A customer enters a building, approaches the front desk and slams down ten dollars. “I bet,” they say, “I will be dead by the end of the week. What odds do you give me?”
Naturally, the bookmaker asks questions (How old are you? What is your medical history? Do you smoke?) before giving the customer 5000:1 odds of expiring before Sunday. Certain safeguards are put in place: the customer cannot, for example, “throw the match” and cause said death prematurely. Hands are shaken, contracts are signed, consideration passes.
Is that a wagering contract, or a life insurance policy?
This was a dilemma typical of early life insurance contracts. In the 18th century, one popular wagering pastime was to gamble on the yearly deaths of celebrities (known as a “dead pool”, this is still popular with some crowds). A long-closed loophole in British gambling legislation allowed one person to take out a life insurance policy on another and so benefit from their improbable death. (Similar wagers were taken out on whether a vessel would make its destination port or when Parliament would dissolve.)
Different rules attach to the different types of contracts. In Australia, the various State and Territory Gambling Acts govern which wagers are appropriate, while the Commonwealth Insurance Contracts Act 1984 does the same for life insurance contracts. The largest distinction addresses the above loophole. While it is frowned upon (or unlawful) to gamble where you have another interest in the outcome (eg betting against a sports team of which you are a member), you may only form a contract of insurance where you have an “insurable interest” (whether as the insured object, as in health insurance; a company, as in marine insurance; or a beneficiary, as in life insurance).
Unauthorised gambling agreements are usually treated as null and void, not unlawful (meaning they are unrecoverable in a court action, but not punishable by the State). They also distinguish between “pool betting” (eg between colleagues or friends) and wagered bookkeeping (eg at the local TAB).
Flowing in the other direction, long-term contracts known as “tontines” exist where two or more people invest money into a scheme in return for some benefit, with the others in the scheme inheriting those benefits until the last survivor holds them all. Such arrangements make for fantastic literary tropes of wartime buddies anteing up looted or confiscated Nazi goods, the survivor granted some rare prize long after they care to receive it.
In a way, insurance contracts are just wagering contracts. In a true wagering contract, the gambler’s position is intensified: either they “win” the wager and increase their money, or they “lose” both wager and wealth. An insurance contract does the opposite, though still based on an undecided outcome. It moderates the gambler’s position: replacing lost assets but inflicting a small financial burden. To win an insurance contract wager can literally cost a gambler an arm and a leg.
Insurance contracts are discussed in the updated The Laws of Australia Subtitle 22.1 “Insurance”.
For more information about The Laws of Australia click here.