The Doctrine of Insurable Interest in Life Assurance
In the previous chapter we saw that wagering by insurance was viewed as a pernicious practice and that this resulted in a series of statutes aimed at curbing the enforcement of insurance contracts where the insured lacked insurable interest. Using insurance as a subterfuge for wagering was by no means restricted to property insurance. In life insurance it was not uncommon to insure the lives of those accused of capital offences such as murder. The nature of the wager related to the odds of whether the accused person would be convicted and executed. It was also common practice to insure the lives of prominent people, particularly where such a person had been reported as suffering from a serious illness:
 Thomas Mortimer, Every Man His Own Broker (London, WJ & J Richardson, 1801)
‘Another manner of spending the vacation formerly was, in insuring on the lives of such unfortunate gentlemen, as might happen to stand accountable to their country for misconduct. I am not willing to disturb the ashes of the dead, or I could give an instance of this cruel pastime, the parallel of which is not to be met within the history of any civilised nation: but I hope we shall hear no more of such detestable gaming…
A practice likewise prevailed of insuring the lives of well-known personages, as soon as a paragraph appeared in the newspapers announcing them to be dangerously ill. The insurance rose in proportion as intelligence could be procured from the servants, or from any of the faculty attending, that the patient was in great danger. This inhuman sport affected the minds of men depressed by long illness; for when such persons, casting an eye over a newspaper for amusement, saw that their lives had been insured in the Alley…they despaired of all hopes, and thus their dissolution was hastened.’
 Gilbert v Sykes (1812) 16 East 150
[Having discussed the probability of Napoleon Bonaparte’s assassination over dinner, the claimant entered into a wager whereby he agreed to pay the defendant one hundred guineas on 31 May 1802 in return for which the defendant agreed to pay him one guinea a day so long as Napoleon Bonaparte lived. The daily payments were met for some eighteen months but on the 25 December 1804 the defendant stopped paying. The plaintiff sued claiming £2,296 being the sum outstanding for non-payment of the instalments].
Lord Ellenborough CJ:
‘where the subject-matter of the wager has a tendency injurious to the interests of mankind, I have no doubt in saying that it ought not to be sustained…I think that an action should not be countenanced upon a subject in which the parties had not only no interest other than what they created to themselves by the bet, but the public have no interest to restrain it. Therefore founding my opinion upon all the circumstances in evidence in this case, I consider it as a wager against public policy and of immoral tendency…’
Le Blanc J:
‘It has been often lamented that actions upon idle wagers should ever have been entertained in Courts of Justice: the practice seems to have prevailed before that full consideration of the subject which has been had in modern times…and it is now clearly settled that the subject-matter of a wager must at least be perfectly innocent in itself, and must not tend to immorality or impolicy. Then, can a wager upon the life of a person, whether enemy or friend, founded upon the probability of its terminating by assassination or other violent death, be said to be innocent in itself? Such a wager does not come within the range of any of those cases where wagers have been sustained…in my opinion it is both impolitic and immoral to bet concerning the life of a Sovereign, whether he shall come to his death by assassination or other violent means.’
‘The discussion which has been had of this case has strongly illustrated the inconvenience of countenancing idle wagers in Courts of Justice: it occupies the time of the Court, and diverts their attention from causes of real interest and concern to the suitors: and I think it would be a good rule to postpone the trial of every action upon idle wagers till the Court had nothing else to attend to. This is the case of a mere idle wager, in which the parties had no particular concern. It was induced by a conversation, not upon the probability of the person’s death within a given time, in the course of nature, but by assassination or other violent means: the amount of the sum given shews that his death by violent means was in the contemplation of the wagering parties; and that, I think, for the reasons which have been stated, makes the wager both immoral and impolitic’.
As we saw in relation to property insurance, wagering aside, the policy underlying insurable interest was aimed at addressing the moral hazard that those who lack interest might succomb to the temptation to bring about the loss. In the context of life insurance, the anxiety was to prevent the wilful destruction of life. A modern and colourful illustration is afforded by the facts of an American decision:
 Rubenstein v Mutual Life Insurance Co of New York United States District Court, Eastern District of Louisiana 584 F Supp 272 (1984)
[The facts appear from the judgment].
