Cecily Zamora
In the context of insurance, common law refers to a body of law derived from court decisions based on custom and precedent, rather than statutes. Common law systems are characterised by the concept of judge-made law and the principle of stare decisis, which holds that courts are bound by the previous decisions of courts of the same or higher status. This means that in common law jurisdictions, insurance law tends to favour the insurer, protecting them from the possibility that the risk accepted is greater than anticipated. Common law jurisdictions include former members of the British Empire, such as the United States, Canada, India, South Africa, and Australia, which ultimately originate with the law of England and Wales. Within the context of insurance, common law also defines a common law employee, which is a term used by insurance companies to refer to an individual who is not an independent contractor but is also not the business owner or their spouse.
| Characteristics | Values |
|---|---|
| Definition | Common law is a body of law derived from court decisions based on custom and precedent, as opposed to being derived from statutes. |
| Insurance contract | At common law, an insurance contract is defined by the transfer of risk freely negotiated between counterparties of similar bargaining power. |
| Common law jurisdictions | Common law jurisdictions include former members of the British Empire, such as the United States, Canada, India, South Africa, and Australia. |
| Distinction from civil law | Common law jurisdictions protect the insurer from the possibility that the risk is greater than anticipated, while civil law jurisdictions tend to favour the insured. |
| Insurable interest | Insurable interest is required in marine insurance law and other common law systems; it ensures that an insured cannot recover more than their true loss. |
| Uberrimae fides | The doctrine of uberrimae fides, or utmost good faith, is present in the insurance law of all common law systems. It requires the insured to disclose all material information to the insurer. |
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What You'll Learn
Common law employees and contractors
The distinction between common law employees and independent contractors is important for business owners to understand, particularly when it comes to health insurance.
According to the Internal Revenue Service (IRS), a common law employee is someone over whom the business owner has control in terms of what work will be done and how it is performed. This means that the business owner can set the worker's schedule, restrict them from working for others, train them, and require them to follow instructions. Common law employees have a more structured work schedule, and the employer has more say over how their work is executed.
On the other hand, independent contractors have more control over their work. They are self-employed, answerable to multiple clients, and do not have to constantly report to a management team. They usually have their own workspace and pay for their own tools and equipment.
The IRS uses the Common-Law Test to determine whether a worker is a common law employee or an independent contractor. This test evaluates the type of relationship, behavioural, and financial factors involved in the working arrangement.
It is important to note that the classification of workers as common law employees or independent contractors has legal implications, particularly regarding income tax, Social Security, Medicare, and unemployment insurance. Misclassification can result in legal claims by workers.
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Common law marriage and health insurance
In the insurance industry, common law is a body of law derived from court decisions based on custom and precedent, as opposed to being derived from statutes. It is contrasted with statutory law.
In the context of health insurance, the term "common law employee" is used by some insurance companies to refer to an individual over whose work a business owner has direct control. According to the Internal Revenue Service (IRS), if a business owner can dictate what work will be done and how it will be performed, then that individual may be classified as a common law employee. Common law employees differ from independent contractors, who have more autonomy and are typically self-employed. Understanding the distinction between common law employees and independent contractors is crucial for small business owners when considering health insurance options.
When it comes to health insurance for small businesses, the number and type of employees are important factors. In most cases, at least one common law employee is required to obtain a small business health insurance plan. This employee cannot be the business owner or their spouse. Additionally, the employee must work full-time, typically defined as at least 30 hours per week, and they must opt to enrol in the group plan. It's important to note that plans from different companies may have varying standards, so it's essential to pay attention to the details when considering different options.
In the context of marriage and health insurance, the recognition of common-law marriage can vary depending on the location. For example, in Texas, some counties recognize common-law marriage while others do not. If a couple lives in a county that recognizes common-law marriage, they should be able to include their common-law spouse on their insurance, provided they can show the requested proof. While it is not mandatory, couples can officially register their common-law marriage by filing a declaration with the county clerk. For couples who choose not to formally declare their common-law marriage, alternative forms of proof, such as lease agreements, tax returns, or insurance policies, may be requested.
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Common law and commercial insurance
Common law, in the context of insurance, is a body of law derived from court decisions based on custom and precedent, as opposed to being derived from statutes. Common law jurisdictions in former members of the British Empire, including the United States, Canada, India, South Africa, and Australia, ultimately originate from the law of England and Wales. A key characteristic of common law systems is the concept of judge-made law and the principle of stare decisis, which means that courts are bound by the previous decisions of courts of the same or higher status.
In the context of commercial insurance, common law defines a contract as a transfer of risk freely negotiated between counterparties of similar bargaining power, equally deserving (or not) of the courts' protection. The underwriter drafts the policy terms and delineates the precise boundaries of cover, while the insured has the advantage of knowing the precise risk proposed to be insured in better detail. Central to English commercial insurance decisions are the linked principles that the underwriter is bound by the terms of the policy and that the risk is as it has been described, with nothing material to the decision to insure having been concealed or misrepresented.
