If a complete and definite offer has been accepted in accordance with the rules discussed above (2), prima facie a insurance contract has been validly concluded. Exceptions occur when a “contract” is vitiated by illegality.108
If the insurance is illegal in the sense of contrary to law or to public policy and this is (or should be) obvious to the party who seeks to enforce the contract, it will not be enforced. If the illegality is not obvious, the position is the same109 but the illegality must be established by the party that objects to enforcement, usually the insurer—as if the illegality was an express exception to cover.110
Like other kinds of insurance, liability insurance may be illegal because the “insured” lacks insurable interest and, therefore, public policy does not allow that person to contract the insurance.111 Alternatively, the insurance may be illegal because it is intended to promote an unlawful object; or because, although that was not the intention, enforcement in the particular case would have that effect. The object is unlawful, in the case of liability insurance, when indemnity softens the effect of consequences which public policy requires that the insured should bear (personally), notably sanctions of the criminal law,112 or where the granting of cover amounts to unlawful discrimination.113
A contract of insurance is illegal, if the insured lacks an insurable interest in what has been purportedly insured. In order to have an insurable interest, a person must have, first, a “relation in fact” to the subject-matter of the insurance giving rise to an economic interest; and, second, a “legal or equitable relation” to the subject-matter insured.114
To define insurable interest in words which will apply in all situations and to all contracts of insurance is difficult, as was once demonstrated by Waller LJ.115 Much depends on the context. For example, reinsurance was once thought to be liability insurance. The thought was that reinsurers cover the liability of primary insurers to meet their obligations to pay policyholders, for reinsurers are not liable to pay “until the amount of the reinsured’s liability has been ascertained by judgment, award or settlement”;116 this remains true. Today, however, the established view is that reinsurance is not insurance of “the primary insurer’s potential liability or disbursement” but “double cover”: “an independent contract between reinsured and reinsurer in which the subject-matter of the insurance is the same as that of the primary insurance, that is to say, the risk to the ship or goods or whatever might be insured.”117 Reinsurance claimants prove not what they paid to primary policyholders but the loss suffered by the latter. The “double cover” rule applies to reinsurance of liability insurance.
The time when the insured must have an interest is the time of loss and not, although it will usually be the case, the time of contract. Interest at the time of contract would be necessary only if the Life Assurance Act 1774 applied to liability insurance. True the Act was applied to reinsurance in 1922 in Re London County Commercial Reinsurance Office Ltd,118 however, only indirectly. The court noted that “the reinsurers can raise all defences which were open to the reassured against the original assured” and concluded that if “it once be established that the original insurances were illegal, it follows … that all the reinsurances are tainted with that illegality and are themselves illegal and void.”119 Having found that the underlying policies were wagering policies within the meaning of section 1 of the Act of 1774, it followed that reinsurance was unenforceable too.120 If, however, as will be suggested here, the subject-matter of the cover lies in the assets of the insured, this is not a problem: the 1774 Act does not apply to liability insurance.121
In the case of fire insurance, the subject-matter is the property insured against loss by fire. In the case of liability insurance, the subject-matter is less obvious. What is in essence at least partly liability insurance may be described as all risks insurance or even property insurance; there is “no hard and fast rule that because the nature of an insurable interest relates to a liability to compensate for loss, that insurable interest could only be covered by a liability policy rather than a policy insuring property or life or indeed properties or lives”; and the “question whether a policy embraces the insurable interest intended to be recovered is a question of construction.”122 The court has broadened its approach.123 Be that as it may, there is little doubt that the law allows people to insure their liability;124 but what does that mean?
As the subject-matter of insurance, surely there is much sense to say, as was once said in Switzerland,125 that the subject-matter lies in the assets of the insured that are covered against loss in the event of the insured’s being liable to third parties. This description seems to match the classic description of insurable interest by Lord Eldon as “a right in the property, or a right derivable out of some contract about the property, which in either case may be lost on some contingency affecting the possession or enjoyment of the party.”126