Insurance Law Reform by Degrees: Late Payment and Insurable Interest

AuthorFranziska Arnold‐Dwyer
Publication Date01 May 2017
Insurance Law Reform by Degrees: Late Payment
and Insurable Interest
Franziska Arnold-Dwyer
Over the last 11 years, the LawCommission and the Scottish Law Commission have worked on a
joint project to modernise the law of insurance contracts. Due to the size of the project, the Law
Commissions proceeded in phases and separated out specific issues for legislative reform. Their
proposals have already resulted in the Consumer Insurance (Disclosure and Representations)
Act 2012 and the Insurance Act 2015 which brought about significant changes for consumer
and non-consumer insureds and insurers alike. This paper examines twofur ther areasof refor m:
the introduction of an implied term about payment of insurance claims by insurers within a
reasonable time and a statutory restatement of the doctrine of insurable interest. It considers the
old and new substantive law and provides an insight into the reform process.
English insurance law is in the process of undergoing a gradual transformation
from a complex body of law whose main principles were shaped by the needs
of sea-trading commercial parties in the 18th and 19th centuries to a modern
insurance law fit for consumers and business needs in the 21st century. Thus, the
re-balanced the approach to the provision of information by consumer insureds
to their insurer before or upon the conclusion of the contract of insurance.
The Insurance Act 2015, which came into force on 16 August 2016, has
reformed the pre-contractual duty of disclosure of non-consumer insureds and
the law on insurance warranties and fraudulent claims for consumer and non-
consumer insureds alike. But the reform process has not been holistic: not all
aspects of insurance law are being reformed or restated and there will be no
all-encompassing Insurance Code in the tradition of the Marine Insurance Act
1906, or in the image of the Australian Insurance Contracts Act 1984. To date,
reforms have been targeted at 1) particularly harsh principles of insurance law
and 2) relatively uncontroversial matters that had already been market practice
or established Financial Ombudsman Service jurisprudence.
This paper looks at two further areas of reform, liability for late payment
of insurance claims and the doctrine of insurable interest. The current law
does not penalise insurers who procrastinate in payment of valid claims. The
doctrine of insurable interest has been in the spotlight for being (mis)used as a
tactical weapon in the arsenal of insurers to escape liability for paying claims.
This paper examines the reasons why these two areas have been identified
PhD Researcher, Queen Mary University of London, and Solicitor of the Senior Courts of England
and Wales.
C2017 The Author.The Moder n Law Review C2017 The Modern Law Review Limited. (2017) 80(3) MLR 489–509
Published by John Wiley& Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
Insurance Law Reform Late Payment and Insurable Interest
as being in need of reform by the Law Commission and the Scottish Law
Commission.1In relation to late payment of claims, the paper will trace the
reform and legislative processes which highlight how consultation with, and
lobbying by, the insurance industry influenced the substance of the new law,
the reform timetable and the choice of legislative procedure. From 5 May
2017, all contracts of insurance entered into will include an implied term that
the insurer must pay any valid claims within a reasonable time. This paper
will reflect on what impact the late payment reform is likely to have in the
As regards the doctrine of insurable interest, the Law Commissions have
put forward proposals for an Insurable Interest Bill which would clarify and
rationalise the existing law without making any radical changes. A review of
the Law Commissions’ papers and reports indicates that the reform process has
been shaped by formal consultations and informal interaction with stakeholders
and by finding consensus-based solutions to the problems with the doctrine
of insurable interest under the current law. It is argued that this approach has
not resulted in a comprehensive overhaul of the law on insurable interest. In
particular, the current reform proposals fail to consider more thoroughly the
role of insurable interest in the definition of contracts of insurance and do not
address the insurer’s responsibility in taking steps to ascertain the prospective
insured’s at the pre-contractual / selling stage. In relation to both reforms it
is questioned whether by singling out specific issues for reform in isolation,
instead of opting for a holistic overhaul of insurance contract law, the impact
on other principles of insurance law, insurance regulation and market practice
may be overlooked.
Most contracts of insurance, other than life and accident insurance, are contracts
of indemnity. The insurer undertakes to hold the insured harmless against loss
by an insured peril or perils specified in the policy.2The characterisation of
the insurer’s ‘hold harmless’ obligation as the primar y obligation in indemnity
insurance has three consequences: first, the insured’s cause of action arises if
a loss caused by an insured peril is sustained.3Secondly, the insurance claim
by the insured is a claim for unliquidated damages,4and not a claim in debt.
Thirdly, if the insurer refuses or fails to pay a valid claim, the insurer is not liable
to the insured for any damages over and above the amount of the indemnity
1 For ease of reference, the author will refer to the ‘Law Commissions’ denoting both the Law
Commission and the Scottish Law Commission in the text of this paper, unless specifically stated
2Secony Mobil Oil Inc vWest of England Shipowners Mutual Insurance Association (The Padre Island)
[1991] 2 AC 1; Sprung vRoyal Insurance (UK) Ltd [1997] CLC 70 (CoA); Vent o u r is vMountain
(The Italia Express) (No 3) [1992] 2 Lloyd’s Rep 281 (Comm Ct).
3Photo Production Ltd vSecuricor Transport Ltd [1980] 1 Lloyd’s Rep 139 (HL).
4Sprung vRoyal Insurance (UK) Ltd n2above;Ve n t o ur i s vMountain (The Italia Express) (No 3) n2
490 C2017 The Author. The Modern Law Review C2017 The Modern Law Review Limited.
(2017) 80(3) MLR 489–509

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