Most legal systems worldwide apply common-law principles when adjudicating commercial insurance disputes, recognising that the insurer and the insured are more-or-less equal partners in sharing the economic burden of risk. Until 2005, all common law jurisdictions required the insured to have an insurable interest in the subject matter of the insurance, which is a legal or equitable relationship between the insured and the subject matter, separate from the insurance relationship itself. This requirement was removed in non-marine English law by the Gambling Act 2005 but remains in place for marine insurance and other common law systems.
The doctrine of uberrimae fides, or utmost good faith, is another important principle in the insurance law of all common law systems. It requires the prospective insured to accurately disclose all material information to the insurer, which means disclosing anything that would influence a prudent insurer in determining whether to write a risk and upon what terms. If the insurer is not provided with all material information or there is a material misrepresentation, they may rescind the policy, treating it as void from inception and returning the premium paid.
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Common law and civil law jurisdictions
Common law, as it pertains to insurance, is a body of law derived from court decisions based on custom and precedent, as opposed to being derived from statutes. Common law jurisdictions in former members of the British Empire, including the United States, Canada, India, South Africa, and Australia, ultimately originate with the law of England and Wales. The defining feature of common law jurisdictions is the concept of judge-made law and the principle of stare decisis, which holds that courts are bound by the previous decisions of courts of the same or higher status.
In the context of insurance law, common law defines a contract of commercial insurance as a transfer of risk freely negotiated between counterparties of similar bargaining power, equally deserving (or not) of the courts' protection. The underwriter and the prospective insured each have advantages in this dynamic: the underwriter drafts the policy terms and delineates the precise boundaries of cover, while the prospective insured knows the precise risk proposed to be insured in better detail than the underwriter. Central to English commercial insurance decisions are the linked principles that the underwriter is bound to the terms of the policy, that the risk is as it has been described, and that nothing material to the decision to insure has been concealed or misrepresented.
Civil law jurisdictions, in contrast, tend to regulate the content of the insurance agreement more closely and more in favour of the insured. Insurance in these jurisdictions has typically been more closely linked to the protection of the vulnerable, rather than as a device to encourage entrepreneurialism through risk-spreading. Most legal systems worldwide, however, apply common-law principles to the adjudication of commercial insurance disputes, recognising the insurer and the insured as more-or-less equal partners in the division of the economic burden of risk.
Until 2005, all common law jurisdictions required the insured to have an "insurable interest" in the subject matter of the insurance. Insurable interest was long held to be morally necessary in insurance contracts to distinguish them, as enforceable contracts, from unenforceable gambling agreements. The requirement for insurable interest has since been removed in non-marine English law by the Gambling Act 2005, although it remains a requirement in marine insurance law and other common law systems. The doctrine of uberrimae fides, or utmost good faith, is another principle present in the insurance law of all common law systems. This doctrine holds that an insurance contract is a contract of utmost good faith, requiring the prospective insured to accurately disclose to the insurer everything that is material to the reasonable insurer.
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Common law and insurable interest
Insurable interest is a fundamental legal concept that forms the basis of all insurance policies, linking the insured and the owner of the policy. It is an economic stake in an event or object, which, if damaged, destroyed, or lost, would result in financial loss or hardship. Insurable interest is, therefore, a type of investment that protects anything subject to financial loss.
To exercise insurable interest, the policyholder would buy insurance on the item, person, or event in question. The policy must not create a moral hazard, where the policyholder benefits from the loss of the insured item. Insurable interest is an essential requirement for issuing an insurance policy, making it legal, valid, and protected against intentionally harmful acts. Without insurable interest, an insurance policy would be considered null.
Insurable interest can be established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles but not in their neighbours' homes and vehicles. A married person has an insurable interest in the life of their spouse, and minor children have an insurable interest in their parents. A person also has an insurable interest in their own life, as they prefer to be alive and in good health rather than sick, injured, or dead.
In the case of life insurance, a beneficiary-owner must prove an insurable interest or financial dependency in the insured person. This means that they would experience financial loss and hardship should the insured person die. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead.
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Frequently asked questions
A common-law employee is someone who is not a business owner or their spouse and whose work is controlled by the employer. This includes control over what work is done and how it is executed.
Common law forms the basis of insurance law in many parts of the world, including former members of the British Empire such as the US, Canada, India, South Africa, and Australia. Common law in insurance is based on the concept of judge-made law and the principle of stare decisis, which means courts are bound by the previous decisions of courts of the same or higher status.
The doctrine of uberrimae fides, or utmost good faith, is a principle in the insurance law of all common law systems. It states that an insurance contract is a contract of the utmost good faith, meaning the prospective insured must accurately disclose everything that is material to the reasonable insurer. If the insurer is not told everything material about the risk, they may treat the policy as void.
Insurable interest is a requirement in marine insurance law and other common law systems. It is a legal or equitable relationship between the insured and the subject matter of the insurance, separate from the insurance relationship, by which the insured would be prejudiced by the occurrence of damage or loss to the subject matter.