Charles Schwartz Jr., District Judge:
‘Plaintiff, Alan M. (“Mike”) Rubenstein, instituted this action to recover the proceeds of a $240,000 credit life insurance policy issued by defendant, The Mutual Life Insurance Company of New York (MONY), insuring the life of Harold J Connor, Jr. Connor died on 6 November 1979. Plaintiff is the beneficiary and owner of said policy; MONY claims that plaintiff is not entitled to recovery under the policy for reasons that are the subject of this suit, and refunded to plaintiff the premiums paid by plaintiff.
Plaintiff is a resident of Louisiana; defendant is a corporation incorporated and domiciled in New York, authorised to do and doing business in Louisiana. Prior to, during, and after July 1979, plaintiff was employed as a fulltime owner and operator of a taxi cab associated with the United Cab Company of New Orleans. After attending a local seminar, he purportedly became interested in starting and developing “TV Journal”…to be circulated free of charge in St Tammany Parish. Revenues were to be derived solely from paid advertisements contained in the publication. In late July 1979, Connor contacted plaintiff through the Louisiana Unemployment Commission in Slidell, where plaintiff had placed a notice requesting assistance in developing and operating the “TV Journal.” On 7 August 1979, shortly after their initial meeting, plaintiff and Connor entered into a partnership agreement making Connor a 25 per cent partner in the “TV Journal” business until 1 January 1980; thereafter, plaintiff would “grant” Connor a franchise for the publication of a tabloid in the St Tammany Parish area to be entitled “TV Journal.” Under the franchise aspect of the agreement, Connor was required to pay plaintiff $1,000 per month for 20 years beginning on 1 February 1980, but could terminate the agreement at any time upon 60 days notice without penalty.
Also on 7 August 1979, plaintiff and Connor met with Earl Moreau, a MONY agent, regarding life insurance on Connor. Based on discussions between plaintiff, Connor and Moreau concerning plaintiff’s newly established business relationship with Connor, Moreau recommended, and plaintiff applied for, a $240,000 credit life insurance policy [covering the risk of a debtor dying before repaying a debt to the insured creditor] on Connor’s life, who was then 23 years old. As of the date of application, Connor had done little if any work for the “TV Journal” business; and no edition of it had been published, and no advertisements sold. No evidence was introduced to demonstrate the need for this fledgling and undercapitalised business to expend its limited resources for insurance on the life of an apparently healthy 23 year old man.
In providing information for the insurance application, plaintiff and Connor represented that Connor’s annual income at the time of the application was $26,000 when in fact Connor’s sole source of income was the “TV Journal” business, from, which he received approximately $100 to $150 a week. Had MONY known Connor’s actual income, it would not have issued the policy herein since an insured earning such limited income has no reasonable prospect of repaying a debt of $1,000 per month for 20 years without the life insurance…
The evidence further establishes that when plaintiff applied for the insurance policy, and when Connor died on 6 November 1979, Connor was not at all indebted to plaintiff because Connor was not obligated to begin making payments to plaintiff until 1 February 1980.
Based on the information before it, MONY agreed to issue the policy on 28 September 1979; it was thereafter delivered to plaintiff on 6 October 1979.
According to plaintiff’s testimony, Connor was to do all the work in preparing the “TV Journal” for publication, while plaintiff was to provide the capital. However, Connor’s education was limited to high school, and prior to 7 August 1979, he had no experience in publishing and only limited experience in sales, having worked for approximately two months without success as a furniture salesman, according to Paula Andrus, Connor’s girlfriend at the time. Ms Andrus also attested to Connor’s inability to balance his own checking account, further evidence of his lack of business skill.
