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HMRC internal manual

Insurance Premium Tax

Overview and the law: how to determine whether there is a contract of insurance: purpose and outline of this section

The IPT legislation does not contain a definition of a contract of insurance for IPT purposes. However there are legal precedents, which set out the characteristics a contract of insurance may be expected to display.

The Medical Defence Union (MDU) case involved the MDU and the DTI, and sought to establish whether or not MDU were carrying on an insurance business. To resolve this it was necessary to determine if the contract between the MDU and its members was one of insurance. The judge decided that if there was a contract of insurance there had to be, on the occurrence of some event, a right to receive money or money’s worth. This was expanded to include three specific points:

  • the contract must provide that the insured will become entitled to something on the occurrence of some event;
  • the event must be one which involves some element of uncertainty, and
  • the insured must have an insurable interest in the subject matter of the contract.

The main characteristics of a contract of insurance are that the insured party must have an ‘insurable interest’ i.e., a pecuniary interest in the subject matter of the insurance and will display many or all of the following features.

  • There is a legally enforceable contract between the insurer and the insured, which should clearly identify what is being insured. (It is possible for the insurer or the insured each to consist of more than one person, all of whom are party to the contract.)
  • Under the contract, the insured (or a party on behalf of the insured) pays a premium, in return for which the insurer indemnifies them against losses, compensates them for damage, or provides some corresponding benefit. The loss or damage will arise from one or more events which adversely affect the interests of the insured.
  • The premium charged is usually calculated with reference to the claims the insurer expects to meet from a pool of premiums collected to cover the corresponding pool of risks.
  • The contract is one of ‘utmost good faith’ under which the insurer requires the insured party to disclose any material facts before the insurer enters into the contract. If the insured fails to meet this condition the insurer can declare the contract void from the beginning and can refuse to pay any claims.
  • If the insured breaches the contractual conditions the insurer can declare the contract void from the date of the breach whether or not a claim is made under the policy and whether or not the breach is material to any claim subsequently made. This, of course, is far stricter than the general law of contract.
  • The insured has an absolute right to payment or assistance under a contract of insurance.