contingent interest; and supposing the intentions of the Crown to remain unaltered, nothing stood between them and the vesting of that contingent interest but the perils insured against'.[132] The judges summed up their approach:

“The question always is, whether the policy be a gaming contract? If it be no artifice how can it elude the force of the statute? The case of Le Cras v Hughes was infinitely more likely to introduce an abuse of the statute than the present case. That has been decided above 20 years; yet what ill consequences have followed? The same may be said of valued policies. In the case of wagering policies, any number of persons may make insurances on the same ship. But that is not the case here. If the commissioners could not insure this property, the Dutch owners could not; and it would be a strange paradox to assert, that these are ships and cargoes subject to all the perils of the sea in their voyage, and yet none are competent to insure them.’[133]

2.16                There were two very strong dissenting voices in the House of Lords. Chambre J held that the statute appointing the Commissioners afforded no right over the property until arrival in the jurisdiction. While Lawrence J in his dissenting judgment similarly denied the existence of insurable interest, his reasoning differed. It is worth considering his opinion at some length because of its enduring influence. He began by defining the nature of an insurance contract in terms of the protection it afforded the insured partly not merely against loss resulting in deprivation of property but also against uncertain events which may lead to some other disadvantage, such as loss of anticipated profit. The risk of such loss, damage or other prejudice is thereby shifted to the insurer.

2.17                Having spoken generally about the nature of interest and insurance, Lawrence J went on to formulate what has become known as the factual expectation test:

“To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. The property of a thing and the interest devisable from it may be very different: of the first the price is generally the measure, but by interest in a thing every benefit and advantage arising out of or depending on such thing, may be considered as being as comprehended.”[134]

2.18                In the House of Lords, Lord Eldon delivered the leading speech. Although he agreed with Lawrence J that here there was no insurable interest, Lord Eldon was keen to emphasise the very different policy consideration which led him to that conclusion. His main concern was with wagering. Curiously, Lord Eldon rejected the suggestion that before the 1745 Act insurance might have been effected without interest, but, in any event, he took the view that the Act was decisive and that the courts should follow its spirit: “lest that sort of wagering in policies should grow up, which has of late been extending itself considerably.”[135] He rejected the alternative ground for the decision in Le Cras, namely, that expectation of a grant by the Crown was sufficient:

“What expectation, though founded upon the highest probability, was not interest, and it was equally not interest, whatever might have been the chances in favour of the expectation”[136]

2.19                For Lord Eldon the appropriate test was to ask whether the insured possessed 'a right in property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party?'[137] On this basis he said in the following paragraph, that the commissioners:

“If they have a right so to insure, it seems to me that any person who is directed to take goods into his warehouse may insure; and that there is nothing to prevent the West India Dock Company from insuring all the ships and goods which come to their docks. If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First the dock company, then the dock-master, then the warehouse-keeper, then the porter, then every other person who to a moral certainty would have anything to do with the property, and of course get something by it.”

2.20                Whichever of the two tests – Lawrence J’s factual expectation test, or Lord Eldon's legal interest test – is applied, the final outcome in the majority of cases will be the same. The decision in Lucena itself illustrates the point.

2.21                In cases heard in the 19th century the judges, in so far as the definition of insurable interest was considered, expressed support for factual expectancy. For example, in Lloyd v Fleming,[138] Blackburn J said:

“This subject-matter [of the insurance] need not be strictly a property, in either the ship, goods, or freight; for, as has been long said, if a man is so situated with respect to them that he will receive benefit from their arriving safely at the end of the adventure, or sustain loss in consequence of their not arriving "[139]

2.22                Notwithstanding the uncertain state of the case law, for marine insurance the issue appeared to be settled by Chalmers, who in drafting the Marine Insurance Act 1906, adopted Lord Eldon’s test:

“a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.”[140]

2.23                In the non-marine context, the issue was settled by the House of Lords in Macaura v Northern Assurance Co Ltd[141]. In this case, Macaura was the only substantial shareholder in a company to which he had sold timber on credit. He insured the timber in his own name and when it was destroyed by fire sought to claim against the policies. An initial allegation that Macaura's claim was fraudulent and dishonest was dismissed by an arbitrator and, apart from a brief statement to that effect, this was not mentioned in the House of Lords. The issue before the court was whether Macaura had an insurable interest in the timber owned by the company. Counsel for Macaura, drawing on Lawrence J, argued that Macaura's insurable interest derived from his being the only shareholder. It was also argued that a separate insurable interest arose from his being the only substantial creditor of the company whose only substantial asset from which the debts could be paid was the timber. On both grounds, it was claimed, Macaura was bound to benefit by the preservation of the timber and suffer by its destruction. All five of their Lordships rejected this argument[142] ruling that Macaura had no insurable interest. In giving the leading speech, Lord Buckmaster cited, with approval, Walton J’s reasoning in Moran, Galloway & Co v Uzielli,[143] in which he had said: “in so far as the plaintiffs' claim depends upon the fact that they were ordinary unsecured creditors... I am satisfied it must fail.”[144] Lord Buckmaster, therefore, dismissed the idea that a creditor had an insurable interest in the assets of a debtor. His principal objection to Macaura’s contention, however, turned on his status and interest in the company as shareholder. If Macaura’s argument was accepted, then, in Lord Buckmaster's view, each shareholder in every company would have an insurable interest in corporate assets and the extent of that interest `could only be measured by determining the extent to which his share in the ultimate distribution would be diminished by the loss of the asset — a calculation almost impossible to make.’[145] Lord Buckmaster then explicitly attacked Lawrence J’s view in Lucena v Craufurd by saying, “I find ... difficulty in understanding how a moral certainty can be so defined as to render it an essential part of a definite legal proposition.”[146]

C                      Modern development of insurance interest and factual expectation in other jurisdictions

2.24                In Canada, Australia, the USA and South Africa a pragmatic approach has been adopted in response to the perceived social and commercial benefits which widespread insurance offers. The reasoning in Macaura has been rejected principally on the basis that an overly technical determination of the insurable interest requirement has the potential to defeat the reasonable commercial expectations of the parties.[147] In its place the courts have substituted factual expectancy as the determinative test.

(1)                   Canada, Australia, the USA and South Africa

2.25                Thus, in Constitution Insurance Company of Canada v Kosmopoulos,[148] the facts of which closely resemble Macaura, the Supreme Court of Canada, which had previously followed the restrictive Lord Eldon formulation,[149] overruled this approach. Wilson J, for the majority, took the view that the definition of insurable interest was ripe for fundamental re-examination: “if the application of a rule leads to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to ameliorate its ill effects on a case-by-case basis.”[150] She therefore refused to follow the expedient solution adopted by her colleague, McIntyre J, of distinguishing Macaura and piercing the corporate veil on the basis that this was a one-shareholder corporation.[151]

2.26                Reviewing Lord Eldon’s reasoning, which had led Lord Eldon to reject the factual expectation test, Wilson J cited a passage from Brown and Menezes, Insurance Law in Canada.[152] Commenting on Macaura, the authors conclude:

“After Macaura, it is no longer possible to claim merely that one would be adversely affected by the loss; the insured must assert that he owned an interest in the objects destroyed. This provides the illusion of great certainty. Property law is among the most technical and certain segments of the law. This certainty is totally illusory because the new formulation makes no concessions either to the reasons for which insurable interest is a component of insurance law or for commonplace business transactions .... Assuming that an insurable interest in `things' must mean property, among the simple questions raised are matters such as how does one own a direct interest in property which is not in existence at the time of the contract? Can next season's crops or fluctuating inventory be insured? Are warehousing and other bailee policies subject to the law as set out in Macaura so as to limit the right to insure to the bailee's liability to the bailor?”

2.27                With respect to Lord Eldon's anxiety that the adoption of the factual expectation test would lead to too much insurance, Wilson J concluded that that fear “may also be illusory.” Insureds are under a duty to disclose all material circumstances so that insurers can assess the risk and if an insurer cannot estimate the likelihood of the loss occurring (because, for example, the information is in the hands of third parties) then it does not have to write the policy.[153]

2.28                Wilson J rejected the argument that a broadly conceived notion of insurable interest would lead to an increase in the willful destruction of insured property stating that the legal interest test provided no better deterrent against such moral hazard. She considered that insureds who have a legal or equitable interest would, in fact, have better access to the insured property and therefore more opportunity to destroy it than those with an interest in the broader sense: “If Lawrence J's definition of insurable interest... were adopted, this moral hazard would not be increased. Indeed, the moral hazard may well be decreased because the subject-matter of the insurance is not usually in [their] possession or control.”[154]

2.29                Recognising that there might be an incentive to sole shareholders to destroy corporate assets, if insurance moneys were paid to them free of the company's creditors, Wilson J pointed to company law remedies and doctrines, including the constructive trust and directors' duties, by which the courts can make the proceeds of insurance policies held by a shareholder available to the company. By such means the share-holder is more effectively prevented from benefiting personally from a wrongful act.

2.30                Wilson J’s analysis reflects a shift in emphasis from Lord Eldon's concerns, which led to a narrow definition of insurable interest, to a view that recognises the economic and social benefits of insurance and, therefore, a broader conception of insurable interest. In the modern commercial world property insurance is generally sought to secure indemnification, and, as Wilson J points out, it is more socially beneficial to encourage widespread insurance than to restrict it. There seems, therefore, no convincing reason in this context for interfering with freedom of contract and, in particular, for not requiring insurers to meet liabilities under contracts which they have freely entered into and for which they have received premiums.

2.31                In Australia Lord Eldon's approach has also been discarded. The Australian Law Reform Commission (ALRC), in its Report Insurance Contracts[155] concluded that Lawrence J's formulation “would allow more flexibility to insurers and to the insuring public, without in any way promoting gaming and wagering in the form of insurance or adding to the risk of destruction of the property insured.”[156] In its opinion, technical rules had prevented the insured in Macaura from recovering the loss actually suffered by him. The ALRC considered that the strict legal interest test gave rise to results that were socially undesirable. For example, a named beneficiary under the will of a living testator stands to lose much of his projected inheritance if the testator’s property is destroyed by fire. Yet, if the beneficiary takes out a fire policy on the property, the legal interest test will prevent recovery notwithstanding actual loss. The ALRC also thought that the restrictive test produced commercially undesirable results. By way of example, it cited Truran Earthmovers Pty Ltd v Norwich Union Fire Insurance Society Ltd[157], in which a purchaser of a bulldozer was held to have no insurable interest in the vehicle even though he had lent the owner money which was to be deducted from the purchase price: 'Once again, technical rules prevented recovery of an actual loss.'[158] The ALRC therefore proposed legislative reform to provide that 'where an insured is economically disadvantaged by damage to or destruction of the insured property, the insurer should not be relieved of liability by reason only that the insured did not have a legal or equitable interest in the property.'[159] This was given statutory effect by the Insurance Contracts Act 1984, section 17.[160] Thus, an insurable interest is not required in Australia.

2.32                Although early US case law followed Lord Eldon's narrow formulation,[161] the view that most states have now adopted is that economic interest is the determinative test.[162]. Some 30 years before the decision in Macaura, the New York courts recognised that shareholders did have an insurable interest in corporate assets: Riggs v Commercial Mutual Insurance Co.[163] Statute law in the USA reflects this pattern. Two statutory examples will suffice. The California Insurance Code, s 281 provides that '[e]very interest in respect of the property, or any interest in relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insured, is an insurable interest.' In the codified New York Insurance Law, Art 34 defines insurable interest in property insurance as including 'any lawful or substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.'

2.33                In South Africa, the 1774 Act was never enacted or adopted in any way and the South African judiciary adopted an economic interest test. In Refrigerated Trucking (Pty) Ltd v Zive[164] a Transvaal Court has provided a broad ecomonic interest test, following earlier South African authorities that appear to reject a legal or equitable interest approach, the judges upholding a contract even though the claimant has “neither a jus in re nor a jus in rem to the thing insured.”[165] In Zive the Court held:

“an insurable interest is an economic interest which relates to the risk which a person runs in respect of a thing which, if damaged or destroyed will cause him to suffer an economic loss or, in respect of an event, which if it happens will likewise cause him to suffer an economic loss. It does not matter whether he personally has rights in respect of that article, or whether the event happens to him personally, or whether the rights are those of someone to whom he stands in such a relationship that, despite the fact that he has no personal right in respect of the article, or that the event does not affect him personally, he will nevertheless be worse off if the object is damaged or destroyed or the event happens.”

(2)                   The current British debate on Insurable interest

2.34                In the few cases where insurable interest is directly in issue,[166] it is not surprising that Macaura continues to represent the orthodox approach. For instance, in Mitchell v Scottish Eagle Insurance Co Ltd,[167] Mitchell had entered into partnership with his son but had insured the partnership's premises in his own name. In the Outer House, Lord Prosser, applying the Macaura principle, held that Mitchell lacked an insurable interest.[168] More directly, in Cowan v Jeffrey Associates,[169] the issue again arose as to the interest possessed by the director and sole shareholder of a company. Lord Hamilton felt obliged to follow Macaura, observing that, while it was an English authority and not, therefore, technically binding on him, nevertheless, it was highly persuasive. In his view the adoption of factual expectancy would require either legislative intervention or the House of Lords reversing itself. Although these recent Scottish decisions show the continued importance of the narrow legal interest test, the judiciary has displayed tentative signs of a willingness to sidestep the force of Macaura. For instance, in Sharp v Sphere Drake Insurance Ltd, “The Moonacre”,[170] Colman J distinguished Macaura and held that the sole shareholder in a company possessed an insurable interest in a yacht purchased by the company because the yacht was intended for his use and a power of attorney had been granted to him in respect of it.

2.35                While the requirement of insurable interest has not been subjected to the sort of rigorous analysis that led other common law countries to adopt the factual expectation test, the English and Scottish courts have, nevertheless, taken cognisance of developments in those jurisdictions. The issue has emerged in the context of insurers' rights of subrogation. Simply put, on paying a claim in full the insurer takes on the rights of action which the insured would have had: in effect, the insurer steps into the shoes of the insured. This means that the insurer can, for instance, sue the tortfeasor responsible for the loss. However, the tortfeasor can use all the defences that would have been available against the plaintiff in an action brought by the insured, and the insurer will have no cause of action where the loss is caused by the insured.[171] This is of particular importance in insurance policies relating to construction contracts, in which the head contractor is commonly required by the contract to insure the project for their own benefit and that of the sub-contractors. The issue then comes down to whether the sub-contractor has an insurable interest which will grant immunity against the insurer's subrogation rights. Of course, if the position was taken that it is only the insurer who can plead the absence of an insurable interest these difficult problems could be avoided.

2.36                That the courts distinguish between joint and composite liability is illustrated by Petrofina (UK) v Magnaload Ltd,[172] in which it was held that the owners, the head contractors and each of the sub-contractors on a construction site, had an insurable interest in the entire works despite the fact that they were working only on limited parts of the site. Their interest arose not from any ownership or possession, but from the fact that, in the event of negligence, each sub-contractor could suffer loss should any part of the works be damaged or destroyed. So, although the sub-contractors lacked property interest in the work in progress, they had an insurable interest in its continued existence. In so finding, Lloyd J said the case was analogous with that of an insurable interest possessed by a bailee in goods. Accordingly, it was possible for a policy covering the entire works to be taken out on a coinsurance basis by the head contractor and all sub-contractors. Lloyd J reasoned that to hold to the contrary would result in commercial inconvenience as each sub contractor would need `to take out his own separate policy. This would mean, at the very least, extra paperwork; at worst it could lead to overlapping claims and cross claims in the event of an accident. Furthermore ... the cost of insuring his liability might in the case of a small sub-contractor, be uneconomic.'[173]

2.37                The approach taken by Lloyd J was endorsed in National Oilwell Ltd v Davy Offshore (UK) Ltd.[174] Colman J held that the suppliers of a subsea wellhead completion system for a floating oil production facility were coinsured’s under the contractor’s All Risks policy. Colman J dismissed the contention that there could not be an insurable interest based merely on potential liability arising from the existence of a contract between the insured and the owner of property. Instead, he held that an insurable interest could be found in the insured's proximate physical relationship to the property in question.[175]

2.38                In Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd,[176] the English Court of Appeal considered the meaning of the phrase “the interest of the insured” in a policy covering the owner of a building against consequential loss following a fire or other insured peril. The issue was whether the insured could recover for the loss of architect's drawings, which were, at the time of the loss, owned by the architects, although the insured might eventually have acquired them. It was held that the insured had an insurable interest in the drawings despite the lack of a proprietary interest. Although the court saw the insurable interest as being in respect of consequential loss rather than in the actual drawings themselves, Auld LJ and Sir lain Glidewell both expressed the view that the drawings could have been insured on the basis of Lawrence J's 'factual expectation' test.