Plaintiff, too, had no prior experience in publishing or in selling advertisements, his only sales experience of any nature having occurred “years” ago, by his own admission. Plaintiff did observe the operations of “TV Tempo” for the purpose of learning the operations of such a weekly, and prior to 7 August 1979, had taken some preliminary steps in furtherance of the “TV Journal” (eg. contacting printers, obtaining proofs and TV listings, and figuring possible advertising rates). But, after that date, plaintiff’s involvement in the operations of the “TV Journal” was nominal at best; he testified that he did not even know whether Connor had sold a single advertisement, and plaintiff himself had made only a few calls for that purpose. Plaintiff also stated that he was not aware of what bills Connor was paying, or how much he was paying Connor in salary. As further evidence of his own lack of business acumen, plaintiff explained the origin of the provision requiring Connor to pay him $1,000 per month beginning 1 February 1980, by saying that they “both came up with the idea of $1,000,” with no further justification for the projection.
Regarding the financing of “TV Journal,” plaintiff explained that he bought some furniture for the office, which was located in Connor’s apartment, and that he paid Connor’s salary and “whatever” else Connor needed. The evidence indicates, however, that at most $5,000 was available as of late August, 1979, to develop the “TV Journal” until it became profitable or generated significant advertising revenues. Most of the $5,000 apparently originated from a $5,433 loan issued by the Bunkie Bank & Trust Company on 22 August 1979, for which Connor signed the note and plaintiff provided the collateral. Of the $5,433, however, $1,400 was used by plaintiff to pay off a previous personal loan from Bunkie Bank & Trust, and $1,000 was given to Connor for his personal use. Disposition of the remaining $3,000 is unclear, although it appears that the money was deposited in plaintiff’s personal account with the Hibernia National Bank, which account he used to pay Connor’s salary. This account showed a balance of $1,246 on 7 November 1979, which was immediately before Connor had planned to print the first issue. Plaintiff’s only other account was one he maintained with Bunkie Bank & Trust from November 1976 to November 1979. It had an average balance of $1,500 to $1,800 before it was closed. The “TV Journal” account at the Fidelity Bank & Trust Company shows a balance that was overdrawn twice in a two month period…
In addition, the failure of “TV Journal” to presell any advertisements or to obtain any advertising contracts further impaired any likelihood of success; without presold advertisements, the business would have incurred substantial losses during its first six months, from which it would have had little chance of recovering. Given this slim chance of reaching the breakeven point, Connor would have had no realistic possibility of being able to cover the $1,000 monthly payment to plaintiff.
The bizarre circumstances surrounding the tragic death of Harold J Connor, Jr, even after lengthy testimony from five witnesses who were present when Connor was shot, are still largely in dispute and somewhat irreconcilable. What was established conclusively at the trial was as follows: Connor was part of a deer hunting party that included plaintiff, plaintiff’s stepchildren, David and Darryl Perry, and the Perrys’ first cousin, David Kenney. They left the New Orleans area on 5 November 1979, and arrived at plaintiff’s parents’ home in Bunkie later that day. Thereafter, plaintiff’s brother, Larry Rubenstein, and a friend of his, Michael Fournier, also arrived at the home of plaintiff’s parents. Plaintiff claims that he had no prior notice of his brother’s and Fournier’s visit. The latter joined the hunting party early the following morning. The group travelled in plaintiff’s car on a dirt road surrounded by woods to a location selected the previous evening when plaintiff visited his uncle and cousin.
When the party arrived at the location, plaintiff distributed the firearms, ammunition, and orange hunting vests to each member of the group. Thereafter, Kenney locked the car keys inside the car, and the group searched for wire with which to open the door lock. Soon after Connor was able to open the front door on the passenger side, Foumier, who was standing less than 10 feet behind Connor, discharged his gun, a single shot, 12 – gauge shotgun. The pellets struck Connor in the back, slightly above the waist, and travelled generally in a lateral path through his body.
Fournier claims that the gun discharged when he tripped, and Darryl Perry, in corroborating his testimony, claims that the gun discharged about when the butt was close to the ground and while the barrel was pointed diagonally upward in the direction of Connor. This testimony, however, was flatly contradicted by the forensic scientist and pathologist, who concluded that in view of the lateral path of the pellets through Connor’s body above his waist, the barrel of the gun must have been parallel (horizontal) to the ground and at waist level at the time of discharge. Further, because of its safety device, in order for the gun to have been discharged, it must have been loaded, cocked, and the trigger pulled. The firing pin could not have been activated just by the gun striking the ground.
