Legal basis of insurance: case law
In the absence of a statutory definition, case law has provided a description of a number of the characteristics of insurance. One essential characteristic is that insurance is a particular type of contractual relationship between the parties. This requirement is reflected in the words used in the descriptions in Schedule 1 FSMA 2000 quoted at GIM1020. These descriptions also refer to the contracts as being upon or against specified subjects or risks, providing a further pointer to the nature of the contracts. The principles were summarised in the early stamp duty case Prudential Insurance Company v IRC, (1904) 2 KB 658. The point at issue was whether the contract was a ‘policy of insurance’. Channell J said at page 663:
‘A contract of insurance, then, must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have…some degree of uncertainty about it and must be of a character more or less adverse to the interest of the person effecting the insurance.’
This is a description rather than an all-embracing definition of insurance. It may not fit all insurance contracts, but it does serve to emphasise the point that if there is no contract there can be no insurance. A body that carries on activities that are closely similar to insurance will not be an insurer if its rights and obligations derive from legislation. Nor will it be if it administers a trust fund out of which benefits that are technically discretionary are paid to persons who suffer some misfortune. Some medical benefit plans are arranged as trusts rather than insurance operations, and in recent times this approach has been adopted with a view to there being no insurance premium tax to pay.