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Mentally disordered people
Generally a contract with a person in unsound mind is binding on that person if the other person contracting with them was unaware of the mental condition of the other contracting party. The contract can be repudiated if the person with the mental condition (or on their behalf) if the other party was aware of their mental condition when they entered into the contract. A life insurer should not therefore enter into a life insurance contract with someone who is of unsound mind.
Under the mental Health Act 1983 the affairs and property of a mental patient can be placed into the hands of the Court of protection. If this is done the mental patient has no powers to contract. The Court of protection would normally appoint a receiver who only has the powers empowered to them by the court. The order does not amount to a transfer of ownership of the patient’s assets and is not equivalent to a power of attorney. It might or might not give the power to make investments nor to deal with a patient’s existing contracts.
Companies
A company is a legal entity in its own right and separate from the individual legal entirety of its shareholders. The powers of a company are set out in its constitution and memorandum and articles of association.
Originally contracts that were neither expressly authorised nor impliedly authorised were said to be ultra vires and void. However under section 108 Companies Act 1989 it is provided that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s memorandum. The effectively abolishes the ultra vires rule.
It is also in section 108 that a person dealing with a company in good faith had the right to believe that a director of a company or others authorised by a director of the company are free (from limitation under the memorandum) to contract on behalf of the company.
The effect of this is that companies will be bound by their contracts not withstanding the fact that they may not have the power to enter into them.
For some time it has been considered that a trading company does have the right to enter into a contract to affect life insurance on the life of a director or employee subject to insurable interest. A proposal may be signed by any person acting under its authority expressed or implied.
The life office
The life office must be authorised under the Financial Services and Markets Act 2000 to do long term insurance business (life insurance, annuities and income protection insurance) in the UK. This act then gives the Financial Services Authority powers to set rules and to police the industry.
Insurable interest
Since the Life insurance Act 1774 there was no requirement for insurable interest on the part of the proposer and as a result people would insure the lives of the famous and of criminals in the hope of making a profit. The Life insurance Act 1774 applied the following requirements,
- No insurable interest then no insurance,
- The person interested (the proposer) must be named in the policy,
- No greater sum in payment of the claim can be recovered than is equal to the interest.
The act does not of its self define insurable interest and that must be drawn from case law. In essence insurable interest must be an interest recognised by law. For example death would cause a loss capable of valuation in monetary terms or the loss of some legal obligation or liability. Mere moral obligation or loss of a friend is not sufficient.
A person has unlimited interest in their own life and also in the life of a spouse. Griffiths V Fleming 1909.
Specific examples on insurable interest are as follows.
- Creditor on the life of a debtor for the amount of debt. Von Lindenau V Desborough 1828.
- An employer on an employee for the value of services agreed to be rendered or possibly more on a key person. They may also have interest in the amount of death benefit payable under a pension scheme where this is guaranteed by the employer.
- A partner in business has an insurable interest in their partners especially if there is an agreement to buy out the share of the deceased partner.
- The donee of a life time gift has an interest in the life of the donor for seven years to cover any inheritance tax that might be payable.
Examples to which no insurable interest exists.
- A parent has no interest in their child as no financial loss would be suffered on death. Halford V Kymer 1830. A variation that is sometimes allowed is the cost of funeral expenses. There might be a difference if the child was the bread winner where the child was a star actor and the parent their manager.
- A child has no insurable interest in their parent. Howard V refuge Society 1886.
- A beneficiary under a will does not have an interest in the testator. The will may be changed and thus there is no guaranteed hope of benefiting.
In Scotland a child has the right to be supported by their parents and vice versa. Thus in those circumstances for those domiciled in Scotland and insurable interest would exist.
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Case Law