2.39                As Lowry and Rawlings argue, this line of authority can, therefore, be seen as amounting to some recognition of the broader conception of an interest as adopted in Canada and elsewhere. However, a limit was placed upon this trend by the Court of Appeal in Deepak Fertilisers & Petrochemical Corporation v Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd.[177] The Court did accept the broad conception of insurable interest. It agreed that a sub-contractor in a building contract possessed an insurable interest in the entire works during construction. This was because of the economic disadvantage which would be suffered if, in the event of the structure being damaged or destroyed, they lost the opportunity to complete the work and receive remuneration. However, once the work had been completed the court stressed that such an interest came to an end. Deepak itself has been criticised by a later Court of Appeal Decision in which that Court was anxious to carve out an even broader notion of insurable interest for sound commercial reasons.[178]

2.40                It is noteworthy that the broad conception of insurable interest has been utilised beyond the confines of construction insurance. In Mark Rowlands Ltd v Berni Inns,[179] the issue arose because of a tenancy agreement that required the lessor to insure premises against fire and to use any proceeds of insurance to rebuild. The tenant contributed to the premium and was relieved of the duty to repair in the event of fire damage. The Court of Appeal held that the insurers, who had paid out on the policy following a fire, could not recover against the tenant. The tenant was not mentioned in the policy, but it was clear from the terms of the lease that the insurance was effected on his behalf. The court took into account the fact that the tenant was required to contribute to the premium and that the lease excluded his liability for fire. Although the insurers were unaware of the arrangement in the lease, the court held that it must have been the intention of the lessor and lessee that in the event of a fire the lessor's loss would be recouped from the insurance policy. This meant there would be no other claim against the tenant by the lessor, or, therefore, by the lessor's insurer. In his judgment, Kerr LJ ignored Lord Eldon's definition and explicitly adopted what he termed the 'classic' definition of insurable interest given by Lawrence J.[180]

2.41                Clearly, where the lessor and the tenant jointly take out an insurance policy, the insurer cannot use the covenant to keep the house in good repair as a means to sue the tenant for damage to the house because the tenant would be entitled to claim against the policy; unless, of course, the tenant has deliberately damaged the property, in which case he or she could not claim against the policy. The tenant will not be able to claim immunity from a subrogated claim by the lessor's insurers in respect of damage to any parts of the building which are not covered by the lease, as, for instance, where the tenant negligently sets fire to his or his part of the premises and that fire also damages premises occupied by another tenant of the same lessor in the same building.[181]

(3)                   Conclusions on the Bitish debate

2.42                The anxieties over moral hazard and wagering that prompted Lord Eldon to reach his view of insurable interest seem less relevant in the context of modern commercial practice. Lord Eldon’s test does not seem to achieve the objectives he believed it would. It does not necessarily provide any better deterrent against the moral hazard that the insured might destroy the property than the factual expectation test, indeed, it can be argued that an owner is likely to have more opportunity to damage the property.[182]

2.43                With respect to Lord Eldon's other concern, the dangers of a wager being concealed under the guise of an insurance contract seem more remote now than they were in the early nineteenth century. Since that time the activities of insurance and wagering have become separated. Gaming has become a legitimate activity with sifnificant economic benefits to the ecomony. The Commission examines these issues later in this chapter. Macaura itself has been explained as a case where the insurers believed that the insured had acted fraudulently, but, because they could not prove the point, they used a lack of insurable interest as a technical defence.

2.44                Lord Eldon’s other concern, that without an insurable interest requirement in relation to property, gaming would be concealed as insurance, has been dealt with through statutory regulation of financial services and the legitimisation of gaming and betting, where the UK Parliament has provided the appropriate framework for these activities. Indeed, the UK Gambling Act 2005 has effectively removed the insurable interest requirement for non marine indemnity insurance but, as Templeman argues, the effect of the 2005 Act is in many senses completely uncertain. In spite of the 1745 Act and its successors, Policy Proof of Interest (PPI) contracts, or honour policies, where the insurer agrees not to raise the issue of insurable interest, remain an important slice of the marine insurance industry.[183] While it would not make good business sense for the insurer to deny liability, even though such a policy is unenforceable, it seems curious that in formal terms insurance law is so out of line with commercial practice. A more fundamental point is that Lord Eldon prioritised the public interest advantages to be secured in the regulation of gaming through prohibition by the use of insurable interest and failed to give proper emphasis to pacta sunt servanda, the competing public interest in ensuring that contracting parties perform their promises. In the final analysis, it is this that underpins the whole of contract law and might, therefore, be considered as of greater importance in public policy terms.

2.45                Modern insurers can frame coverage on the basis of a proposal in which they can ask such questions about the relationship between the proposer and the property as they think relevant to their decision as to whether or not to accept the risk. Moreover, the duty of disclosure, which places the insurer in an advantageous position when compared with parties in noninsurance contracts, makes it difficult to justify a situation in which the insurer can freely enter into the contract on the basis of full disclosure and still deny liability because of a lack of insurable interest. The implications of the lack of litigation directly on insurable interest since Macaura might be that the insurers accept the logic of this argument, or that the commercial implications of refusing to pay out would, presumably, be the same as those facing the bookmaker who failed to pay a winning bet.

2.46                The absence of legal clarity must have adverse commercial results. This is certainly the view of Mark Templeman QC who comments that large offshore and construction projects are often situated according to the insurance arrangements that have been made for them. Advising clients (Templeman says) that such arrangements may be void because the law is unclear, and that it is likely that the insurable interest point may not be taken by either side in litigation thus saving the insurance arrangement, is an unstisfacotry position for English law to be in:

“it is even more unsatisfactory for a client, having paid for such advice, to be required to order its affairs on the basis that a significant transaction may be fatally flawed, but that with any luck no one will complain. Clearly, the law is in need of reform.”[184]

2.47                If the policy considerations that underpinned Lord Eldon's definition are no longer relevant, then one is left to wonder whether the requirement of insurable interest serves any useful purpose. It has the potential to allow the insurer to defeat the reasonable expectations of the parties and this encourages the judges to complicate the law by devising exceptions to the requirement, as has been seen in the cases on subrogation. Where a party stands to suffer a pecuniary loss it seems illogical to argue that the desire to insure against such loss is tantamount to wagering. This has been a repeated theme of judicial comment, in many of the decided cases. The point was made by Mance J:

“... the present policy is not on its face one which the parties made for other than ordinary business reasons; it does not bear the hallmarks of wagering or the like. If underwriters make a contract in deliberate terms which covers their assured in respect of a specific situation, a Court is likely to hesitate before accepting a defence of lack of insurable interest.[185]

2.48                Maintaining the insurable interest requirement ignores modern developments such as a number of statutes permitting third parties to sue insurers directly in certain circumstances, notwithstanding the absence of insurable interest. One is left to wonder what it adds to the principle of indemnity under which, in general, the claimant is compensated for the pecuniary loss suffered. It seems wrong to allow the requirement to be used as a technical defence in circumstances which bear no relation to its original policy objectives. Where fraud is alleged it should be proved. An insurer always has the option of refusing to underwrite a risk which is difficult to assess, such as where a shareholder seeks to insure the assets of a company.

2.49                The continuing insistence on requiring insurable interest—whatever definition is adopted—harks back to a time when policy issues dictated that this should be a precondition to the validity of the insurance contract. Once those policy arguments are removed, the justification for the requirement disappears.[186] Even if, as the Commission has shown, a process of assimilation of the factual expectation test is underway, the obvious question remains, is there a role for insurable interest?

2.50                The Law Commissions, in Issues Paper No. 4, Insurable Interest criticised the law relating to contingency insurance, primarily on the basis that the law was both uncertain and difficult to analyse and was capable of allowing contracts of insurance to be avoided on technical grounds while being capable of being side-stepped via assignments and other commercial dealings. The Law Commissions also suggested that moral hazard and gambling in the guise of insurance were not effectively counteracted by an insurable interest requirement, especially in the light of the Gambling Act 2005 which has all but abolished the need for an insurable interest in non-marine indemnity insurance in the United Kingdom. In cases of contingency insurance the same problems of uncertainty of definition and scope of application arise and have to be addressed.

2.51                In relation to indemnity insurance, the Law Commission’s main proposal was that there should be no requirement of insurable interest in such insurance. This has been described as a “plainly sensible” recommendation by one commentator who has subjected Issues Paper No.4 to a critical evaluation.[187] On the choice between abolition or the possible reform and retention of an insurable interest in relation to contingency insurance, the Law Commission favours this latter option on the basis that the insurable interest in contingency insurance often serves to define insurance vis-à-vis speculative financial transactions and indeed gambling. But Templeman argues that the insurable interest is ill suited for this purpose.[188] Similarly, a reluctance to allow persons to effect a life insurance policy in relation to persons with whom they have no legal or emotional tie

“must stem from a concern that to do so will encourage wrongdoing. But there is really no evidence that this is so…the deterrents to wrongdoing are the sanctions of the criminal law and the refusal of the courts to allow a wrong-doer to recover or retain the proceeds of their crime. Further, the assignment of life policies and the existence of the [Traded Endowment Policies Market] themselves give rise to the same risk of wrongdoing.”[189]

D                      The insurable interest test in Irish Law

2.52                There is no clear statement from the Irish courts on whether a strict legal interest test is to be applied or whether a factual expectation test, or some variant thereon, will be enough to satisfy an insurable interest requirement, when this arises. Macaura was considered in Coen v Employers Liability Insurance Co[190] but no opinion was expressed on the relevant test. The facts of PJ Carrigan Ltd and Carrigan v Norwich Union Fire Society Ltd[191] closely resemble those contained in Macaura itself, but Lynch J had no difficulty in finding that because the second plaintiff was the holder of a substantial if not a beneficial interest in a company that had purchased real property, the second plaintiff had in law an insurable interest. The factual expectation test is in accordance with recent Irish case law[192] that recognises legitimate expectation as being an alternative basis for recognising promises as enforceable, even absent some legal ground for holding the promise to be contractually enforceable.

2.53                There are of course difficulties in using legitimate expectation in this way – an insurance company is not a public body and it is engaged in commercial, not regulatory activities. But contract law alone can be adequate. If the contract of insurance was characterised as one in which the insurer has undertaken to extend cover to a proposer or insured, and the facts reveal that the proposer or insured has a (legitimate) or factual expectation that the policy will be honoured, it is difficult to see why or how an insurer should be permitted to resile from the contract. The legitimate or factual expectation should of course be anchored on some appropriate economic relationship between the proposer or insured and the subject matter of the insurance contract. Wagering contracts will not suffice; situations where the proposer or insured has suffered no loss because the property is essentially owned by others will be outside most insurance contracts, by virtue of the indemnity principle. If an insurer is to insist upon being able to avoid payment upon a policy because no insurable interest existed at the time of the contract, it might be appropriate to require the insurer to bargain for such a right in express terms and be under a duty to seek information from the proposer on the nature of the interest held as a sine qua non to such a right to resile from a contract. In the absence of such an exchange of information, an insurer should be regarded as not requiring the proposer to have anything other than a factual expectation in the transaciton or property in question and that the policy will be honoured by the insurer. As the reasoning of Wilson J in Constitution Insurance Co of Canada v Kosmonpoulos attests, the insurable interest requirement is a poor means of advancing the deterrence functions against wagering and moral hazard, while at the same time having the negative effect of frustrating the development of socially desirable insurance policies, especially in the areas of income protection, elderly and disability maintenance insurance, and life policies.

2.54                In A Casebook of Irish Insurance Law, Corrigan and Campbell observe:[193]

“By and large, however, it is rare for insurers to raise the issue of insurable interest to avoid their contractual obligations. It is primarily a technical requirement and, in the absence of significant substantive reasons for relying on it as a defence, it is unlikely that an insurer would obtain a sympathetic hearing and so succeed in invoking it before an Irish court.”

2.55                Buckley[194] citing Keaton, Insurance Law; Basic Text observes that “it is said that in Macaura the House of Lords was influenced by unproven allegations of fraud.” Ellis and Wiltshire, in Regulation of Insurance in the UK, Ireland and EU also suggest that a test less onerous than possession of a legal interest or equitable represents Irish law. Some awareness of the need to liberalise the law is found in the wider literature. The 1976 O’Donoghue Report[195] commented on the need to extend insurable interest so as to cover instances of adoption and give the trustees of trust funds a right to insure where it would be commercially prudent to do so, but the O’Donoghue Report did not give a view on the relevant test. Ellis, in Modern Irish Commercial and Consumer Law[196] suggests a working definition of insurable interest, fusing this definition from a combination of the outcome in the Carrigan case and the views of Wilson J in Kosmapoulos:

“insurable interest can be said to arise when a person stands in such relationship to the subject matter of the insurance that:

(1) he benefits by its continued safety (or absence from liability in the case of liability insurance); or

(2) is prejudiced by its loss (or incurring of a legal liability).

In short, to possess insurable interest, a person must have some financial involvement with the subject-matter of the insurance.”

2.56                It is arguable that as the Life Assurance Act 1774 does not apply to fire insurance for buildings,[197] nor in relation to goods,[198] the most important question to be addressed in Ireland relates not to the test to be applied but whether the insurable interest requirement in life policies needs to be repealed or reformed.

2.57                It is clear that Irish courts give unmeritorious insurable interest arguments short shrift. Dissatisfaction has also been shown by non-judicial decision makers. The insurable interest issue arose on several occasions in relation to the question whether the non-statutory Insurance Ombudsman of Ireland could take jurisdiction over complaints made by employees arising out of disability claims arising out of group schemes. The Insurance Ombudsman found that an interest could be established when the complainant was required to pay the premium and initiate the claim,[199] or when the group scheme itself had been negotiated between the employer and a representative trade union.[200] Even in the case of a non-contributory group scheme the Insurance Ombudsman ruled that jurisdiction existed if the complainant could be regarded as an individual member;[201] change of position on the basis of assurances given also had the same effect.[202] However, where a life assurance policy that had been taken out by the proposer, the complainant’s (now) estranged husband, the complainant being the life assured and responsible for paying the premiums, the Ombudsman indicated that she had no power to order the insurer to effect a transfer of title from the proposer to the complainant.[203]


E                      Conclusion on the insurable interest test

2.58                The Commission considers that the narrow test for an insurable interest, advocated by the UK House of Lords in the Lucena case in 1802 and in the Macaura case in 1925, is no longer acceptable. In any event, Macaura itself has never been endorsed in Ireland. The dicta of Brett MR in Stock v Inglis[204] sets out, in the view of the Commission, a compelling argument against a legal or equitable interest test being deployed:

“in my opinion it is the duty of a court always to lean in favour of an insurable interest, if possible, for its seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer.”[205]

2.59                Accordingly, the Commission has concluded that legislation should provide that an otherwise valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured and the subject matter of the insurance contract. The Commission has also concluded that insurable interest should, in the interests of certainty, be more broadly defined in legislation as an interest that subsists when a person may benefit from the continued existence or safekeeping of the subject matter of the insurance or may be prejudiced by its loss; and that this definition would apply both to non-life insurance (in particular property and liability insurance) and to life insurance.

2.60                The Commission provisionally recommends that legislation should provide that an otherwise valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured and the subject matter of the insurance contract.

2.61                The Commission provisionally recommends that insurable interest should, in the interests of certainty, be more broadly defined in legislation as an interest that subsists when a person may benefit from the continued existence or safekeeping of the subject matter of the insurance or may be prejudiced by its loss; and that this definition would apply both to non-life insurance (in particular property and liability insurance) and to life insurance.

F                       Insurable interest in Life Policies – common law and statute law

2.62                In British Commercial Insurance Company v Magee[206] Joanna Magee had insured the life of Daniel Ryan for a sum of £500, promising that Daniel Ryan was not in excess of 36 years of age and had not contracted small-pox or cow pox, had not suffered from gout or the spitting of blood, nor was affected by any disorder tending to shorten human life. Daniel Ryan was also not to go on the high seas, or beyond the boundaries of Europe, nor engage in military or naval service without the consent of the directors of the company. On Daniel Ryan’s death, Joanna Magee’s claim for the sum insured was met by a plea that she had no insurable interest in the life of Daniel Ryan and that the Life Assurance Act 1774 was merely declaratory of the common law. Counsel for the company remarked that “[i]n some countries such contracts are prohibited on the ground of their furnishing a temptation to assassination.”[207] On the central point concerning public policy, after noting that the Life Assurance Act 1774 had not (at that time) been applied to Ireland, Bushe CJ, giving judgment for the plaintiff company in the Court of Exchequer Chamber stated:

“no authority has been cited, to show that such an insurance has been held illegal, as being against policy or morals in any case decided in England before the Statute; and it is only necessary to look into the statute to be satisfied that it is not declaratory, for it does not recite any existing doubt, or prevailing mistake as to the law [recital recognising the evil of gaming] and the necessity for preventing it in future.[208]

2.63                The net effect of British Commercial Insurance Co v Magee is that, at common law, wagering policies, or policies upon the lives of persons in which the assured has no interest, are valid in Ireland. It is only through Statute law that such contracts may be void or unenforceable.