The testimony of the witnesses raises more questions than it answered, in particular: why did Connor go deer hunting when according to his mother, girlfriend and cousin, he had never been hunting before and was disgusted by the idea of killing animals, and did not pack the proper clothing? And why did Fournier load his gun, cock it, have his finger on the trigger, and have it pointed at Connor? We conclude that examined in the light most favorable to the plaintiff, his handing a shotgun and ammunition to an individual who was, according to the plaintiff, previously unknown to him, and who was, it was later learned, a convicted felon then on probation and prohibited from carrying firearms, constitutes conduct falling well below the standard of care required of a reasonable person in possession of firearms. Examining the evidence not in the light most favorable to plaintiff but instead with the slightest circumspection leads to the distasteful conclusion that Harold J Connor, Jr. was killed under highly suspicious circumstances, circumstances that suggest something far more sinister than a mere “accident.”
CONCLUSIONS OF LAW
…Defendant interposes three separate and independent defenses to plaintiff’s claim that he is entitled to recover under the $240,000 credit insurance policy insuring the life of Harold J Connor, Jr: (1) that defendant was induced to execute the policy by material misrepresentations made with the intent to deceive the insurer; (2) that plaintiff as the beneficiary lacks an insurable interest in the life of the insured; and (3) that plaintiff was culpably negligent in contributing to the death of the insured, and that such negligence bars his recovery under the policy. For the purposes of this decision, we need only consider defendant’s first two defenses, and make no ruling on the third.
Under Louisiana law, a life or health insurance policy is null and void if the insurer is induced to execute the policy by misrepresentations in the application that were made with the intent to deceive and if the misrepresentations materially affected the insurer’s decision to accept the risk or increased the hazard assumed by the insurer…
Consistent with the foregoing findings, wherein we found that plaintiff and Connor misrepresented Connor’s salary and failed to disclose the termination provision; that they knew of the falsity and the materiality of their misrepresentations; and that each of said misrepresentations materially affected the insurer’s decision to accept the risk; we find that the insurance policy in question is null and void under La RS 22:619(B). We further conclude that each of the misrepresentations constitutes a separate and independent ground for invalidating the insurance policy under said statutory provision [as to non-disclosure and misrepresentation see chapter 6].
Louisiana law also requires that a beneficiary who procures an insurance policy upon the life of another have an insurable interest in the life of the insured. La RS 22:613(A). The absence of any insurable interest on the part of the beneficiary who procures the policy invalidates the policy, and the insurer’s only liability is to return the premiums paid…The beneficiary has the burden of proving the existence of the insurable interest.
A beneficiary who is not related by blood or marriage to the insured does not have an insurable interest unless he has a reasonable expectation of pecuniary gain from the continued life of the insured, or reasonable expectation of sustaining loss from his death…
Where the beneficiary’s insurable interest is a debt allegedly owed by the insured, as is herein claimed, the amount of the life insurance at the time the policy was written and at the time of the insured’s death must be proportionate to the debt actually owed by the insured; if the value of the life insurance is grossly disproportionate to the amount actually owed, the beneficiary lacks an insurable interest, and the policy is null and void…Since we earlier held that Connor was not indebted to plaintiff either when the policy was written or when he died, the amount of the insurance is grossly disproportionate to the amount of the debt. Even if we consider the amount that Connor could have owed under the terms of the partnership agreement — $2,000 — this too is far exceeded by the face value of the policy. Accordingly, we conclude that plaintiff lacks an insurable interest in the policy herein considered.
Should we characterise the beneficiary’s expectation as a pecuniary gain arising from his business partnership with the insured, rather than as a debt arising from their relationship, our findings of fact lead to only one reasonable conclusion: that an expected pecuniary advantage of $240,000 in profits over 20 years derived from “TV Journal” is grossly disproportionate to the amount Connor could have paid plaintiff on a monthly basis given the inexperience of Connor and plaintiff and the vast undercapitalisation of the venture. We therefore hold that plaintiff lacks an insurable interest under this theory too…
Because an insurable interest is required by law in order to protect the safety of the public by preventing anyone from acquiring a greater interest in another person’s death than in his continued life, the parties cannot, even by solemn contract, create insurance without an insurable interest; further, the insurance company cannot waive or be estopped from asserting lack of insurable interest by its conduct in issuing the policy…
Considering the foregoing, we hold that the insurance policy from which plaintiff claims he is entitled to recover is null and void, and thus that his claim against defendant is hereby dismissed.’
