Life Insurance Legal Principals of Life Insurance

Author: Luke Ashworth

This is intended as a very brief introduction to this subject. First of all a life insurance policy is a contract between the insured and the insurer. In English law there are five basic requirements for a contract which are as follows,

- Offer and acceptance;
- Consideration;
- Capacity to contract;
- Insurable interest;
- Consensus ad idem, which in English means a consensus of agreement. You were both contracting about the same thing.

Offer and acceptance. In English law under a contract there is offer and acceptance. One party makes an ‘offer’ and the other party accepts that offer without qualification. If the acceptance is qualified it simply becomes an alternative offer. There is also under English law something called an invitation to treat. That is basically an advertisement. Insurers issue out their prospectus and brochures. They are not offers in their own right. You could not go into the insurer’s office and hand over your cheque for the policy shown in the advertisement.

In life insurance the insurer usually makes the offer to contract by telling the insured that he has accepted the proposal and is willing to offer insurance at a set sum, based on a set policy and subject to the first premium being paid. The insured then usually accepts that offer when the insured pays the first premium.

Usually when a life insurer make their offer they make it subject to the first premium being paid by a certain date and that until the first premium is paid the life to be insured should remain in the same state of health.

So if once you get the insurers offer, your health deteriorates before you pay the first premium then the life insurance contract may not be valid. You would need to discuss that with your insurer.

Consideration. There needs to be consideration on both sides. This applies to all contracts which are not under seal. The insured’s consideration is the first payment of premium and then after that the continuing payment of premium. The insurer’s consideration is the offer to pay out the sum insured if the life insured was to die during the policy period.

Capacity to contract. Both parties must be able to contract. Minors under the age of 18 years are restricted by the Family law Reform Act 1969. Minors under the age of 18 can enter into a contract but subject to certain restrictions the contract can not be enforced against them. That is why most insurers will not issue a policy to someone under the age of 18.

Capacity to contract. Both parties must be able to contract. Minors under the age of 18 years are restricted by the Family law Reform Act 1969. Minors under the age of 18 can enter into a contract but subject to certain restrictions the contract can not be enforced against them. That is why most insurers will not issue a policy to someone under the age of 18.

The Life Insurer must be authorised under the Financial Services and Markets Act 2000 in order to issue policies of life insurance in the England.

Insurable interest. The life insurance proposer, the person taking the policy out, must have an ‘insurable interest’ in the Life Insured. Prior to the Life Insurance Act 1774 this was not the case and many people would take outlife insurance policies on famous or notorious people as a form of gambling. The Life Insurance Act 1774 put a stop to this. The act requires the proposer to have an insurance interest in the life insured and that the level of insurance taking out must not exceed the value of that insurable interest.

Courts will usually hold that a person has an unlimited interest in their own life and that of their spouse. In an 1854 court case called Dalby v India and London Life Insurance Co it was held that a life insurance policy was not a policy of indemnity, and so the insurable interest only had to exist when the policy was first taken out.

Courts will usually hold that a person has an unlimited interest in their own life and that of their spouse. In an 1854 court case called Dalby v India and London Life Insurance Co it was held that a life insurance policy was not a policy of indemnity, and so the insurable interest only had to exist when the policy was first taken out.

In life insurance this area of law has been extended by the idea of ‘utmost good faith’. Courts believe that the insured has all the knowledge about themselves and the insurer has none. The insured therefore under English Law has the duty to advise the insurer of all material facts.