2.64                The Life Assurance Act 1774,[209] as applied to Ireland by the Life Insurance (Ireland) Act 1866,[210] was enacted at a time when wagering on lives (including, in 1774, the life of King George III) had become common, and one of main purposes was to ban this practice. The 1774 Act consists of 4 sections. Section 1 provides that insurance contracts on lives or other events[211] should not be affected where the person to benefit had no interest; contracts by way of gaming and wagering are also prohibited. Section 2 requires the names of persons for whose use, benefit or on whose account the policy is taken out to appear on the policy; this was amended in the Insurance Act 1989 so as to cover group insurance policies whereby a class of person may be expressed on the policy. Section 3 limits the amount that can be recovered to the value of the interest (although life assurance policies are not indemnity policies). Section 4 excludes from the Act, for historical reasons, policies on ships, goods or merchandises. It is certainly arguable that the 1774 Act needs to be repealed. Section 1 is either superfluous or in need of restatement and expansion. Section 2 is, in the view of the English and Scottish Law Commissions’, “superfluous” on the basis that section 2 is governed by section 1 in any event. Section 3, which in Ireland is limited to life insurance contracts, is incompatible with case-law establishing that life policies are contracts to pay a fixed sum on the occurrence of a stated event. Section 4 is a saver provision that was necessitated by virtue of the unpalatable consequences that would have followed had goods been caught up in the rest of the 1774 Act.

2.65                In New Zealand the 1774 Act has been repealed with no discernable consequences and the Commission has provisionally concluded that the Irish position should be the same. However, the Commission recognises that it is arguable that life insurance should continue to require some form of insurable interest and possibly a consent provision as an alternative basis for effecting a valid contract of life insurance. The requirement in section 2, even if it can be seen as a formalities provision, should not be tucked away in an old statute, especially when it provides a technical defence to an action on a life policy which renders the contract void. Section 3 has been identified as defective insofar as life insurance taken out to insure the life of a debtor, the debt being for other than a fixed term, will not allow for interest to be recoverable on such an expectancy. The most significant criticism of the 1774 Act is that it is simply unnecessary and ineffective in countering wagering contracts and dissuading persons from embarking on criminal pursuits via moral hazard.[212]

2.66                Section 2 is a source of some mischief and in section 26 of the Insurance Act 1989 a caveat was added to section 2 of the 1774 Act so as not to allow the section to invalidate a policy of insurance for the benefit of unnamed persons if there is a specified class or description of those persons in the policy which will enable the identity of those persons to be established. This provision applies whether the policy was made before or after commencement of the section. The English and Scottish Law Commissions, in their Insurable Interest issues paper, also question the wisdom of retaining these “entering the names of interested persons” provisions.[213] In particular, such a matter as entering the names of beneficiaries into policy documentation could be left as a regulatory requirement, to be supervised by the Central Bank of Ireland rather than allow policies to be avoided altogether.

2.67                The Commission provisionally recommends the repeal of the Life Assurance Act 1774, as extended to Ireland by the Life Insurance (Ireland) Act 1866.

G                      Should a remodelled section 1 of the Life Assurance Act 1774 be re-enacted as a formalities provision?

2.68                While section 1 of the Life Assurance Act 1774 does not define the nature of the interest, there are four categories that have emerged via case-law.

(1)   an interest arising out of natural love and affection;

(2)   an interest arising out of a potential financial loss recognised by law which existed at the time of contracting;

(3)   an interest arising out of statutory provisions;

(4)   a miscellaneous category recognised by the courts.

(1)                   Natural Love and Affection

2.69                Natural love and affection will permit a person to insure their own life or that of their spouse. Other family relationships that cannot satisfy factor (2) or (3) above will not involve an interest that arises out of natural love and affection. Children and parents have no right to insure each others lives and, a fortiori, persons related by marriage, siblings, cousins, etc do not possess an insurable interest across such classes of relative. The most obvious instance in which this rather arbitrary position can be shown to be socially undesirable relates to cases where a child is born who will, or may, require care at some time in the future when the child’s parents could then be expected to have died. Conversely, because a child is not at any stage charged with obligations to support a parent, no insurable interest will arise if an adult child, for example, seeks to effect insurance that will provide a financial lifeline for a parent who may require institutional care, or nursing home accommodation at some future date. Even some attempt to side-step the insurable interest requirement – for example, describing the policy a burial expenses policy when the proposer was seeking to insure his mother’s life because she was also his cook/housekeeper will not be effective. One commentator[214] on the Law Commission’s Insurable Interest Issues Paper has indicated that there is scant evidence to show that dependants find it difficult to effect insurance and that steps can be taken to avoid the 1774 Act, for example, by an assignment. These observations seem to be beside the point. There remains the possibility that the 1774 Act will frustrate a socially desirable objective and that avoidance techniques such as cross insurance and assignments complicate a process that should be simple and transparent. There are cases which show that the law can be capricious in the sense that insurable interests points may not be taken by the courts[215] or that a strict reading of the law vis-a-vis morally unobjectionable family arrangements may lead to unacceptable results when inadequate professional services have been rendered.[216]

2.70                Cohabitees and persons engaged to be married do not possess any insurable interest in each other’s lives. This situation seems to the Commission to be unacceptable in the 21st Century, and when one considers that the insurable interest survives a decree of judicial separation or a divorce, a major anomaly clearly exists. The difficulty of legislating clear rules in relation to non-marital relationships and the insurable interest should not be underestimated but the law needs to be rationalised and clarified. It may be that such difficulties make outright repeal of an insurable interest requirement the most appropriate course of action.


(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.[217] 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.[218] Conversely, Lord Kenyon, in Reed v Royal Exchange Assurance Company[219] 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.”[220] 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)[221] and many judicial utterances are directed at the privity of contract problem rather than that of insurable interest.[222] 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 insurance contracts, not least because the insurance industry would be encouraged to develop new insurance products that would address the health care and maintenance needs of “the objects”, to use the language of the 1882 legislation.

(4)                   The Miscellaneous Category

2.74                This category exists in English law as a result of Waller LJ’s speech in Feasey v Sun Life Assurance of Canada.[223] This decision has not been considered by an Irish court and it has been doubted by English commentators. The existence of this category can be said to arise out of the inconvenience of an insurable interest requirement and how it may obstruct otherwise unobjectionable contractual arrangements in a commercial setting. Rather than heaping an exception onto an exception, it would be better to reform or even repeal the insurable interest requirement altogether.

(5)                   The limits of natural love and affection

2.75                The leading cases on the absence of natural love and affection being insufficient to create an insurable interest as between a parent and child generally revolve around old poor law maintenance and burial obligations, the effect of which is often to supplant arguments about legal support and contractual consideration. In Ireland, decisions such as Farrington v Donoghue[224] and Pordage v Canter[225] demonstrate that statutory obligations to support children born outside marriage were imposed upon mothers, but not fathers. Current Irish legislation imposes support obligations horizontally on parents: Social Welfare Consolidation Act 2005, section 345. However, in circumstances where a parent takes out insurance on the life of an adult child the weight of authority stands against an insurable interest being made out. In Halford v Kymer[226] a father took out a policy of insurance on the life of his son. The issue was whether the policy could be enforced on the basis that the chance that the father might be supported by his son in his old age afforded an insurable interest. Bayley J said of the father that “the parish is bound to maintain him, and it is indifferent to him whether he be maintained by the parish or his own son.”[227] Recent English authority has cast some doubt on this case, Waller LJ, in Feasey v Sun Life Assurance Co of Canada and others[228] remarking that “one wonders whether the same decision would be reached in the modern era.”[229] The fact that many of the cases appear to involve collusive acts by proposers and agents of the insurer (albeit agents with limited capacity) or even instances of innocent and ignorant persons being duped by insurance agents, was allowed to speak to the recovery of premiums paid by the in pari delicto rule but not the enforceability of the underlying contract. There are isolated cases however where the courts were prepared to allow family members to bargain for support obligations by analogy with creditor and debtor transactions. Case-law sometimes permitted recovery on a policy where a family member may have a legal duty to maintain another family member. In Barnes v London, Edinburgh and Glasgow Life Insurance Company[230] the plaintiff promised her mother to maintain a 10-year-old child, the promisor’s step-sister; the evidence indicated that the plaintiff had commenced to perform her promise, taking out a life policy on the child. A self-imposed duty of this kind permitted the promisor to secure the repayment of the expenses incurred. Lord Coleridge CJ remarked that obligations of the sort undertaken by the promisor “were obligations the repayment of which was habitually secured in this way.” Both the Chief Justice and AL Smith J regarded the promisor as having an insurable interest to the extent of monies actually expended. AL Smith J distinguished this situation from instances where a legal obligation to support a child is imposed by law, as in the case of a father and his son. Case-law holds that should a son seek to contractually recognise benefits obtained from his father no insurable or pecuniary interest will arise and any policy will be void as between the insurer and the insured: Worthington v Curtis.[231] The policy behind such instances varied somewhat; the most obvious instances being a desire to protect vulnerable persons[232] and require truthful disclosures by proposers.

2.76                The fact that natural love and affection was limited to spouses, judged at the time of taking out the insurance policy led to a range of legislative adjustments in the family context. Legislative provisions relating to payments upon the death of small children were contained in Friendly Societies legislation; the Friendly Societies Act 1896 provided that no society should pay any sum of money on the death of a child under five years of age in excess of £6, or £10 in the case of a child between 5 and under 10 years of age.[233] Monies were also only to be aid to the parent of the child or the personal representative.[234] Section 67 specifically excluded these restrictions on insurances where the insurer had an insurable interest in the life of the person insured. Before looking at the 1909 and 1936 Acts, it must be said that although industrial insurance in Ireland has declined considerably, and the present trend is towards winding up this form of insurance, the law does reflect some important public policy considerations that remain valid today. Clearly children need to be protected against any moral hazard that may arise, but the existence of a cap on the amount payable under a policy on the invalidation of policies on the basis of absence of an insurable interest seem to be rather clumsy mechanisms which ignore the more effective deterrents, namely, the public policy proscription against persons benefiting from an illegal act and the general law against infanticide and murder.

2.77                The Assurance Companies Act 1909[235] was enacted to ameliorate the insurable interest requirement and the fear of a “parish burial”. Section 36(1) of the 1909 Act provided that policies of assurance could be issued for the purpose of insuring money to be paid for the funeral expenses of a parent, grandparent, grandchild, brother or sister. Section 36(2) provided that no policy effected before or after the passing of the Act would be void on the grounds (inter alia) that the person effecting the policy had no insurable interest at that time, if such a person had a bona fide expectation that he would incur expenses in connection with the death or funeral of the assured, and the sum assured be not unreasonable for the purpose of covering those expenses. These life policies were intended to allow the poor and working classes to have enough money set by to permit a dignified death and burial, rather than suffer the ignominy of knowing that they would receive a parish or pauper’s funeral and the case-law that the statute threw up involved a diverse range of issues such as agent’s misrepresentation, proposer fraud and non disclosure, for example.[236] On the question of whether the 1909 Act created an insurable interest there was a difference of opinion between the Irish and English judges. In O’Brien v The Irish National Insurance Co Ltd[237] Sealy J observed that section 36(2) “comes to the relief” of the plaintiff who had taken out a policy in respect of her brother’s life. Subsequently, in a similar case, Gallagher & McPartland v The Industrial & Life Assurance Amalgamated Co Ltd,[238] Dixon J observed that the 1909 Act “made it legal for a policy to be effected on the life of inter alia, a sister for the purpose of providing for funeral expenses, and that provision, in my view implicitly conferred an insurable interest in the life of a sister.”

2.78                In England Rowlatt J, on the other hand, questioned whether the 1909 Act created a new insurable interest; in Goldstein v Salvation Army Assurance Society[239] he thought it did not.

2.79                In Britain, the 1909 Act was repealed and replaced by the Industrial Assurance and Friendly Societies Act 1929.[240] A significant feature of the 1929 Act was the expansion into endowment policies; in the broader sense of social policy, individuals were being encouraged to make provision for dependants via a number of endowment and whole life policies. The 1929 Act did not specifically address the insurable interest question.[241]

2.80                Part V of the Insurance Act 1936 effectively replicated the British 1929 Act, specifically providing however that any policy of industrial assurance effected under section 50 was deemed to create an insurable interest in the life of the person and that no such policy is to be deemed an indemnity policy. But even this legislative change, modest though it was, produced some very technical and difficult court decisions. Policies taken out in respect of funeral expenses under s.36(1) of the Assurance Companies Act 1909 have been held to be policies of indemnity. When a proposer took out a number of policies on the life of his mother, for burial expenses, payment by one company was held to discharge the claim in full. Case-law holds that in the absence of fraud or a mistake of fact, the premiums were not recoverable as all of the companies were at risk during the currency of the policy: Wolenberg v Royal Co-op Collecting Society.[242] The existence of an insurable interest was also fatal to recovery of premiums. In Gallagher and McPartland v The Industrial and Life Assurance Amalgamated Co Ltd,[243] M took out life policies on his sister but after some time M’s daughter, G, took over payment of the premiums. Clearly G had no insurable interest but M’s insurable interest at the commencement of the policy rendered the contract valid until such time as M ceased to pay the premium: absent fraud by the company’s agent, Dixon J held the premiums irrecoverable: see also Wall and Wall v New Ireland Insurance Co.[244]

2.81                Although industrial assurance legislation sought to prevent ‘moral hazard’ by restricting the availability of cover, there are other means of advancing criminal or undesirable practices. Sham transactions whereby a limited policy of insurance is taken out by the life to be insured – each person has an insurable interest in his or her life – with the premiums being paid by third party were likely to be invalid via the law of misrepresentation: Wainewright v Bland.[245] The leading decision on section 2 of the 1774 Act is Shilling v The Accidental Death Insurance Company.[246] Thomas Shilling took out a policy of life insurance upon his father James Shilling. Thomas effected the policy, apparently as agent of his father who was in a hazardous occupation; however, James was not aware that his son had effected the policy. When, following the death of James Shilling his Administratrix claimed on the policy, the company pleaded non compliance with section 2 of the 1774 Act, reasoning that if a close relative could take out insurance without that relative’s knowledge or consent, the temptation to collect on the policy by materialising the risk (in this case causing James Shilling’s death) could well be irresistible to some persons. The policy was held to be void. In Reed v Royal Exchange Assurance Company[247] Mrs Reed took out a life insurance policy on her husband six days before his death. While Lord Kenyon held that a wife is presumed to have an insurable interest in the life of her husband, after hearing the facts of the case and seeing the evidence, “particularly a letter from the plaintiff to a young man of her acquaintance” a claim on the policy was unseccessful (Mrs Reed was subsequently indicted for the murder of her husband but acquitted).

(6)                   Debtors and creditors

2.82                A debtor has no insurable interest in the life of a creditor unless there is some consideration present. Where a creditor promised a debtor that he would not seek to enforce a claim to a debt during the creditor’s lifetime, such a promise could not create a pecuniary interest in that life: Hebdon v West.[248] In the case of a creditor who seeks to insure the life of a debtor, such a contract was at one time considered to be a contract of indemnity that would only enure to the benefit of the policyholder should the debt remain unpaid following the death of the creditor.[249] This was overruled in Dalby v The India and London Life.[250] The logic of Dalby case, that a policy of life insurance is a contract to a certain definite sum at a future time, in consideration for payment of the premiums, is illustrated by Law v London Indisputable Life Policy Co.[251] Law purchased from his son a contingent legacy of £3,000, payable to the son when he reached 30 years of age. Law insured his son’s life for two years, the son being at that time 28 years and four months old. The son reached his 30th birthday and Law was paid the legacy. However, the son died shortly thereafter and within the two year period of insurance. Wood VC held the contract was one in which Law clearly had an insurable interest, even if the interest was not for the entire period insured. The contract was not a wagering contract, nor would the court cut down the sum payable in some way. MacGillivray[252] is critical of the “unrealistic situation” that the 1774 Act produces in this way, suggesting that in such case the American solution (whereby the creditor’s interests should be the amount of the indebtedness at the time of death, and the cost of the insurance with interest, any balance being payable to the deceased debtor’s estate) should be adopted into English law.

(7)                   Property insurance

2.83                Apart from Marine insurance and section 4 of the 1906 Act, there is no statutory insurable interest requirement in Irish law relating to property. Although the 1774 Act, as extended into Ireland in 1866 has been held not to require an insurable interest for property insurance, [253] property insurance cases also reflect a judicial sensitivity concerning fraudulent claims, particularly incendiarism. In Sadler’s Company v Badcock[254] Mrs Strode leased a house which was insured for £400. Her tenancy expired and the property was destroyed by fire shortly thereafter. Mr Strode assigned the policy to the “ground-landlords” who sought to enforce the policy. As Mrs Strode was required to have a property in the thing insured at the time the insurance was made and at the time of the fire, she had no interest that could be assigned as this policy was intended to insure Mrs Strode from damage, rather that insure the property from damage. Lord Chancellor Hardwicke remarked that “if the insured was not to have a property at the time of the insurance or loss, any one might insure another’s house, which might have a bad tendency to burning houses.” In contrast, a wharfinger who insures a building and his own goods, as well as property bailed with him and held “in trust” for the owners of those goods is able to recover on the policy in respect of third party goods held by the wharfinger on behalf of those third parties: Waters v Monarch Fire and Life Insurance Company.[255] In James v Royal Insurance Co.[256] 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.[257] ‘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,[258] 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[259] 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[260] 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,[261] would be an expectation interest rather than a pecuniary interest and thus fail to satisfy section 1 of the 1774 Act.