It was commented in chapter 6 that the Life Assurance Act 1774 sought to address both the moral hazard and the societal waste caused by the prevalence of wagering under the guise of life insurance by requiring the proposer to have insurable interest in the life insured [the relevant provisions are given in chapter 6 but for ease of reference they are again reproduced here]:
 Life Assurance Act 1774 (14 Geo III, c 48)
An Act for regulating Insurance upon Lives, and for prohibiting all such Insurances except in cases where the Persons insuring shall have an interest in the Life or Death of the Persons insured.
1. No insurance to be made on lives, etc., by persons having no interest, etc
Whereas it hath been found by experience that the making insurances on lives or other events wherein the assured shall have no interest hath introduced a mischievous kind of gaming: For remedy whereof, be it enacted by the King’s most excellent Majesty, by and with the advice and consent of the lords spiritual and temporal, the commons, in this present Parliament assembled, and by the authority of the same, that from and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person, or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall have not interest, or by way of gaming or wagering: and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.
3. How much may be recovered where the insured hath interest in lives
And…in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the insured in such life or lives, or other event or events.
7.2 Time When Interest Must Be Shown
If section 1 and section 3 of the 1774 Act are read together, it might be assumed that an insured would need to demonstrate interest at the time of effecting the policy and at the time of the loss (as is the case with indemnity insurance; see Godsall v Boldero (1807) 9 East 72 discussed by Merkin, below ). However, it was held in Dalby that interest must be shown at the time of effecting the policy only:
 Dalby v The India and London Life Assurance Co (1854) 15 CB 365
[The life of the Duke of Cambridge had been insured with Dalby’s company, Anchor Life, for £3,000 under four policies. The company reinsured the risk to the extent of £1,000 with the defendants. When the insured, Wright, cancelled the policies Anchor nevertheless maintained the reinsurance policy until the Duke’s death at which time Dalby claimed. The defendants refused to pay arguing that Dalby’s interest in the Duke’s life ceased when the insured cancelled the policies. It was held that life insurance is not a contract of indemnity and the requirement of insurable interest need only be shown at the date of effecting the policy].
‘It may be conceded for the purpose of the present argument that the [cancellation by Wright]…totally put an end to that interest which the Anchor Company had when the policy was effected, and in respect of which it was effected: and that, at the time of the Duke’s death, and up to the commencement of the suit, the plaintiff had no interest whatever…
This raises the very important question, whether, under these circumstances, the assurance was void, and nothing could be recovered thereon…
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 when bonuses have been given by prosperous offices) the same, on the other. This species of insurance in no way resembles a contract of indemnity…
The statute [the Life Assurance Act 1774 (14 Geo III, c 48)] recites, that the making insurances on lives and other events wherein the assured shall have no interest, hath introduced a mischievous kind of gaming: and, for the remedy thereof, it enacts “that no insurance shall be made by any one on the life or lives of any person or persons, or on any other events whatsoever, wherein the person or persons for whose use and benefit, or on whose account, such policy shall be made, shall have no interest, or by way of gaining or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.”
As the Anchor Assurance Company had unquestionably an interest in the continuance of the life of the Duke of Cambridge, — and that to the amount, of £1,000, because they had bound themselves to pay a sum of £1,000 to Mr Wright on that event, — the policy effected by them with the defendants was certainly legal and valid, and the plaintiff, without the slightest doubt, could have recovered the full amount, if there were no other provisions in the Act.
This contract is good at common law, and certainly not avoided by the first section of the 14 Geo III c 48. This section, it is to be observed, does not provide for any particular amount of interest. According to it, if there was any interest, however small, the policy would not be avoided.
The question arises on the third clause. It is as follows [the judge recited the provision]…
Now, what is the meaning of this provision?
