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HMRC internal manual

General Insurance Manual

Legal basis of insurance: contract of insurance

The ‘Prudential’ definition of insurance (GIM1030) remains the starting point for a discussion of the legal basis of insurance. For example, Chitty on Contracts (paragraph 39-001 28th edition) summarises a contract of insurance as follows:

‘A contract of insurance is one whereby one party (the insurer) undertakes for a consideration to pay money or provide a corresponding benefit to or for the benefit of the other party (the assured) upon the happening of an event which is uncertain, either as to whether it has or will occur at all, or as to the time of its occurrence, where the object of the assured is to provide against loss or to compensate for prejudice caused by the event, or for his old age (where that event is the reaching of a certain age by the assured) or for the benefit of others upon his death. It is these objectives which distinguish insurance from gaming or wagering.’

Case law relating to insurance has also established a general principle that the substance of the contract prevails over its form. This follows from the decisions in Fuji v Aetna [1997] Ch.173 (CA) and in Sentinel Securities [1996] 1 WLR 316. In the Fuji case the Court also held that the regulatory consequences of treating a contract as insurance are not relevant to the classification of that contract.

Contracts of insurance will be either ‘contingent’ against the happening of an event, life assurance being the most common example, or ‘indemnity’ against loss suffered – see GIM1060.