2.86                The Commission invites submissions as to whether, on the issue of valuation, an insurer should be free to fix any value with the proposer at the time of concluding the policy of insurance.

H                      Reforming the insurable interest requirement in Ireland

2.87                In recommending that a contract should not be defeated solely because the insured lacks a legal or equitable claim or interest, the Commission leaves open the question whether there is any need to recommend additional reform of the insurable interest requirement. It is possible to take a somewhat sanguine view on this question: matters of definition vis-à-vis insurance contracts are generally side-stepped by legislators, regulators and the courts, once it is clear that the arrangement under review is an acceptable and commercially useful mechanism such as swap or option contracts. These contracts are intended to lay off risk on loans, debt securities or other assets by reference to a contracting party – it could be a multinational or even an entity closely linked to a sovereign state, for example, in exchange for either swap payments or the payment of a premium. Credit derivatives may thus resemble contracts of insurance, and it is clear that regulators seek to regard such commercial dealings as being regulated transactions, but the absence of an insurable interest in credit derivative transactions may count against them being regarded as contracts of insurance, strictu sensu.[262] The weight of opinion is against financial derivatives being considered to be wagering contracts on the basis that it cannot be said that both parties will have a common purpose and interest in concluding a wagering contract. The fact that such issues have not troubled the courts may suggest that commercial practices may legitimise financial dealings that do not cross over into gaming contracts or raise issues of moral hazard. While this may be so, the recent analysis of the two Law Commissions, in their Issues Paper 4, Insurable Interest[263] argues persuasively for not only the partial retention of the insurable interest requirement but a significant expansion of the range of persons who may have a statutory insurable interest and the circumstances in which such an interest may be established. The recasting of the insurable interest requirement along the lines found elsewhere in Europe and as proposed in the England and Wales 2008 Issues Paper will possibly stimulate new business for the industry and provide some very important and sound reforms, particularly in relation to life and healthcare policies vis-à-vis vulnerable adults, an area that the Commission has already considered more generally.[264]

2.88                The Life Assurance Act 1774 renders void and illegal any policy of insurance where the applicant does not, at the taking out of the policy, have an insurable interest in the life of the person to be insured. It is established that a person will have an insurable interest in the life of his or her spouse, regardless of whether the death will cause any financial loss. Even if the marriage is ended by way of divorce, the insurable interest will remain. The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010, through the financial adjustment orders provisions permits a court to require one civil partner to take out insurance policies for the benefit of the other civil partner, but the legislation stops short of holding that civil partners have an insurable interest in the life of the other civil partner. This is in marked contrast to the position in other jurisdictions where an insurable interest has been recognised by statute or case-law:[265] the UK Civil Partnership legislation makes express provision on this point.[266] The Commission believes that Irish law should do so also.

2.89                The Commission has decided that it would be prudent to define an insurable interest in such a way as to reflect the factual expectation test. In addition, the Commission believes that in respect of general, that is, non-life insurance, it would be advisable to stipulate that an otherwise valid contract of insurance should not be defeated solely because the insured lacks a legal or equitable interest in the subject matter of the contract of insurance. These two recommendations can stand or fall separately, but these recommendations beg the question about whether the insurable interest requirement, such as it is, should remain a part of Irish law.

2.90                A broad approach to this question would start from the position that, at common law, there was no insurable interest requirement. The 1774 Act, as adopted into Irish law in 1866, has been held only to apply to life insurance. Property insurance does not require a statutory insurable interest to be shown. Indemnity insurance contains its own mechanism to control fraudulent claims and over-insurance, that is the indemnity principle. If the formalities provisions in the 1774 Act remain valid, they should be re-enacted in a modern statute. If gambling is to be regulated, it should be regulated via a gaming statute. If insurance is to be distinguished from other financial transactions, an insurable interest concept or requirement is an unsatisfactory way of doing so. In sum, there is no need to retain any insurable interest requirement.

2.91                In contrast, a narrow approach to the statutory insurable interest requirement would start from the position that the insurable interest, at least in life policies, remains a useful protection against gambling or moral hazard, it is in need of reform.

(1)                   Proposals for Reform – A Broad or Narrow Approach?

2.92                There is a considerable degree of consensus in favour of widening the categories of person who may be able to assert an insurable interest in relation to the natural love and affection route towards meeting the insurable interest requirement. As the Law Commissions point out, the New York position allows a court to rule that any person who has a close relationship, by blood or by law, may thus possess an insurable interest in another person’s life. This right extends to the insurance contract being available for unlimited and stipulated amounts of money, as distinct from being pegged to the insurable interest per se. The Law Commissions, while mentioning this as a possible approach tentatively inclined towards the Canadian and previously proposed Australian model of setting out persons in defined relationships.

“We tentatively propose that the following groups should be deemed to have insurable an interest arising out of natural affection:

(1)   any person – in his or her own life and in the life of his or her spouse or civil partner;

(2)   any person who is cared for and dependent on his or her parent or guardian – in the life of his or her parent or guardian;

(3)   any parent – in the life of his or her adult child;

(4)   any person – in the life of his or her cohabitant.”[267]

2.93                The Commission considers this proposal to represent a modest and worthwhile restatement and expansion of the law, reflecting contemporary developments in terms of social policy (eg recognition of the rights of carers) and the fact that many persons are in cohabitation relationships. However, there will have to be some attention paid to defining persons in a cohabitating relationship, which the Commission assumes, is to include same-sex cohabitionship. For this purpose the Commission refers to the definition of “cohabitants” in the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010, which implemented the key elements of the Commission’s 2006 Report on the Rights and Duties of Cohabitants.[268]

2.94                A related question that the Law Commissions did not address was the impact that payments made on the foot of any insurance contract may have in respect of social welfare payments and health care benefits. Should these payments made under an insurance contract be seen as a collateral benefit that is to have no impact on social insurance entitlements such as social assistance payments and medical benefits? Further, if some insurance payments are to have an impact on social welfare or health care (eg via means tested assessment mechanisms) how should these two systems of private insurance and social provision be integrated with each other? The Commission has previously considered these questions from the perspective of how to integrate considerations of legal principle with social justice and social solidarity: see the Commission’s 2002 Report on Section 2 of the Civil Liability (Amendment) Act 1964.[269] The Commission appreciates that our recommendation that an insurable interest is to vest in cohabitants raises a number of issues that must be considered in broader socio-economic terms but that such considerations go way beyond the ambit of this Consultation Paper.

2.95                The Law Commissions, in Issues Paper 4, also invited submissions on what should be done in respect of other relationships, in particular:

“(1) should parents have an interest in the lives of their children under 18?

(2) should fiancé(e)s have interests in each other’s lives?

(3) should siblings have interests in each other’s lives?

(4) should grandparents and grandchildren have interests in each other’s lives?”[270]

2.96                The fact that these relationships have been separated from the position pertaining or proposed by the Law Commissions in respect of spouses or civil partners, persons cared for and dependant on a parent or guardian, parents and adult children, and cohabitees, tends towards an implicit assumption that siblings, for example, are less likely to be in close or supportive relationships than a married couple. While this may be so in many cases, it is just as foreseeable that two unmarried brothers may form a dependant relationship that could render some insurance arrangement a prudent and socially desirable step for them to take. Whether the moral hazard – the possibility that one family or blood relative might take the life of another for financial gain – is stronger as between married persons than siblings is presumably a matter of idle speculation but any actuarial information on this and other matters would be welcome.[271]

2.97                The Commission provisionally recommends that, in connection with life insurance, the following should also be deemed to have an insurable interest in the life policy: (a) spouses in relation to each other; (b) civil partners in relation to each other; (c) cohabitants in relation to each other; (d) a child in relation to his or her parent or guardian; and (e) a dependant parent in relation to his or her adult child.

2.98                The Commission invites submissions as to whether, in connection with life insurance, the following should also be deemed to have an insurable interest in the life policy: (a) a grandparent in relation to his or her grandchild; and (b) siblings in relation to each other.

(2)                   Non Indemnity Insurance and the Insurable Interest

2.99                Non indemnity insurance, that is insurance which pays a fixed sum upon the risk materialising, is generally associated with life policies but property insurance of many kinds is also effected on a non indemnity basis. As Irish law does not currently contain an insurable interest requirement, the 1774 Act not applying outside the area of life cover, an argument would have to be made for legislating for the introduction of an insurable interest requirement to be introduced in non indemnity, non life insurance. The only basis upon which such an argument can proceed revolves around either that of moral hazard/deterrence, or public policy considerations that proscribe gambling. In the Commission’s view, neither of these considerations necessitate the introduction of an insurable interest requirement where it does not currently exist.

(3)                   Moral hazard/deterrence

2.100             The argument that an insurance claim should only be honoured when the claimant can show an insurable interest in order to deter fraud, or moral hazard, does not make very much sense. The arsonist who has no interest in a property but who has an insurance policy in relation to that property might fall under a greater degree of suspicion than any householder or property owner who has such an interest. Furthermore, the liberal interpretation placed upon the requirement in some of the pre Church and General Insurance Co v Connolly[272] decisions such as Brady v Irish Land Commission[273] and Coen v Employers Liability Assurance Co[274] suggests that, as a threshold test, there is no effective purpose to be served by insisting upon an insurable interest requirement; illegality, and fraud are more likely to constitute effective barriers to an improperly constituted insurance claim. The Commission believes that legislation directed at preventing criminals from profiting form criminal acts such as the Proceeds of Crime Act 1996[275] and the Criminal Justice (Theft and Fraud Offences) Act 2001[276] represent a more direct and effective means of dissuading persons from engaging in criminal activity, while at the same time allowing due process to be observed.[277] Similar considerations suggest to the Commission that Irish Society is less concerned with the distinction between gaming and wagering on the one hand, and insurance and other financial products on the other. The National Lottery, scratch cards, on-course and off-course betting on horses and greyhounds, as well as the explosion in spread betting and betting exchanges suggest that the issue is not whether to facilitate such activities as a part of the leisure industry; rather, the question is how best to regulate activities that often straddle the boundary between recreational wagering and financial investment activities. This question goes beyond the scope of the current analysis of insurance contract law. Nevertheless the Commission does not see any case for introducing an insurable interest requirement (in the traditional Macaura sense) in non-indemnity insurance that does not involve life insurance.

2.101             It certainly is arguable that the Life Assurance Act 1774 no longer serves any useful purpose. As the Australian Law Reform Commission graphically put it:

“The legislative requirements relating to the interest which an insured must have in the subject matter of an insurance contract are the result of a combination of imprecise drafting and historical accident rather than coherent implementation of clear legislative policy... Even in 1774, there was no reason why that Act should extend to contracts of indemnity, since the nature of such a contract prevents gaming and wagering in the form of insurance.”[278]

2.102             The Gaming Act 1845,[279] which was repealed and replaced by the Gaming and Lotteries Act 1956, provided the most obvious means of counteracting wagering contracts that were dressed up as insurance transactions, and although the 1956 legislation is generally regarded as in need of root and branch reform, the provision in section 36(1), which provides that every contract by way of gaming or wagering is void, still can provide a sound basis for regulating the boundary between wagering and insurance contracts under Irish law.

2.103             In Byers v Beattie[280] Shares were purchased by the plaintiffs on the foot of an agreement that if a resale was effected on disadvantageous terms, the plaintiffs would be entitled to the difference and commission and other charges from the defendant. The transaction was held to be void as a wager. Even where an insurable interest is evident, the Irish courts are able to identify undesirable transactions and deny enforceability. The leading case is Wall and Wall v The New Ireland Assurance Co.[281] the plaintiff, with the connivance of agents of the defendant insurance company, took out a number of policies in his own name or the life of his mother, ostensibly under section 50(1)(a) of the 1936 Act, that is, to cover reasonable expenses in connection with the death and funeral of his mother. The first two policies were regarded as being potential losses, given the premiums and his mother’s longevity, so three additional policies were taken out as a form of insuring himself against such a remote loss on the first two policies. While the five policies in question produced an assured sum that would not in itself have been regarded as an unreasonable amount, the Supreme Court endorsed the trial judge’s view that these later three policies were gaming policies and therefore illegal under section 1 of the 1774 Act. The Supreme Court also reasoned that it was possible to approach this case from the perspective of illegality even through, on the facts, knowledge of the illegal purpose as between the proposer and the insurer’s agents could not be attributed to the insurer. Walsh J, giving the main judgment for the Supreme Court[282] stated:

“It does not appear to me that an insurance company should, nor is it contended for by the respondents in this case, in the absence of knowledge on its own part be at the mercy of the secret and undisclosed intentions of the person effecting such a policy of insurance if, on the face of it, the transaction is legal. If, therefore, the plaintiff, Mark Wall, while ostensibly effecting these five policies for the purpose of funeral expenses had the secret intention of using three of them as a form of insuring himself against financial loss on the first two policies, that fact or intention alone would not, even if proved to exist at the time, invalidate or render illegal the policy. On the other hand I am satisfied that if it can be proved not merely that the plaintiff had that intention but had communicated that intention to the Assurance Company or if the Company had actual or imputed knowledge of that intention at the time the policy was effected, the policy would, notwithstanding its ostensible purpose, be illegal.”

(4)                   Pleas of illegality

2.104             While public policy considerations are sometimes used to explain why the law requires an insurable interest to be shown by an insured – “if the insured was not to have a property at the time of the insurance or loss, any one might insure another’s house, which might have a bad tendency to burning houses”[283] – it should be noted that the insurable interest requirement is not the only means of deterring fraudulent claims based on deliberate acts of destruction, for example. An assured cannot recover on the foot on an insurance policy in respect of a loss caused by this own criminal or tortious act.[284] If the deliberate act has caused a loss which is the natural or probable result of that act then the necessary causal element will be present: Hardy v Motor Insurer’s Bureau.[285] Clearly in cases where the insured is found by a court to have deliberately set fire to his property there can be no right to enforce a fire insurance policy, eg Michovsky v Allianz,[286] but the High Court ruled, in Gray v Hibernian Assurance Co,[287] a case in which the (deceased) insured was suspected of having commissioned others to set fire to his Dundalk public house, that the onus rests on the insurer to show the illegal bargain. The fact that in these kind of cases the owner of the property clearly has an insurable interest suggests that it is through illegality or public policy considerations – ex turpi causa non oritur actio – that moral hazard dangers are most effectively addressed. Any reduction in insurable interest requirements will have no effect on moral hazard considerations which, the Commission believes, can be effectively addressed without the need to retain any insurable interest requirement. It is also arguable that because public policy and common law illegality doctrines contain a degree of flexibility – certainly in contrast to s.1 of the 1774 Act which declares the contract “to be null and void to all intents and purposes whatsoever” – the judiciary is better able to respond to the individual facts and circumstances of borderline cases. Two Canadian decisions illustrate this point.[288]

(5)                   Options for reform under the Law Commissions Issues Paper – the regulatory definition question

2.105             As has been shown, Irish law differs radically from English law insofar as the Irish courts have ruled that an insurable interest is not a common law requirement and that the 1774 legislation only applies to contracts of life assurance. In the Insurable Interest Issues Paper the Law Commissions ask whether an insurable interest is necessary in order to identify and distinguish insurance from other products which lack an insurable interest. The Law Commissions concluded that the retention of a strict insurable interest requirement is unnecessary for regulatory purposes.

2.106             The Financial Services and Markets Act 2000, the governing UK legislation, does not define a contract of insurance but deems contracts listed in a statutory instrument to be contracts of insurance. In relation to certain types of financial product, regulatory agencies and representative bodies such as the International Swaps and Derivatives Association have avoided the temptation to review the boundary between insurance and other financial products on the ground that such a scrutiny could damage market consensus and undermine confidence in economically significant products, particularly when the market does not see such products as gambling activities. [289] The Law Commissions concluded that the Financial Services Authority regard the “assumption of risk by the [service] provider” as the key factor in identifying insurance for regulatory purposes; this factor however is not the same as the statutory insurable interest requirement under English law.