On the part of the plaintiff, it is said, it means, only, that, in all cases in which the party insuring has an interest when he effects the policy, his right to recover and receive is to be limited to that amount; otherwise, under colour of a small interest, a wagering policy might be made to a large amount, — as it might if the first clause stood alone. The right to recover, therefore, is limited to the amount of the interest at the time of effecting the policy. Upon that value, the assured must have the amount of premium calculated: if he states it truly, no difficulty can occur: he pays in the annuity for life the fair value of the sum payable at death. If he misrepresents, by overrating the value of the interest, it is his own fault, in paying more in the way of annuity than he ought; and he can recover only the true value of the interest in respect of which he effected the policy: but that value he can recover. Thus, the liability of the assurer becomes constant and uniform, to pay an unvarying sum on the death of the cestui que vie, in consideration of an unvarying and uniform premium paid by the assured. The bargain is fixed as to the amount on both sides.
This construction is effected by reading the word “hath” as referring to the time of effecting the policy. By the first section, the assured is prohibited from effecting an insurance on a life or on an event wherein he “shall have” no interest, — that is, at the time of assuring: and then the third section requires that he shall cover only the interest that “hath.” If he has an interest when the policy is made he is not wagering or gaming and the prohibition of the statute does not apply to his case. Had the third section provided that no more than the amount or value of the interest should be insured, a question might have been raised, whether, if the insurance had been for a larger amount, the whole would not have been void: but the prohibition to recover or receive more than that amount obviates any difficulty on that head.
On the other hand, the defendants contend that the meaning of this clause is, that the assured shall recover no more than the value of the interest which he has at the time of the recovery, or receive more than its value at the time of the receipt.
The words must be altered materially, to limit the sum to be recovered to the value at the time of the death, or (if payable at a time after death) when the cause of action accrues.
But there is the most serious objection to any of these constructions. It is, that the written contract, which, for the reasons given before, is not a wagering contract, but a valid one, permitted by the statute, and very clear in its language, is by this mode of construction completely altered in its terms and effect. It is no longer a contract to pay a certain sum as the value of a then existing interest, in the event of death, in consideration of a fixed annuity calculated with reference to that sum ; but a contract to pay, — contrary to its express words, — a varying sum, according to the alteration of the value of that interest at the time of the death, or the accrual of the cause of action, or the time of the verdict, or execution; and yet the price, or the premium to be paid, is fixed, calculated on the original fixed value, and is unvarying ; so that the assured is obliged to pay a certain premium every year, calculated on the value of his interest at the time of the policy, in order to have a right to recover an uncertain sum, viz, that which happens to be the value of the interest at the time of the death, or afterwards, or at the time of the verdict. He has not, therefore, a sum certain, which he stipulated for and bought with a certain annuity; but it may be a much less sum, or even none at all.
This seems to us so contrary to justice and fair dealing and common honesty, that this construction cannot, we think, be put upon this section. We should, therefore, have no hesitation, if the question were res integra, in putting the much more reasonable construction on the statute, that, if there is an interest at the time of the policy, it is not a wagering policy, and that the true value of that interest may be recovered, in exact conformity with the words of the contract itself.
The only effect of the statute, is, to make the assured value his interest at its true amount when he makes the contract.’
The decision in Dalby has generated considerable academic debate. The issue is what interest did Anchor have in the Duke of Cambridge’s life once the policies had been cancelled.
 R Merkin “Gambling by Insurance — A Study of the Life Assurance Act 1774” (1980) 9 Anglo-American LR 331
‘1 — The Need for Insurable Interest
(1) The reasons for requiring insurable interest
The paramount purpose of the 1774 act was to stamp out gambling hidden by a notional insurance. There were three factors behind this. In the first place, there was a growing objection in this period to gambling in all its forms because of the social consequences that it inevitably produced. Blackstone expressed his outrage thus:
“Taken in any light, it is an offence of the most alarming nature; tending by necessary consequence to promote public idleness, theft and debauchery among those of a lower class; and among persons of a superior rank, it hath been attended with the sudden ruin and desolation of ancient and opulent families, an abandoned prostitution of every principle of honour and virtue, and too often hath ended in self-murder.”