2.107             In terms of identifying insurance itself for regulatory proposes, the Law Commissions emphasise that the three key factors in Scots law and English law concur: they are requirements of payment, uncertainty and interest. The Law Commissions conclude that both the Scottish and the English Courts require the insured to have an interest in the subject matter of the contract. However, the Law Commissions are of the view that the leading cases do not equate such an interest with a pecuniary loss recognised by law: “it is an interest in something so that one would be adversely affected if it were to be lost.”[290]

2.108             The Law Commissions conclude that “interest loosely defined does play a role in distinguishing insurance from other contracts although staturoty insurable interest...does not”. The Law Commissions refer to tax guidance and Insurance Premium Tax requiring an insurable interest, which is described as “a financial or other loss on the happening of the isured event.” This definition looks more like the legitimate expectation test as canvassed in the Kosmonpoulos decision in Canada. While this test may be required under fiscal and other statutes for accountancy and tax purposes, it is not to be equated with a statutory insurable interest: in other words, these important governance and regulatory functions would not be subverted if a statutory insurable interest requirement were to be removed from the UK statute book.


(6)                   Defining Insurance Contracts in Irish Law

2.109             The leading Irish decision is International Commercial Bank plc v Insurance Corporation of Ireland plc.[291] The case concerned a credit guarantee insurance agreement whereby ICI provided an indemnity if (as happened) a company that borrowed monies from the plaintiff bank defaulted on the loan. ICI resisted the claim on the grounds that the contract was one of credit insurance and as such caught by uberrimae fidei. Failure by the bank to disclose certain material facts gave ICI, the defendant, a right to avoid the policy. Blayney J, following Seaton v Heath[292] found the contract was one of guarantee, not insurance. Blayney J, looked at the question by reference to the substance of the case. In Seaton v Heath Romer LJ had said:

“Contracts of insurance are generally matters of speculation where the person desiring to be insured has means of knowledge as to the risk, and the insurer has not the means or not the same means. The insured generally puts the risk before the insurer as a business transaction, and the insurer on the risk stated fixes a proper price to remunerate him for the risk to be undertaken; and the insurer engages to pay the loss incurred by the insured in the event of certain specified contingencies occurring. On the other hand, in general, contracts of guarantee are between persons who occupy, or ultimately assume, the positions or creditor, debtor, and surety, and thereby the surety becomes bound to pay the debt or make good the default of the debtor. In general, the creditor does not himself go to the surety, or represent, or explain to the surety, the risk to be run. The surety often takes the position from motives of friendship to the debtor, and generally not as the result of any direct bargaining between him and the creditor, or in consideration of any remuneration passing to him from the creditor. The risk undertaken is generally known to the surety, and the circumstances generally point to the view that as between the creditor and surety it was contemplated and intended that the surety should take upon himself to ascertain exactly what risk he was taking upon himself.[293]

2.110             In an article on the legal nature of credit default swaps,[294] Smith argues that by focusing on the substance of credit default swaps, that is, that the payment obligation under a credit derivative is not conditional on the payee’s loss,[295] it is possible to avoid both the conclusion that a credit default swap is not indemnity insurance and the rather inconvenient result that uberrimae fidei duties attach thereto. The Commission has been advised that these issues of form and substance, unsatisfactory as they are, are approached in an identical manner in Ireland, that is, precise definition and classifications are eschewed. In any event, this point is of much less importance in Ireland because the Life Assurance Act 1774, a source of some mischief in this context in the United Kingdom[296] is confined to life policies in this jurisdiction.

(7)                   The insurance/gaming divide – current review of gambling legislation

2.111             The Department of Justice and Equality is currently (November 2011) engaged in a major review of Irish gambling law, currently regulated by the Gaming and Lotteries Act 1956, with a view to developing “a new and comprehensive legal and organisational framework governing the gambling architecture in the State.”[297] Building on the Report of the Casino Committee Report, Regulation Gaming in Ireland[298] the then Minister announced that one of the premises that most modern gambling codes are built upon is “that gambling is kept free of crime.”[299] The Commission expects that the “complex and comprehensive legislation”[300] that may arise in the future may not address the insurance/gambling dichotomy directly. In the most recent discussion document the Department of Justice and Equality observe that any new regulatory architecture for gambling will pursue three central objectives:

·         that young people and the vulnerable are protected;

·         that gambling should in all respects be fairly and openly conducted

·         that gambling is kept free from crime.

2.112             It is a central point in the discussion document to note that the emphasis is on better regulation, not deregulation. This observation, in relation to gambling policy, also holds true in relation to the Commission’s recommendations in relation to reform of the insurable interest rules. It is of interest to note that many of the central recommendations in relation to changing the gambling regulation architecture – the creation of a regulatory authority, licensing of operators with strict compliance rules, a power vested in the Minister to fine-tune rules by way of secondary legislation – resemble the insurance regulation landscape as it currently exists. Because it is to be a feature of gambling reform that definitions of gambling will be written into Irish law for the first time[301] and the statutory rules preventing the enforcement of gambling contracts will not be continued,[302] a co-ordinated but not integrated approach to insurance and gambling regulation will be required. Commercial and cultural developments such as the expansion of betting exchanges and spread betting illustrate that certain types of risk hedging or avoidance will straddle the boundary between gaming regulation and insurance/financial services authorisation.[303]

2.113             Currently, spread betting and Contracts for Difference products (CFDs) are regulated by the Central Bank of Ireland, and press reports in 2011[304] indicate that compliance with regulatory requirements in Ireland are not being fully met by the 29 companies that are approved to offer such products within the State. These matters are seen as consumer protection matters rather than moral hazard issues and attest to the fact that any insurable interest requirement, as a legislative proxy for counteracting socially undesirable contracts of speculation, has no part to play in modern Irish law.




CHAPTER 3             Duty of Disclosure

A                      Introduction

3.01                The duty of a proposer to volunteer information to an insurer when that information would appear to a prudent insurer to be material to a decision whether to accept the risk, and on what terms, is long-established. In this Chapter, the Commission notes that the duty of disclosure is mandated by both the common law and the Marine Insurance Act 1906 as being applicable to all insurance contracts. The duty is rooted in “special knowledge” of a risk as being likely to be solely in the possession of the proposer. Whether this remains the case is open to some doubt in the light of telecommunications and other advances. The duty has always been balanced by reference to the insurer’s duty to disclose and investigate circumstances within the insurer’s competence and expertise. In some jurisdictions the duty of disclosure has been offset or indeed removed altogether by an insurer’s obligation to ask specific questions.

B                      The Duty of Disclosure in Insurance Contracts

3.02                Under section 18(1) of the Marine Insurance Act 1906 (generally regarded as applicable to all forms of insurance, except in respect of the constructive knowledge issue, discussed below) a person who is seeking to obtain insurance:

“must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.”

3.03                The basis upon which the duty of disclosure rests is disparity of information and bargaining power. Insofar as the proposer may, in the many situations, possess superior knowledge of the facts and circumstances that attend the risk, particularly those personal to the proposer, it is entirely appropriate that the proposer should reveal those facts and circumstances to the insurer. In Carter v Boehm[305] Lord Mansfield contrasted situations where “special facts” are held by one party to a negotiation from instances where “either party may be innocently silent, as to grounds open to both, to exercise their judgment upon”. Because Lord Mansfield observed that “insurance is a contract or speculation”, the law requires that such “special facts” as either party has access to must not be suppressed. Even if the suppression were to happen through a mistake, even without fraudulent intent, Lord Mansfield observed that the policy would be void “because the risque run is really different from the risque understood and intended to be run, at the time of the agreement.” So, the suppression of factual information, whether fraudulent or otherwise would allow the insurer to treat the contract as void. Lord Mansfield reasoned that:

“The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under-writer trusts to his representation and proceeds upon confidence, that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance did not exist, and to induce him to estimate the risque, as if it did not exist.”[306]

3.04                Carter v Boehm of course is also at the heart of another cardinal principle of insurance law that is similarly enshrined in statute law, s.17 of the Marine Insurance Act 1906:

“A contract of marine insurance is a contract based on utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.”

3.05                The utmost good faith principle, and the duty of disclosure,are in most instances linked together. However, there are cases where judges have stressed that non-disclosure may occur even though the proposer did not act mala fides.[307] Most traditional jurisprudence however inclines towards placing the emphasis on the duty of disclosure as a means of protecting the insurer, decoupling the duty from the wider implications of the (mutual) duty of utmost good faith. [308]

3.06                In Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd,[309] the proposer for fire insurance in relation to a property failed to make disclosures in relation to security measures concerning that property. McMahon J held that these matters were on the facts not material but went on to consider whether the insurer’s failure to examine the property or investigate this risk was pertinent in a case of non-disclosure:

“The principle of uberrimae fidei, which applies to all insurance contracts, imposes a heavy onus of disclosure on the insured. Without this obligation to divulge information frequently available only to the insured, the insurer would have great difficulty in assessing the risk or in calculating the premium. This does not, however, mean that the insurer can cover its eyes or abstain from making normal inquiries or investigations, in the expectation that, in the event of the risk materialising, it can point to the insured’s omission and repudiate the contract. The insured’s duty is balanced by a reciprocal duty on the insurer to make its own reasonable inquiries, to carry out all prudent investigations and to act at all times in a professional manner. In fact the onus to do this, because of its experience and expertise, lies primarily on the insurer. The law is willing to assist this process by obliging the insured to volunteer information not easily available to the underwriter and which is material to the risk. The uberrimae fidei principle applies with the greatest force to situations where the relevant facts are peculiarly within the knowledge of the insured and are not easily available to the underwriter. Where, however, the full extent of the risk can readily be defined without the insured’s participation, the law does not insist on full disclosure...”

3.07                The emphasis that this ‘knowledge’ exception places upon the insurer to follow up on facts that are disclosed and to carry out an examination of the property, the medical condition of the assured, and so on, cannot be overstated. American judges have voiced their opposition to an over broad duty of disclosure on the basis that where a proposal can be examined by the insurer, a duty of disclosure is inappropriate. In explaining why Carter v Boehm was never extended into fire insurance underwriting, in the Ohio case of Hartford Protection Insurance Co v Harmes[310] it was said that there is no need to impute a need for reliance on information from the proposer:

“in fire insurance no such necessity for reliance exists, and, if the underwriter assumes the risk without taking the trouble to either examine, or inquire, he cannot very well, in the absence of all fraud, complain that it turns out to be greater than he anticipated.”[311]

3.08                These remarks were made as long ago as 1853. As such, the decision of McMahon J in Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd, also a fire insurance case, in which the insurer failed to inspect the property or follow up on information provided, resonates across the centuries. McMahon J wrote that “uberrimae fidei is not a charter for indolent insurers.”[312]

3.09                In contrast, in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co [313] regarded as the leading modern English case, Lord Mustill, speaking of the importance of Carter v Boehm, stated:

“Whilst it is true that this decision has been criticised on the facts, and that the wide general contractual duty of good faith which Lord Mansfield propounded has long since ceased to hold sway, the courts have never been deflected from the high standard of duty prescribed in this judgment. The assured is not to keep anything back which goes to the computation of the ‘contingent chance’, for otherwise there is no ‘fair representation’, and the underwriter is led to approach the ‘risk understood to be run’ on a false basis. Such is the principle on which insurance law has been developed and insurance contracts made for more than 200 years and I would do nothing to dilute it now.”

3.10                Lord Mansfield was seeking to establish a general contractual duty of good faith, not simply a specific rule that would operate in insurance law, but this general duty of good faith has not taken root in the common law world.[314] As such, the duty of disclosure in contracts of insurance has been classified as a contract uberrimae fidei, a contract of ‘utmost good faith’, and, along with a diverse but expanding range of sui generis contracts,[315] is regarded as an exception to the caveat emptor or caveat venditor approaches to contractual liability.

3.11                The stricter view is that the duty of disclosure does not depend on the proposer’s awareness of the existence of the duty. The proposer is under a duty to disclose material facts, even if the insurer or a broker fails to ask questions or the insurance is negotiated without the use of a proposal form.[316] Even if questions are asked the proposer must still disclose material facts that the questions might not have alluded to (subject to the possibility of a waiver or a similar argument). The question, what is a material circumstance, requires the proposer to have an awareness of the factors that would be relevant to an insurer, even if the insurer has not explained the insurer’s business or prompted the proposer in any way. The Marine Insurance Act 1906 directs in section 18(2) that “every circumstance is material which would influence the judgment of a prudent insurer on fixing the premium, or determining whether he will take the risk”. This test was endorsed by Kenny J on behalf of a unanimous Supreme Court, in a case of property insurance,[317] thus indicating that the test has a horizontal effect across all insurance contracts, with the possible exception of life policies and the like other policies (eg income protection cover).

3.12                On the question of whether the proposer is to be fixed with constructive knowledge of facts that the proposer ought to have discovered had he or she undertaken reasonable inquiries, section 18(1) of the Act is generally regarded as providing a specific rule for business insurance, the section directs that “the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”.

3.13                In cases of health insurance and similar insurance areas Irish case-law suggests that a distinction is to be drawn between cases where the proposer honestly believes that a symptom, medical episode, or medical condition has, or will have, no serious or long lasting consequences, from situations where the proposer simply is unaware of the medical condition. In this first situation, cases such as Curran v Norwich Union Life Insurance Society[318] suggest that if the symptoms being experienced by individuals have alerted a medical practitioner to prescribe medication, for example, this would be enough to trigger a duty of disclosure, even if the patient does not believe the suspected illness is likely to manifest itself or develop into a serious medical condition. In contrast, the fact that the individual is not made aware of the prognosis will not constitute non-disclosure: Coleman v New Ireland Assurance plc.[319] In the decision of the Supreme Court, in a leading life insurance case, Keating v New Ireland Assurance Company[320] a policy of life insurance was executed in June 1985. At a medical examination that took place prior to the policy being concluded the life in question disclosed that he had received treatment for a gastric disorder two months previously and the he had been prescribed medication. The life in question did not know what his underlying condition was and that the medication was used in treating angina pectoris, not a gastric disorder. The condition led to the death of the individual some five months later. The insurer declined to pay up on the policy on the grounds of non-disclosure, the argument centring on the fact that in undergoing tests investigating the gastric disorder, an angiogram and ECG test were undertaken. McCarthy J observed that while the doctors treating the patient were aware of his heart condition, the patient was not:

“The insurers were not informed of these material facts; was it a non-disclosure? One cannot disclose what one does not know, albeit that this puts a premium on ignorance. It may well be that wilful ignorance would raise significant other issues; such is not the case here. If the proposer for life insurance has answered all the questions asked to the best of his ability and truthfully, his next-of-kin are not to be damnified because of his ignorance or obtuseness which may be sometimes due to a mental block on matters affecting one’s health.”[321]

3.14                In Aro Road and Land Vehicles Ltd v Insurance Corporation of Ireland[322] McCarthy J also limited the duty of disclosure by reference to the underlying good faith standard. In this case the proposer failed to disclose criminal convictions that had been secured against him some 19 years previously, the insurance being property insurance obtained over the telephone, in circumstances of some urgency, without detailed questioning of the proposer or the use of a proposal form. After invoking the utmost good faith standard McCarthy J asked:

“how does one depart from such a standard if reasonably and genuinely one does not consider some fact material; how much the less does one depart from such a standard when the failure to disclose is entirely due to a failure of recollection? Where there is no spur to the memory, where there is no proposal form with its presumably relevant questions, how can a failure of recollection lessen the quality of good faith?” [323]

3.15                McCarthy J also seems to have considered the underwriter to have forfeited the right to insist upon full disclosure in circumstances where the proposer is not questioned about a particular matter, on the basis that the insurance contract is a contract of good faith on both sides. Similarly, in Kelleher v Irish Life Assurance Company[324] the terms of the proposal form, which intimated that the policy would issue on the basis of a “medical free offer” dispensed with a duty of disclosure.

3.16                In contrast to Aro Road (and it should be said that in Aro Road Walsh J and Hederman J concurred with the more radical approach articulated by McCarthy J), a more traditional view of the duty of disclosure was expressed by the Supreme Court in Chariot Inns Ltd v Assicurazioni General Spa.[325] Kenny J, giving judgment for a unanimous Supreme Court, stated:

“A contract of insurance requires the highest standard of accuracy, good faith, candour and disclosure by the insured when making a proposal for insurance to an insurance company. It has become usual for an insurance company to whom a proposal for insurance is made to ask the proposed insured to answer a number of questions. Any misstatement in the answers given, when they relate to a material matter affecting the insurance, entitles the insurance company to avoid the policy and to repudiate liability if the event insured against happens. But the correct answering of any questions asked is not the entire obligation of the person seeking insurance: he is bound, in addition, to disclose to the insurance company every matter which is material to the risk against which he is seeking indemnity.