Similar views in a more modem setting have been expounded by Paterson [“Insurable Interest in Life”, (1918) Columbia LR 381]:
“…a sense of antagonism is aroused in a community of workers against persons who obtain a means of livelihood without participating in the machinery of social or economic production or distribution — in short, against ‘social slackers’. More specifically, unearned gains lead to idleness, and the wagerer becomes a social parasite. On the moral side, idleness leads to vice; and the impoverishment of the loser entails misery, and, in its consequence, crime.”
Secondly, the particular practice of wagering on lives brought in its wake an unfortunate consequence:
“The duration of lives of persons believed to be on their death bed was a common hazard, and the dissolution of persons, who saw themselves insured in the public papers at 90%, was, not unlikely, hastened by such announcement [Welford, Insurance Guide and Handbook (1901), at 27–8].”
Finally, there is a strong possibility that if the only interest of X in Y is an insurance policy there may be a temptation on the part of X to expedite Y’s demise. The preamble to Marine Insurance Act 1746 expressly recognised the danger in these words:
“…it hath been found by experience, that the making of insurances, 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…been fraudulently lost or destroyed…”
It has been argued [see Harnett and Thornton, chapter 6, ] that the effect of requiring interest is irrelevant to the incidence of destruction or murder for if X takes out insurance on Y and Y soon afterwards meets an untimely end, the evidential presumption against X becomes overwhelming…
(2) The position at common law
The legality of wagers at common law did not arise for decision until the second quarter of the eighteenth century. Up to this period, the courts were laying down general contractual principles and it seems never to have occurred that wagers were anything other than ordinary contracts. As Professor Simpson has pointed out, important concepts have their origins in decisions on wagers. Perhaps the most common and important type of non-gaming wager, at least until 1746 (the year of the first Marine Insurance Act), was that disguised as marine insurance. Such wagers were readily enforceable and although the courts did adopt the “unsettling tendency to impute more serious motives to the parties than they intended” by construing such policies as requiring proof of loss, policies which were expressed as mere wagers (normally, by the statement that the holder of the policy was deemed to have interest, commonly known as PPI insurances) were undoubtedly lawful. The Marine Insurance Act 1746 (subsequently replaced by the Marine Insurance Act 1906) passed, as we have seen, as a reaction to the fraudulent destruction of insured property and rendered null and void all marine policies by way of gaming or wagering. Given this lead, the courts began a century of seeking ways to avoid their own basic rule as to the legality of wagers, a task in which they were more successful, and the exceptions they developed more numerous, that is commonly supposed. As it is hoped to demonstrate it is highly likely that the courts would have held life policies without interest to be illegal at common law. In addition to the early nineteenth century rule that mere frivolous wagers were unenforceable as being degrading to the courts, there were four grounds on which wagers were regarded as fully illegal.
(a) Public Matters. It was argued in Foster v Thackeray (1781) 1 TR 57 that a wager on matter of public importance was per se unlawful, and although there is no record of any judgment ever having been delivered in that case, the dichotomy between public and private affairs was expressly adopted by Lord Mansfield in Murray v Kelly (M.25. G.3) and Buller J in Atherfold v Beard (1788) 2 TR 610. Such dicta ran counter to actual decisions, notably that in Andrews v Herne (1662) 1 Lev 33, in which the validity of a wager on the possibility of Charles II being restored to the throne was not doubted, although the decision did not turn on the point. The full potential of the principle was in fact never properly investigated for most of the cases falling within it were decided on other grounds, principally the evidence rule (see, in particular, Shirley v Sankey ((1800) 2 B & P 130)) and, at a later stage, public policy.
(b) Cases in the seventeenth (Allen v Rescous ((1676)) and early eighteenth (Walkhouse v Derwent (1747)) centuries established that wagers leading to physical violence, bribery and other results contrary to morality would not be enforced. In the landmark decision of Lord Mansfield, in Jones v Randall ((1774) 1 Cowp 37)), it was settled that wagers were subject to the same limitations applicable to other contracts, in particular, that a wager against sound public policy was illegal. Of the cases applying this principle, the most important, for our purposes, is Gilbert v Sykes [see above, ]…This wager was held to be unlawful for the reason that each party might be tempted to take steps to ensure that events turned out to his own advantage. Although the case is exceptional in that the court was primarily concerned with the effect of Napoleon’s life or death on England, it is express recognition of the danger faced by those whose death is of interest to others, and arguably supports the proposition that gambling on the lives of public personalities was banned by the common law.