What is to be regarded as material to the risk against which the insurance is sought? It is not what the person seeking insurance regards as material, nor is it what the insurance company regards as material. It is a matter or circumstance which would reasonably influence the judgment of a prudent insurer in deciding whether he would take the risk, and, if so, in determining the premium which he would demand. The standard by which materiality is to be determined is objective and not subjective.”[326]

C                      Constructive Knowledge and Non-disclosure

3.17                Section 18(1) of the Marine Insurance Act 1906, for business insurance, broadens the duty of disclosure to facts which ought to have been known by the proposer. The Commission believe that this is a difficult standard to operate. It is arguable that a better approach may be to ask whether the proposer should, in those circumstances, have made the disclosure in question. This is a less mechanistic test. Nevertheless, the Commission recognise that such an approach is not widely favoured, even within circles that are pressing for reform of the duty of disclosure. The Commission give two examples. The pattern set by the PEICL and some of the recent reform proposals from other common law jurisdictions suggest that the duty of disclosure should apply to

“circumstances of which he is or ought to be aware”,[327] and/or

“facts which the business insured knew or which it ought to have known.”[328]

3.18                This question of constructive knowledge and the duty to volunteer or disclose facts (as distinct from answer questions) that the proposer does not know raises difficult, if not metaphysical, issues. Perhaps the proposer has forgotten previous incidents, particularly incidents that occurred many years ago. Perhaps the proposer is aware of facts or events but regards them as irrelevant or unimportant. It may be that the proposer is aware of facts but does not make the connection with other facts or possibilities that would be highly material to the insurer.

3.19                The decisions of the non-statutory Insurance Ombudsman of Ireland provide some compelling examples of how difficult is may be to draw the line. In one case, the Insurance Ombudsman asked whether a proposer for holiday (cancellation) cover should be taken to know that a parent is terminally ill (pre-existing medical condition).[329] The Insurance Ombudsman held not. In another case, she dealt with a case in which a prison officer died after he suffered a heart attack while restraining a prisoner. Prior to taking out a life policy, and while attending the family GP in regard to treatment of his children, he mentioned one episode of chest pain. The doctor prescribed aspirin and told him to return for an examination which he did not do. While the Insurance Ombudsman felt that this episode of chest pain was a material fact she recommended a proportionate settlement of 50% be made. The Ombudsman’s observations are of interest even though the Commission considers that, in terms of the law, the insurance company acted reasonably; even under the Commission’s proposals in relation to reform of misrepresentation, the company would be entitled to refuse to meet the claim if the company could show it would have declined the proposal. The Insurance Ombudsman stated:

“On the one hand, the Company’s position can be appreciated. There is no doubt that a life assurance underwriter would be interested in the episode of chest pain and that it is, therefore, a material fact. If made aware of it a prudent underwriter would have required it to be investigated before offering assurance.

From the layman’s point of view it is understandable that a person might close his mind to such an episode and in the absence of renewed symptoms take no further action. Whether there was only one instance of chest pain and whether the matter had completely left the life assured’s mind by the time the application form was being completed is not possible to know.

There is always difficulty where there has been no medical diagnosis. No illness was diagnosed in this case by the deceased’s GP. In our day to day lives wehave many symptoms and only in a minority of instances do we consult a doctor. Occasionally, as it transpired in this case, the symptoms were an indication of a sinister underlying condition.

Do I, therefore, concede that the Company are legally correct and support their repudiation or do I acknowledge that the life assured had erased the matter from his mind and being human did not disclose the “casual” consultation with his doctor.

It was not for me to attempt to retrospectively underwrite this Policy but at the same time, in my view, further investigation would have led to assurance being offered, but at an increased premium.”[330]

3.20                Indeed, the duty of disclosure is capable of producing some singular situations, none more so than the dispute between Frank Godfrey and Lloyd’s of London. An exterior wall of Mr Godfrey’s cottage in County Meath had a mural of the 1690 Battle of the Boyne painted on it for over 25 years but, ironically, the Peace Process led to its apparent destruction by arsonists only days after the then Taoiseach and then Northern Ireland First Minister had launched an official tourism centre nearby in April 2008. Lloyd’s of London declined to honour the fire insurance policy taken out by Mr Godfrey on the basis that he had not disclosed the existence of the mural. [331] In 2009 the Financial Services Ombudsman found against Mr Godfrey, ruling “that by virtue of the nature of the subject, [the mural] would have been the source of some provocation, albeit to a limited number of intolerant individuals.” Press reportsindicated that, while an appeal to the High Court, may be under consideration, a separate fund-raising campaign led to the mural being re-painted.[332]

3.21                The Commission considers that the duty to volunteer information can only be seen in the context of the Commission’s provisional recommendations on the insurer’s duty to seek information from proposers in the shape of precise questions being put to a proposer[333]. The IIF Code of Practice on Non Life Insurance states that insurers “should avoid asking questions which would require knowledge beyond that which the signatory could reasonably be expected to possess”, suggesting that insurers may seek to extend s.18(1) beyond business insurers. The Commission considers that judicial decisions after Aro Road satisfactorily resolve these problems in the light of the flexibility of the disclosure test. Indeed, the Commission notes that because Aro Road was written as a marine insurance policy, the Supreme Court may well have confined s.18(1) to issues of “wilful ignorance” in any event. The Commission concludes that a proposer will be in breach of the pre-contractual duty of disclosure where it can be shown that the proposer, in applying for insurance cover, remained wilfully ignorant to material facts or circumstances. This is in line with the decison of the UK Court of Appeal in Economides v Commercial Union[334] where “failing to disclose what he would have seen if only he had opened his eyes” was seen as an example of actual knowledge and not constructive knowledge.

3.22                The Commission provisionally recommends that the pre-contractual duty of disclosure in insurance contract law should be retained, but that it should (in accordance with authoritative case law in Ireland) be restricted to facts or circumstances of which the person applying for insurance cover – the proposer – has actual knowledge; and that the duty of disclosure would not, therefore, extend to every fact or circumstance which ought to be known by him or her (constructive knowledge). The Commission also provisionally recommends that this modified pre-contractual duty of disclosure shall apply to all insurance, other than Marine, Aviation and Transport (MAT) insurance, which would continue to be regulated in this respect by the Marine Insurance act 1906.

3.23                It is of interest to note that the leading English text, MacGillivray on Insurance Law, cites Chariot Inns as articulating ‘the common law test of materiality’[335] while the Aro Road decision is not cited anywhere in the current edition. This difference in perspective clearly holds forth the prospect of an Irish court being able to limit the duty of disclosure, in circumstances where the underwriter seeks to provide cover without assisting the proposer in being made fully aware of the existence and scope of the duty itself. As such, Irish law may not be open to the same level of criticism that Professor Malcolm Clarke has levied against English law:

“Applicants in England may complete the form with scrupulous care, but still find that there was something else material to prudent insurers which, apparently, the particular insurer did not think to ask about but which, nonetheless, the applicant was expected to think of and disclose.”[336]

3.24                Evidence of materiality may be put before the court from a number of directions. Expert witnesses who are engaged in the insurance business and other relevant professionals such as medical practitioners in respect of life assurance, for example, may be expected to provide assistance to the court. MacGillivray states that:

Expert evidence on the materiality of undisclosed facts ought to be admitted whenever it is the usual practice of insurers to be guided by the opinions of that class of experts whose evidence is offered in the case in question.”[337]

3.25                However, the question whether a fact is material or not rests upon the courts as the trier of fact. In Aro Road the Supreme Court overruled Carroll J at first instance when deferring to the opinion of expert witnesses on materiality, and a healthy degree of caution is often demonstrated by judges in relation to issues of moral hazard in particular. Roselodge Ltd v Castle[338] and Aro Road itself provide good examples. The court will require the expert witness to indicate that the fact would be material in the sense that it would influence the decision to take on the risk, and on what terms, or affect the rate of the premium. Evidence that the prudent insurer, if notified that the proposer was suffering from a heavy cold would have led to suspension of a policy was held not material in Harney v Century Insurance[339]

3.26                The Commission has suggested above that in certain circumstances Irish courts have relaxed the duty in recent years. Even if this is so, the boundaries of the duty of disclosure in Irish law are not coherently set out by Irish case-law. The Commission considers that, insofar as the outcome of a case may turn on whether a proposal form was or was not used, as set out in Aro Road, the Irish courts have provided an invaluable starting point, but that a thorough and systematic overhaul of Irish insurance contract law can best be achieved through legislation. In this context, the Commission considers that these adjustments should recognise that the principle of utmost good faith and the duty of disclosure are complementary to one another in most cases. The Commission thus considers that Irish law should reflect the approach to the good faith principle set out by McCarthy J in Aro Road and Keating and by McMahon J in Manor Park Homebuilders.

3.27                The Commission provisionally recommends that legislation should continue to provide that, because the proposer possesses more relevant information than the insurer, the pre-contractual duty of disclosure should continue to be the basis on which a contract of insurance is a contract of utmost good faith.

3.28                The Commission provisionally recommends that legislation should provide that, in respect of all contracts of insurance, an insurer shall not be permitted to repudiate liability on the basis of non-disclosure of material facts of which the insured could not reasonably be expected to have actual knowledge at the time of applying for cover.

D                      Materiality and Inducement

3.29                In Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd[340] the UK House of Lords adopted an inducement test that sits alongside the traditional prudent insurer test for materiality. Thus, to quote from Lord Mustill’s speech, a judgement which is generally regarded as being the most authoritative:

“...there is to be implied in the [Marine Insurance Act 1906] a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using ‘induced’ in the sense in which it is used in the general law of contract.”[341]

3.30                The Marine Insurance Act 1906 does not contain any inducement test and, prior to Pan Atlantic there was no clear view in England on the issue of inducement. Indeed, even experienced insurance judges in England had no clear settled view on this point, Sir Michael Kerr in particular having famously changed his mind on this question.[342] The English law on inducement has been recently summarised by Clarke LJ as follows:[343]

“(i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.

(ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.

(iii) The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.

(iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.”

3.31                There is no clear authority on the issue of inducement in modern Irish law although some dicta in Anderson v Fitzgerald may appear to support the proposition. Such opinion as there is appears against an inducement test. Keane J in Chariot Inns, at first instance, favoured the Australian decision in Mayne Nickless Ltd v Pegler[344] while Kenny J in the Supreme Court also favoured Mayne Nickless, observing that the law did not require an insurer to establish

“that the matter not disclosed did affect (and not merely might have affected) their judgement.”[345]

3.32                Insofar as Chariot Inns suggests that inducement is not part of Irish law, the Commission would favour the adoption of a provision requiring an insurer to show that non-disclosure of a material fact played a part in the insurer’s decision to enter the contract.

3.33                The Commission provisionally recommends that an insurer should be required to show that non-disclosure of a material fact played a part in the insurer’s decision to enter the contract.

(1)                   Materiality: decisive influence or “what the insurer would like to know”

3.34                In the context of the duty of disclosure, where a broker or a team of brokers have been engaged in assisting in the underwriting process, both Chariot Inns and the majority of the judges in Pine Top v Pan Atlantic have favoured a disclosure test that is often criticised as being too favourable to the insurer, unduly uncertain in its scope and impractical in terms of application. To state that a material fact is one that a prudent insurer “would want to know about”, even if the fact would not ultimately affect the underwriting decision, was, in the view of the majority of the Law Lords, the result of section 18(2) of the 1906 Act. This conclusion was heavily criticised by the two dissenting judges: Lord Templeman said that, in his opinion, “the judgment of a prudent insurer cannot be said to be influenced by a circumstance which, if disclosed, would not have affected acceptance of the risk or the amount of the premium.”[346] Lord Templeman went on to comment that if materiality was to be determined by reference to what a broker would have “wanted to know” or “would have taken into account,” even if it would not have affected any decision to take the risk or fix the premium, the law would “give carte blanche to the avoidance of insurance contracts on vague grounds of non-disclosure supported by vague evidence even though disclosure would not have made any difference.”

“If an expert says, ‘If I had known I would not have accepted the risk or I would have demanded a higher premium’, his evidence can be evaluated against other insurances accepted by him and against other insurances accepted by other insurers. But if the expert says, ‘I would have wanted to know but the knowledge would not have made any difference’ then there are no objective or rational grounds upon which this statement of belief can be tested.”

3.35                The central criticism of “the wish to know” test is that it is difficult to challenge on rational and objective grounds: as the law seeks to make the test one which is independent of the actual views or conduct of the insurer, a “wish to know” test seems to inject an unpredictable element into the law. The other dissenting judge, Lord Lloyd, commented that the purpose behind the prudent insurer test was

“to establish an objective test of materiality, not dependent on the actual insurer’s own subjective views. The test should therefore be clear and simple. A test which depends on what a prudent insurer would have done satisfies this requirement. But a test which depends, not on what a prudent insurer would have done, but on what he would have wanted to know, or taken into account, in deciding what to do, involves an unnecessary step. It introduces a complication which is not only undesirable in itself but is also, in the case of inadvertent non-disclosure, capable of producing great injustice.”[347]

3.36                In response to this controversy the Law Commission recommended a two stage test of materiality that one critic has lambasted as an “untested and unserviceable model”[348] that tends to ignore the context in which Pine Top was decided, that is, a large commercial insurance dispute in which the role (and possible downstream liability) of experienced brokers was a central concern. These circumstances should not, in our view, deflect our attention from trying to establish a test of disclosure that takes account of the commercial context – kind of insurance, method of sale or negotiation, role of an intermediary, etc – and yet has a degree of ease of application.

3.37                The Commission invites submissions as to which of the following two definitions of “material facts” should be provided for in legislation: either (a) facts which, in the circumstances, a reasonable insured would know to be highly relevant and should be disclosed; or (b) facts which, in the circumstances, a reasonable insured would know to have a decisive influence on the insurer’s decision in accepting the risk or in setting the level of the premium (the price).

(2)                   Examples of the Duty of Disclosure in Operation

3.38                The duty of disclosure requires the proposer to reveal any matters that would influence the rate of the premium which the underwriter might require the proposer to pay, even if that matter would not strike the proposer as having that effect: Dalgish v Jarvie[349]is often cited as an early authority for this proposition, but Hasson[350] makes the point that this case has nothing to do with insurance and that until Jessel M.R. laid out a broad duty of disclosure in London Assurance v Mansel[351] the weight of opinion was in favour of a fairly narrow duty of disclosure insofar as the duty did not extend to matters that the insurer could discover by an act of fair inquiry and the exercise of due diligence. London Assurance v Mansel concerned a life assurance policy in respect of which the proposer had failed to disclose the fact that an earlier proposal had been declined by another company. Believing that his proposal had been turned down for reasons other than considerations of health, the proposer felt that the matter was not material. This was held not to be a justifiable basis for non-disclosure. There is a significant difference between withholding information on the basis of a belief that the matter is not material from instances where a private individual fails to disclose what he or she does not know. In Economides v Commercial Union[352] the Court of Appeal regarded ‘Nelsonian blindness’ - “failing to disclose what he would have seen if only he had opened his eyes” as an example of actual knowledge and not constructive knowledge.[353]

3.39                It should be noted that the factual issue of what is a material circumstance is a matter of fact and that the onus rests upon the insurer: Joel v Law Union Insurance Co[354] and Kreglinger and Fernau Ltd v Irish National Insurance Co Ltd..[355] In commercial risk insurance the old view that an underwriter is under an obligation to inform himself about the practice of the trade in which he insures, regardless of the generality of the practice in question suggests a narrow perspective on business to business insurance of this kind, and some recent English case-law suggests that a restrictive view of what factors may be regarded as material is taking root. In Meisels v Norwich Union Insurance Ltd[356] failure to disclose a proposer’s various difficulties with the Inland Revenue did not invalidate a property insurance policy. Tugendhat J held that allegations of criminality were not necessarily material. A test of proportionality was held to be applicable. Having regard to the nature of the risk and the moral hazard some matters might be too remote in time or too trivial to require disclosure, whether or not the insured could put forward some persuasive explanatory material, (ie disprove the allegations made against the proposer). However, a distinction is to be drawn between unproved allegations of dishonesty and cases where a claimant has acted dishonestly, (eg preparing false invoices for a commercial prupose even if the purpose has no link with the loss or the claim: Sharon’s Bakery (Europe) Ltd v Axa Insurance UK plc.[357] Such facts are material and must be disclosed.

3.40                In general terms the predominant view of materiality has tended to provide insurers with a convenient means of avoiding policies. Even if a reasonable proposer would not see any connection between the risk and the facts not disclosed, older English cases posit sweeping duties of disclosure in many situations. In Locker & Woolf Ltd v Western Australian Insurance Co[358] failure to disclose the fact that the proposer had been refused motor insurance allowed the company to avoid a policy of fire insurance. In Schoolman v Hall[359] the insured responded to a claim on a domestic contents policy arising out of a burglary by invoking the proposer’s failure to disclose a criminal record, the most recent conviction being some 15 years prior to taking out the policy. In this case (like Regina Fur Co v Bossom[360] where the non-disclosure related to a receiving stolen goods conviction some 20 years previously, a claim being brought for theft on an “all risks” policy) material non-disclosure was made out. The duty of disclosure also attaches to criminal convictions recorded against family members, notwithstanding that a considerable period of time has elapsed since the conviction and the fact that embarrassing matters such as a criminal past are likely to be shunted into a remote part of a person’s consciousness: Lambert v Cooperative Insurance Co[361]. In the area of life insurance, failure to disclose that the life assured was exhibiting symptoms of consumption some four years previously,[362] or had habits or addictions that could be prejudicial to the life of the assured[363] is a material non-disclosure,[364] even in the absence of specific questions being presented.

E                      What the Proposer does not have to disclose

3.41                The Commission believe that many examinations of the duty of disclosure is flawed insofar as there can be an undue emphasis placed upon the nature of the duty and materiality – that is, attention is drawn to the nature of the information – rather than the context in which negotiation has taken place. The correct approach to the duty of disclosure must marry the duty with the exceptions thereto in order to accurately state what must be disclosed.[365] While Carter v Boehm[366] is correctly regarded as creating a duty of utmost good faith that requires full disclosure of material facts, it should be noted that, in the result, the insurer was held not to be entitled to avoid the policy. In a recent article in which Carter v Boehm was given a rigorous re-examination Watterson concludes that the exceptions created by Lord Mansfield suggest that the duty of disclosure is much more limited than is generally thought and that Carter v Boehm is not a pro-insurer case.[367] The exceptions that Carter v Boehm provided to the duty of utmost good faith have been put onto a statutory footing in the form of section 18(3) of the Marine Insurance Act 1906.

3.42                These exceptions have been used very liberally by Irish judges and they afford a variety of counterweights to the duty of disclosure. An insurer who fails to inspect a property for example, or who fails to ask questions relating to a risk will be in danger of being held to have waived the need for disclosure. A specialist in a particular industry who has been put on notice of the existence of facts which he or she, as a prudent insurer should investigate, may be fixed with the knowledge that such an underwriter will be deemed to possess.

(1)                   Knowledge

3.43                Knowledge of any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know.[368]

3.44                MacGillivary treats this exception to the duty of disclosure as being divided into two distinct classes. Firstly, there is “no duty to disclose matters of common knowledge and public awareness of which any reasonably well informed person is presumed to be aware”.[369] In Leen v Hall[370] Ballyheigue Castle County Kerry was insured against damage by riot, civil commotion, war, rebellion and fire. It was destroyed by the IRA in 1921, the proposer failing to disclose that the Crown had used the dungeon to house Sinn Fein prisoners previously. The jury apparently concluded that civil commotion was public knowledge in the County at that time. As in many instances of insurance contract law, the test is easier to state than to apply and the individual facts or each case are critical. The leading case is Bates v Hewitt[371] A confederacy cruiser, The Georgia was dismantled and sold to the plaintiff who obtained insurance from the defendant underwriter in 1864. In 1863 and early 1864 The Georgia had attracted considerable public interest in running blockades mounted by the Union forces and the vessel had been laid up in Liverpool for some time. The underwriter admitted that he had been aware of The Georgia’s earlier exploits, but at the time of granting the policy he did not associate the confederate vessel with the risk being proposed. While the insurer had the means of discovering that the confederate cruiser and the ship being proposed were one and the same, he was under no duty to investigate and the proposer was not discharged from the duty of disclosure. Mellor J in his speech indicated that if a proposer was to be able to calculate just how little was needed in order to discharge the duty, this would be to introduce “a most dangerous principle into the law of insurance”,[372] and the judge stressed that the duty to provide a full and frank disclosure is at the heart of the duty.

3.45                The second sense in which an insurer may not invoke non-disclosure of material fact is where the fact is one that an insurer is deemed to know. An insurer who is active in a specific trade or industry will be deemed to know what the characteristics of the sector are - the kind of goods used and activities that are undertaken respectively. Unusual risks or activities must be disclosed, however, but it is not necessary for the proposer to do anything more than disclose material facts. The proposer is not required to disclose any assessments or opinions or conclusions the proposer has made: insofar as the insurer is able to make these for himself, non-disclosure is not an invalidating factor. In Kreglinger and Fernau Ltd v Irish National Insurance Co Ltd[373] the defendants refused to honour performance bonds taken out in respect of meat processing contracts on the basis that specific undertakings in contracts had not been disclosed to them. In regarding this contract as a contract of utmost good faith, Davitt P considered that no breach of the duty of disclosure had taken place. The President drew a distinction between disclosure of the existence of a contract, the details of which had not been set out, and non-disclosure of material facts:

“While the duty to make full disclosure of all matters material to the risk rests upon the insured, and it does not fall to the insurer to relieve him of that duty, by making inquiries, the converse is to this extent true, that the insured does not have to conduct the insurer’s business for him. Where the contract, the performance of which the insurer is asked to cover, contains a clear intimation that a matter, which is specifically referred to but not fully set out, is of importance, and full information is to be had for the asking, it would be quite unreasonable and unjust to allow the insurer to repudiate liability on the grounds that he did not know and was not told the details of something which he was in fact told about.”[374]

3.46                Other illustrations of this exception to the duty of disclosure are provided by some decisions approved and followed by Davitt P in Kreglinger and Fernau. In The Bedouin[375] the insurer was not told that he was insuring freight under a time charter. The charter contained a standard cesser clause that in the view of the Court was practically universal in time charters and the insurer was held to have been given sufficient information to fix him with notice of the risk. Lord Esher MR remarked that the assured is neither bound to tell the insurer what the law is; nor is he required to tell him of every fact, but only material facts.


(2)                   Factors reducing the risk

3.47                “Any circumstance which diminishes the risk”. The Marine Insurance Act 1906, section 18(3)(a) provides that factors that make a loss less likely to occur need not be disclosed.

In Carter v Boehm Lord Mansfield said that

“the underwriter needs not to be told what lessens the risque agreed and understood to be run by the express terms of the policy…if he insures a voyage, with liberty of deviation, he need not be told what tends to show there will be no deviation.”[376]

In Manor Park Homebuilders Ltd. v AIG Europe (Ireland) Ltd[377] an unoccupied building was the subject of a proposal for fire insurance cover. The proposal failed to disclose that steel shutters to the lower floor had been removed and the windows and doors were bricked up with concrete blocks. McMahon J. held that this was not a material non-disclosure on the basis that this measure rendered the building more, rather than less, secure. MacGillivray remarks that this exception

“may seem obvious, but such a fact does literally fall within the definition of a material fact, since it would influence the underwriter in deciding whether to take the risk or not, or in fixing the premium.”[378]

(3)                   Factors covered by any warranty

3.48                Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. If a material circumstance is not disclosed, but the facts not disclosed are the subject of an express or implied warranty, or an exclusion clause, non-disclosure will not provide a basis for repudiating the contract because the insurer will be entitled to rely upon the contractual promise or limitation in question: Ross v Bradshaw.[379]

(4)                   Waiver

3.49                “Any circumstance as to which information is waived by the insurer”: see the Marine Insurance Act 1906 section 18 (3)(c). This is perhaps the most difficult and unpredictable exception to apply in practice.

3.50                There are several Irish cases in which waiver plays a part in explaining why the contract of insurance remained enforceable, often in conjunction with other factors. For a waiver to be made out however it will be necessary for the insurer to conduct his business in such a way as to intimate that certain facts are not required to be disclosed. The proposer may have disclosed sufficient facts that will require insurers to investigate those surrounding details or circumstances to the prudent insurer standard.

3.51                In the first situation an insurer may specifically state that no duty to disclose is required - over the telephone motor policies are increasingly concluded on this basis. In Aro Road and Land Vehicles v Insurance Corporation of Ireland[380] the minority judgement of Henchy J indicated that where travel or transport insurance was concluded ‘over the counter’ between an agent of the insurer, the proposer being given no opportunity to furnish all material information, the conduct of the insurer will preclude full disclosure. The broader view of the majority was that in cases of over-the-counter insurance, absent fraud, the proposer needs only to answer the questions asked. McCarthy J said that:

“if the insurer were to have the opportunity of denying or loading the insurance one purpose of the transaction would be defeated. Expedition is the hallmark of this form of insurance.”[381]

In Manor Park, McMahon J. took a similar approach, indicating that because the insurer issued the policy for its own reasons (to maintain a good relationship with the proposer’s broker) while failing to issue appropriate documentation and carry out inspections of the property, the insurer was in breach of it’s duty

“of uberrimae fidei in failing to adequately inform itself of the facts and in failing, for improper reasons, to deal fairly with the insured or consider his interests.”[382]

3.52                In cases where a proposal form is used, even McCarthy J in Aro Road conceded that the Chariot Inns approach to the duty of disclosure may still hold sway. The failure to ask a question directed at a particular subject or risk does not amount to a waiver (Roselodge Ltd v Castle[383]) but it is possible that questions posed on the proposal form may imply a waiver of the insurer’s right to obtain information on related matters. It all depends on the questions and context, and some questions may, in particular instances, serve to broaden the duty by reminding the proposer of the common law duty. However, in general, the effect of questions asked will be to limit the duty of disclosure.

“if questions asked on particular subjects and the answers to them are warranted, it may be inferred that the insurer has waived his right to information, either on the same matters but outside the scope of the questions, or on matters kindred to the subject-matter of the questions. Thus, if an insurer asks, ‘How many accidents have you had in the last three years?’ it may well by implied that he does not want to know of accidents before that time, though these would still be material. If an insurer asks whether individual proposers have ever been declared bankrupt, he waives disclosure of the insolvency of companies of which they have been directors. Whether or not such a waiver is present depends on a true construction of the proposal form, the test being, would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?”[384]

3.53                The wording of any declaration on the proposal form may be important. Kelleher v Irish Life Insurance Co Ltd[385] demonstrates that a declaration in a proposal form, and the context in which a policy is offered – in that case as a special promotional deal to a large group of potential customers – can lead to a conclusion that all the insurer is concerned about will be a possibility that the proposer made a misrepresentation. The decision of the Financial Services Ombudsman, in Case 20 of his December 2007 Summary of Complaints, illustrates that the wording of the declaration may be important. Here, a Group Policy covering employees was held to require the policyholder to disclose the fact that a senior employee was seriously ill. The Financial Services Ombudsman held that the questions asked had not limited the duty of disclosure, distinguishing Aro Road and Kelleher on the facts.

3.54                In cases where the proposal form is not completed, some questions being ignored or the space for insertion of an answer being left blank, it may be that the inference to be drawn is that a negative answer was intended. In Roberts v Avon Insurance Co.[386] a question asking about previous losses was not answered; the policy was avoided for fraudulent concealment on the basis that the proposer had effectively answered that there were no previous losses. However, in general terms, if on the face of the proposal form a question is not completed or an answer given is obviously incomplete, an insurer who issues a policy without seeking additional information might be held to waive the requirement of full disclosure, thus having to rely on some other basis for avoiding the policy such as fraudulent concealment or misrepresentation. If, following discovery of the proposer’s failure to disclose all material facts the insurer elects to continue with the contract, the insurer will be held to have affirmed the contract. This will normally require the insurer to unequivocally communicate to the insured an intention to affirm the contract: Peyman v Lanjani.[387] Receipt of a premium, even in a case of fraudulent concealment of a material fact was held to be an act of affirmation in Armstrong v Turquand.[388]

(5)                   The IIF Life Assurance Code of Practice and Ombudsman Adjudications on Non disclosure

3.55                The Irish Insurance Federation Code of Practice on Life Assurance: Duty of Disclosure contains a number of important provisions which are intended to direct IIF Members on how the member is to respond to incidents of non disclosure, misrepresentation and breach of warranty. The Code addresses precontractual issues and avoidance under three headings, Proposal forms, Policies and accompanying documents, and Claims.

3.56                Under the code itself, which is confined to policies of life assurance effected in a private capacity by individuals resident in the Republic of Ireland, a number of provisions are couched in neutral language. Requirements or obligations under this code are not mandatory: words like “should” and “may” appear to condition the binding nature of the Code particularly in relation to the provisions or proposal forms and policies accompanying documents. Nevertheless, the Life Assurance Code provides “best practice” benchmarks that could usefully form the basis for future legislation.

3.57                In relation to proposal forms the Life Assurance Code states:

If the proposal form calls for the disclosure of material facts a statement should be included in the declaration, or prominently displayed elsewhere on the form or in the document of which it forms part: -

(i) drawing attention to the consequences of failure to disclose all material facts that an insurer would regard as likely to influence the assessment and acceptance of a proposal;

(ii) warning that if the signatory is in any doubt about whether certain facts are material, these facts should be disclosed.

3.58                On issues of substance, the Life Assurance Code of Practice seems to suggest that the onus rests upon insurers to elicit information about material facts from proposers by way of specific questions in proposal forms, a proposition that is at variance with the traditional view concerning the duty of disclosure:

In relation to those issues upon which insurers wish to base their underwriting decisions, clear questions should be included in proposal forms on those matters which have been commonly found to be material.

3.59                The code also goes on to state that insurers “will continue to develop clearer and more explicit proposal forms”.

3.60                The Life Assurance Code of Practice also contains a very significant limitation on the asking of questions concerning matters that could be viewed as being within the constructive knowledge of the proposer. The Code states:

Insurers should avoid asking questions which would require knowledge beyond that which the signatory could reasonably be expected to possess.

3.61                These provisions are broadly replicated in the IIF Code of Practice on Life Assurance Selling and in the IIF Code of Practice – Non Life Insurance. While these codes do not appear to be in widespread circulation any longer, it is arguable that even these limited and legally unenforceable statements of good practice reflect an awareness on the part of the Insurance Industry that the duty of utmost good faith requires proposer and insurer to engage in a dialogue and an exchange of information at the precontractual stage. The decisions of the Insurance Ombudsman, under the Insurance Ombudsman of Ireland Scheme reflect this.

·         In a life assurance case where the person to be insured had a serious cardiac condition the agent of the insurer failed to investigate the circumstances or explain the duty of disclosure to the proposer. There was clearly non disclosure of material facts but there was an award of 50% of the sum assured, the non disclosure being mitigated by the agent’s failings.[389]

·         In one case of non disclosure of a previous claims history in relation to household insurance, an accidental non disclosure was condoned and the claim met in the usual way.[390]

·         Due to an ambiguity in one of the questions on the proposal form, a response was held to be a misrepresentation, not non disclosure. The Ombudsman applied a proportionality remedy for the insurer, allowing the insured to recover 70% on a household policy claim.[391]

3.62                The decisions of the Insurance Ombudsman in the 1999 to 2004 period continued to demonstrate a similar approach to non disclosure issues with cases going either way.[392] For example

·         An assured died of cancer 12 months after a life policy came into force. This policy was an upgrade on three other policies that went back for a period of six years. At the time when the first policy was taken out, there was non disclosure of the fact that the proposer was on medication for high blood pressure. That condition had no link with the cause of death but it was probably material.

3.63                The Insurance Ombudsman observed that this kind of situation:

“where the death is due to a condition unrelated to the cause of death, assurers occasionally take the view that a reasonable approach is to pay the sum assured on an ex-gratia basis, or if a significant extra premium has been lost because of the non-disclosure of the pre-existing condition to make some downward adjustment to their payment.”

3.64                The Insurance Ombudsman held that the refusal to pay on the claim was in all the circumstances of the case “too harsh” and she upheld the complaint.[393]

·         A proposal form for life cover asked, “if you have given up drinking alcohol, please state how long since stopping, reason for discontinuing and previous consumption”. The reply, “3 years due to ulcer” was incomplete. Further inquiries would have revealed a history of abuse involving hospitalisation. Death was the result of lung cancer, caused by smoking, a habit which was disclosed on the proposal form. The Insurance Ombudsman noted that:

“the Company went on to admit that there was a degree of disclosure, which should have prompted it to make some further enquiries. In view of the fact that recognising what constitutes a “material fact” may be obvious to an underwriter but not necessarily to a member of the general public, the Company reviewed its position and agreed to admit the claim in amount £30,000.” [394]

·         In one case of non disclosure on an industrial life policy, where medical reports were available, the insured did not exercise the option to send the proposer for a medical examination. Because both parties “were remiss” an ex gratia award was recommended.[395]

3.65                Although the Financial Services Ombudsman’s powers and jurisdiction in relation to the investigation of complaints stand on a statutory footing, there appears to be a significant element of continuity and uniformity of approach to non-disclosure defences. The following examples show that the decisions the Financial Services Ombudsman has reached demonstrate both a willingness to uphold the uberrimae fidei principle and recognise that the principle has implications for proposer and insured.