(c) Wagers affecting third parties. In the notorious case of March v Pigot ((1771) Burr 2802)), two young men wagered as to which of their fathers would live the longer. Unknown to the parties (one of whom was actually a mere assignee) one of the fathers in question had died before the time of the bet. A claim of total failure of consideration was dismissed and the wager upheld by a court headed by Lord Mansfield, but it must again be noted that although the question of enforceability was peripherally discussed the court was willing — albeit reluctantly — to assume the correctness of the jury’s finding that the intention of the original parties was not to wager but to protect their own future interests. Later courts, treating the case as one of wagering simpliciiter, regularly expressed their surprise at the result reached but could do no more than lay down the necessarily limited proposition that a wager affecting a third party was illegal only if it were a threat to public peace. However, there are signs that at turn of the nineteenth century the courts were more willing to bypass March and to hold that when a third party was in any way affected a wager was void and illegal. Uninhibited by March, it seems fairly certain that the courts would have reached this result far sooner (Buller J in Good v Elliott ((1790 3 TR 693)).
(d) Improper evidence. Using the authority of Coxe v Phillips ((1763) Ca Temp Hard 237)), the courts developed the independent procedural rule whereby if it was apparent that improper evidence was to be introduced the plaintiff would be nonsuited, or if the impropriety appeared at a later stage in the proceedings the trial would be stopped. In some cases, the principle was taken further and nonsuits were granted where such evidence could potentially be introduced even though, in the circumstances, there was no factual possibility of its introduction, as in Atherfold v Beard ((1788) 2 TR 610)), where a bet on the amount of hop duty collected could not be enforced due to the confidentiality of the subject matter even though there was no question of its discussion, the loser of the bet having conceded. In other cases, actual introduction was insisted upon. Whatever the extent of the rule, its importance to us is its effect on wagers affecting third parties, notably, its use as an alternative ground for avoiding the wager in Da Costa v Jones ((1778) 2 Cowp 729)). It is evident that life assurances are likely to produce evidence equally damaging to the life in question.
Given the width of these exceptions, it is arguable that the common law would not have tolerated insurances without interest. It is, therefore, to be expected that the courts would have made optimum use of the 1774 Act to stamp out this particular form of wagering. Despite a promising start that expectation has not been fulfilled. Before the reasons are examined, it is necessary to examine the wording to the Act itself…
An intial reading of this statute reveals a determination to rid the common law of its early tolerance of wagers disguised as insurance and, as has been pointed out, there appears to have been no reason to suppose that it would fail. However, 200 years of hindsight has revealed…critical deficiencies either in drafting or omission…
II — The Definition of Insurable Interest
It is clearly essential to produce a proper definition of insurable interest in order to distinguish idle speculation from genuine loss. Although the Act bars insurance without it (s1) prevents recovery beyond it (s3) no definition is actually provided and it has been left to the courts to fill the gap. The guiding principle is that of pecuniary interest — the insured must be able to demonstrate financial loss on the death of the person on whose life the policy has been taken out. The only exceptions, where proof of financial loss is not an essential prerequisite, are that a man may insure his own life, a wife may insure her husband and a husband his wife…
III — The Timing of Insurable Interest
(1) Godsall v Boldero (1807) 9 East 72
The policy underlying a decision of exactly when insurable interest should be required to exist reflects a view of the nature of life insurance. If such insurance is to be regarded as providing an indemnity, interest must be fixed at time of death, for loss by death is the insured risk. If so, on the other hand, the investment element is to be regarded as paramount the need for the ultimate beneficiary to suffer and show loss diminishes. As with the nature of interest, the 1774 Act is silent on this vital issue and the matter has been one for resolution by litigation.
The question first arose squarely in Godsall v Boldero