·         A life assurance death benefit policy was avoided by the insurer when the proposer completed a Declaration of Health Form which asked a number of relevant questions in relation to the proposer’s health and contained a warning that a failure to detail all material facts “may invalidate a future claim”. The insurer referred specifically to the fact that the proposer had not disclosed a consultation with his GP in relation to a serious health problem just two weeks prior to completion of the Form. The Ombudsman found that the Company was entitled to repudiate the claim, stating that:

“the principal characteristic of an insurance contract is that it is a contract of utmost good faith: both the insurance company and the person looking for insurance must exercise utmost good faith in their dealings with each other. If the person looking for insurance fails to disclose circumstances which would influence the decision of the insurance company in fixing the premium or in determining whether or not to accept the risk, the insurance company may be entitled to decline liability under the policy”.[396]

·         In a guesthouse theft insurance case, the proposer had been asked specific questions relating to any previous losses and the consequences of non disclosure had been set out in the Proposal Form. Two questions were incompletely answered. While the facts appear to set out instances of misrepresentation, the Ombudsman referred to the uberrimae fidei principle and the duty of disclosure, holding that the insurer was entitled on these facts to avoid the policy from its inception.[397]

·         In an important ruling on the duty of disclosure in relation to the ill health of an employee to be covered under a Group Policy, the Ombudsman upheld the duty to make full disclosure of all relevant information, rejecting an argument that the medical condition of this high profile executive was a matter of common knowledge.[398]

·         A failure to disclose a medical condition that had arisen out of a road accident that had occurred after the proposal form was completed but before the cover was commenced gave rise to a right to avoid the policy. The Ombudsman stressed that the duty to advise of changed circumstances prior to commencement of cover had been set out on the Proposal Form.[399]

3.66                There are however a number of situations in which the non disclosure of material facts has not been dispositive before the Financial Services Ombudsman. For example, the Ombudsman has been prepared to hold that the non disclosure relied upon was based on illegal or improper inferences drawn by the insurer, or that, despite non disclosure, other mitigating circumstances were present.

·         As a general principle, a decision by an insurance company to decline to meet a claim on the basis that he insured has committed an unlawful act may, in the absence of a finding by a court of law, be an improper inference, the Ombudsman citing articles 34 and 38 of the Constitution.[400]

·         In medical treatment insurance contracts the waiting period or pre-existing condition exclusion may raise issues of non disclosure by the proposer/the proposer’s medical adviser. There are decisions in which the Ombudsman has found in favour of the proposer on the basis that the evidence did not establish the pre-existing condition as a matter of fact.[401]

·         Where the non disclosure can be due to a failure by the insurer’s representative to follow standard procedures, the Ombudsman has observed that an award of compensation may be made because of the way in which the policy was sold. The insurer will be able to avoid the policy itself for non disclosure.[402]

·         Even if an insurer has justifiable grounds for refusing a claim on the grounds of non disclosure of a prior condition, an unrelated risk that materialised led the Ombudsman to award 50% payable on a holiday cancellation policy.[403]

(6)                   Non-Disclosure – the 1957 Reform Proposals in England and Wales

3.67                There have been a number of reviews of English insurance contract law. In the first of these exercises, the Law Reform Committee was asked by Lord Chancellor Simonds to consider the position in law, of insurance companies when using special conditions and exceptions in insurance contracts, as well as the consequences of non-disclosure of material facts by a proposer. The Law Reform Committee issued its report, Conditions and Exceptions in Insurance Policies[404] in 1957. The Committee said that the use of special conditions and exceptions in policies was open to potential abuse insofar as an insurer could invoke a number of technical matters against even an honest and careful proposer in order to avoid indemnifying the proposer in respect of a claim. While the Committee indicated that there were some isolated instances of abuse, the Committee took the view that there was no evidence this was widespread in the industry. The Committee accepted the assurance of the industry that no reputable insurer would invoke a technical defence to defeat an honest claim. Notwithstanding these assurances, the Committee was critical of the fact that the law allowed an insurer a broad discretion in forming an assessment of the honesty of the proposer. Such was the scope of the latitude that express contractual terms could provide to an insurer, the Committee felt that a limited number of provisions could be enacted which would provide some counterbalance, whilst not interfering with the principle of freedom of contract.

3.68                The most important recommendation concerned materiality:

“For the purposes of any contract of insurance no fact should be deemed material unless it would have been considered material by a reasonable insured.”

3.69                The 1957 Law Reform Committee Report was produced at a time when English and Scottish law had no real conception of consumer protection and there was no attempt to distinguish between the position of a proposer acting within his or her private sphere and proposers acting within a business or commercial context. English judges at this time were attempting to protect contracting parties from the effects of draconian or far reaching limitation or exclusion clauses by adopting crude techniques such as the fundamental breach doctrine, and in the area of sales law Parliament ultimately intervened in the form of a number of legislative measures that sought to counteract abuse of the principle of freedom of contract – something the 1957 Law Reform Committee report felt unable to recommend, as a matter of principle. The Law Reform Committee considered that making proposals to counteract unfair contractual practices went beyond the specific terms of reference that the Committee had been given. Nevertheless, the materiality provision, referred to in the paragraph above, has retained its attractiveness as a reform proposal.

(7)                   The English Law Commission’s 1979 Working Paper[405]

3.70                After setting out the nature and scope of the duty of disclosure in English law. The English Law Commission drew attention to a number of criticisms that have been levied against the duty, particularly the Law Reform Committee’s view that the duty may catch honest and careful proposers, and judicial criticisms voiced in 1975 in Lambert v Co-operative Insurance Society Ltd[406] and in earlier cases.

3.71                The provisional conclusion reached by the Law Commission was that the duty of disclosure “should be retained across the board” but the Law Commission went on to distinguish between cases where the insurer did not make use of a proposal form from situations where a proposal form was utilised.

3.72                In cases where no proposal form was used the duty

“should be to disclose those facts which a reasonable man in his circumstances would consider to be material in the sense that they would influence the judgment of a prudent insurer in accepting the risk or fixing the premium. The insured should however only be under a duty to disclose facts which he either knows or which a reasonable man in his circumstances ought to know.”[407]

3.73                The Law Commission explained that the formulation of the test, in particular the reference to “a reasonable man in his circumstances,” sought to direct attention to the circumstances of the particular insured rather than imposing a wholly objective standard of “a reasonable insured”. The standard might depend on “whether the insured was a businessman or consumer”, but no recommendations on the precise range of relevant circumstances were made. Benefits of such a test were said to include dispensing with the need for expert evidence as to what would influence a prudent insurer. In opting for a constructive knowledge factor, such knowledge could be attributed to the reasonable man, the Law Commission sought to clarify the law and bring non marine insurance contract duties into line with the marine insurance duty, as set out by section 18(1) of the Marine Insurance Act 1906.

3.74                In cases where a proposal form was used the Law Commission suggested a radical approach that hinged upon the Commission’s dissatisfaction with the existing law:

“Our provisional recommendation is that if a proposal form has been completed by the insured, insurers should not be permitted to say that a fact outside the scope of the questions asked is material and ought therefore to have been disclosed. Insurers should be taken to have waived the duty of disclosure in regard to that fact.”[408]

3.75                The proposer will be held to have discharged the duty of disclosure and the good faith obligation by providing complete and accurate answers to the questions asked. However, the proposal form must itself contain a statement in respect of the duty and the consequences of non compliance.

3.76                The Law Commission identified two difficulties in relation to the reformulated duty of disclosure vis-à-vis proposal form-based insurance contacts. The first obstacle to effective reform was the possibility that a proposer might well know something that would be material: for example, a proposer has received threats to burn down property from a disgruntled former employee but goes ahead in arranging fire insurance, the threat being outside the ambit of questions put in the proposal form. For this reason the English Law Commission recommended a residual duty “not deliberately to conceal facts which he knows to be material and of which he has actual knowledge.”[409] The second obstacle to effective reform was the possibility that the insurer might ask a general question concerning any facts that a prudent insured should consider relevant. If` this were possible, the reforms would be side-stepped via a contract clause that would fill the gap left by waiver of the duty of disclosure. For this reason the English Law Commission recommended that “an insured should be entitled to ignore any such question and insurers should be deprived of any remedy in respect of false information supplied in answer to any such question”.


(8)                   The English Law Commission’s 1980 Report[410]

3.77                When the Law Commission produced its Report on Insurance Law: Non-Disclosure and Breach of Warranty (October 1980) some significant differences between the provisional recommendations in the Working Paper and the final recommendations became evident. While the analysis of defects in the existing law relating to non-disclosure remained the same, the consultation exercise persuaded the Law Commission to row back from some of the more innovative recommendations, but on the question whether non consumer insurance should be treated differently in a formal sense, the Commissioners held to their view.

3.78                The Law Commission rejected the argument that an attenuated duty of disclosure should be imposed on consumers. Suggestions that the duty should be limited to cases of fraudulent non-disclosure were rejected on the basis that fraud is difficult to prove and that a limited duty would not assist insurers in estimating the risk – after all, this is the primary reason why the duty exists. In this context the Law Commission returned to its core theme, that, save for MAT insurance, the goal of retaining a unitary body of legal rules and contractual practices should be pursued:

“it seems to us that any separate regime for consumers and non-consumers would lead to anomalous results in practice. This can again be illustrated by a shopkeeper who lives above his shop. He applies for fire and burglary cover in respect of both his shop and his flat at the same time: the former application would be made in the course of a business, but the latter would not. It would be odd, to say the least, if the resulting contracts were subject to different vitiating factors.”[411]

3.79                The Law Commission returned to the Law Reform Committee Report from 1957 and proposed that, save for marine insurance contracts, the standard set in that Report should be adopted. Thus:

“for the purpose of any contract of insurance no fact should be deemed material unless it would have been considered material by a reasonable insured.”[412]

3.80                This rejection of the prudent insurer test replicates the view initially set out in the 1979 Working Paper. However, the Law Commission treated the duty of disclosure in a significantly different way when it came to examine the duty of disclosure per se and the duty of disclosure when a proposal form, of whatever kind, is in use. In the Working Paper a much more stark contrast was drawn between these two situations. In the Report the Law Commission set forward a set of recommendations in insurance contracts generally, with a significant gloss being added to the general recommendations when a proposal form was employed by the insurer.

(9)                   The general duty of disclosure in the 1980 Report

3.81                The Law Commission recommended that the duty of disclosure should be modified in the following way:

“A fact should be disclosed to the insurers by the applicant if: -

(i)     it is material to the risk;

(ii)    it is either known to the applicant or is one which he can be assumed to know;

(iii)  it is one which a reasonable man in the position of the applicant would disclose to his insurers, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought.”

3.82                In relation to (i) above, the Law Commission indicated there was no intention to change the definition of materiality, save in relation to the need to expand the range of potential responses by “the prudent insurer”. Rather than decline the risk or charge a different premium, a prudent insurer could well load an excess or exclude some risks via an exclusion clause. Such responses were recommended as a relevant consideration in determining materiality.

3.83                In relation to (ii) above, the Law Commission sought to classify the situation where proposers can be shown not to have known of a particular circumstance – the Law Commission distanced itself from the constructive knowledge epithet used in the Working Paper, and was content to recommend that a proposer:

“Should be assumed to know a material fact if it would have been ascertainable by reasonable enquiry and if a reasonable man applying for the insurance in question would have ascertained it.”

3.84                In relation to (iii) above, the English Law Commission explained that the words, “in the position of the proposer”, had been employed in order to make it clear that the negotiating parties and ultimately the court were not being invited to consider the idiosyncrasies of the proposer – education, intellectual ability etc: the test directs the court “to have regard to the knowledge and experience to be expected of a reasonable person in the position of the applicant. Thus, more would be expected of the large company with an insurance division than of the small shopkeeper.”[413]

3.85                In cases where insurance cover was obtained via the use of proposal forms, the English Law Commission retreated from the position taken in the Working Paper whereby an insurer would be deemed to have waived any need for disclosure, save in respect of specific questions directed at the proposer. Furthermore, general questions were to be impermissible under paragraph 74 of the Working Paper. Following upon representations from the insurance industry, the English Law Commission decided to support a residual duty of disclosure where a proposer would be aware of facts any reasonable person would consider relevant to the risk, citing inter alia the example of the hypothetical proposer for fire insurance who has received arson threats to property. The Law Commission also reaffirmed the legitimacy of using general questions to elicit further information on the basis that the proposer gets the benefit of having his/her attention drawn to the existence of the duty.

3.86                While the Law Commission recognised that this approach left open the central weakness of the existing law – answering specific questions did not supplant the duty to volunteer material facts, the Law Commission felt that the general reforms, and residual doctrines such as waiver, would go some way towards addressing this point. However, the Law Commission suggested that the use of “certain clear and explicit warnings to the insured, presented in a prominent manner, together, with appropriate sanctions wherever such warnings have not been given”[414] afforded a more practical solution than inviting litigation over whether general questions in a proposal form have triggered a new duty of disclosure. The Law Commission went on to provide a number of recommended warnings and suggested that, in general, the appropriate sanction for non compliance will be to deny the insurer the right to rely on any failure by the insured to disclose any material fact, save where the insurer’s failure was not prejudicial to the proposer.

3.87                The 1980 Law Commission Report sought to present a reform model that was essentially unitary in nature. With the exception of MAT insurance, the central duty of disclosure did not distinguish between consumer insureds, and what would now be small to medium enterprise (SME) proposers, and large company/multinational proposers. However, the tests found in several of the recommendations – references to “the position of the proposer” as distinct from a proposer “in his circumstances”, the standard recommended in the Working Paper, had the advantage of allowing the court to differentiate between the individual circumstances of the proposer, the nature and size of the risk, and the circumstances in which the contract was negotiated such as broker involvement.


(10)               Australia

3.88                In ALRC Report No. 20, Insurance Contracts,[415] the Australian Law Reform Commission examined misrepresentation and non disclosure together and concluded that the duty of disclosure required modification on the basis that while the duty can require proposers to reveal facts which, as a reasonable man, the proposer should appreciate as being relevant, the duty may also require disclosure of facts of whose relevance the proposer is rightly ignorant. The ALRC was tempted to suggest that the duty should be re-cast as a duty not to conceal a material fact, avoidance not being avoidable for innocent non disclosure. A residual duty of disclosure was to be balanced by a shift to the “reasonable insured” standard, with a duty being placed on the proposer to give the proposer a clear and prominent warning at the time when the proposal form is filled in. However, the ALRC felt that difficulties of proof made a “fraudulent concealment” standard impractical; the ALRC ultimately recommend that:

“the duty of disclosure should be retained in modified form. An insurer which wishes to rely on innocent non-disclosure should warn the insured of his duty of disclosure before the contract is entered into. The duty should itself extend to facts which the insured knew, or which a reasonable person in the insured’s circumstances would have known, to be relevant to the insured’s assessment of the risk.”[416]

3.89                The Insurance Contracts Act 1984 sought to separate the (post contractual) duty of utmost good faith from any pre-contractual obligations placed upon the proposer. Although Professor Merkin comments that this boundary “has given rise to some difficulty under the 1984 Act”[417] he summarises the redacted duty of disclosure thus:

“As regards disclosure, the assured’s duty of disclosure is retained by s.21, but is subject to three significant restrictions: the test of materiality is no longer based on the prudent underwriter but rather focuses on the prudent assured; under s.21A the duty of disclosure is waived in respect of most forms of domestic policy unless the insurers have asked specific questions; and under s.22 the insurers are under a duty to inform the assured of the duty of disclosure, failing which they cannot rely on it unless the assured has been fraudulent.”[418]

3.90                Any analysis of the duty of disclosure must take account of how the law reacts to non-compliance and the 1984 legislation does this. The major changes to the provisions on remedies involve an analysis of the state of mind of the proposer on completion of the proposal form. Absent fraud, the insurer will in general be put in the position they would have been in had there been no breach of duty: s.28. Pre contractual non disclosure and misrepresentation are normally addressed by reference to the presence or absence of fraud particularly on the question whether the insurer can avoid the policy. Post contractual breaches of the implied duty of good faith are answered by reference to contractual remedies.

(11)               New Zealand

3.91                In contrast to Australia, the New Zealand provisions relating to non disclosure have been somewhat tentative. Some of the provisions in the New Zealand 1977 reform legislation were innovative,[419] but on the duty of disclosure the 1977 legislation was silent. The position in New Zealand is a complex one because life insurance is regulated in a separate statute that goes back to 1908, and the Insurance Law Reform Act 1977 must be seen in the context of innovative New Zealand contract law statutes such as the Contractual Mistakes Act 1977 and the Contractual Remedies Act 1979, statutes that have addressed many of the remedial shortcomings of the common law of contract. Because of the closeness of the Australian and New Zealand insurance markets, the two post 1984 New Zealand Law Commission Reports look closely at Australian reform measures, especially on disclosure.

3.92                In the two subsequent reports the New Zealand Law Commission has sought to restrict the insurer’s common law right to avoid a contract of non disclosure to cases where:

·         the insurer seeks to avoid the contract within 10 working days of the risk attaching, giving an insurer time to inquire into facts, especially on provisional insurance matters;

·         the contract is one of re-insurance;

·         the non disclosure relates to a fact that the proposer either knew, or that, a reasonable person in the circumstances would have known would have influenced the judgment of a prudent insurer in fixing the premium or deciding to take the risk on substantially the same terms;

·         the answer given to a question that was expressly asked is substantially incorrect, because of the non disclosure;

·         In the case of a prospective avoidance, ie the insurer seeks to exercise the common law right before the risk materialises, such a common law right should not be affected.

3.93                The New Zealand Law Commission, in its 1998 Report examined the Australian reforms of 1984 but did not recommend that New Zealand law should be reformed along Australian lines, concluding that these provisions in Australia made the scope of the duty uncertain and that the proportionality remedies “involve difficult assessments