MEDICAL DEFENCE UNION V DEPARTMENT OF TRADE [1979] 2 All ER 421

FACTS

The Medical Defence Union (the 'union') was a company limited by guarantee with members
consisting of medical and dental practitioners.

Their activities included conducting legal proceedings on behalf of members, indemnifying

members against claims for damages and costs, and providing advice and educational
guidance.

Members' rights regarding legal proceedings and indemnities were limited to the fair
consideration of their requests for help; they did not have the right to compel the union to
conduct legal proceedings or indemnify them. Upon acceptance of an application for
membership, a contractual relationship is established between a member and the union.

A member's financial obligation, regardless of the number of claims against them, was
limited to paying the appropriate annual subscription for their class of membership.

ISSUE

The matter in question was to determine whether the contract between the union and its
members constituted a contract of insurance within the meaning of the Insurance
Companies Act 1974.

The Department of Trade contended that the contract was one of 'insurance' under the
general law, falling within the 1974 Act, based on the argument that, on the occurrence of
an event (such as a claim), a member becomes entitled to a 'benefit,' even if that benefit is
not a right to money or money's worth.

The specific contention was that a member's right to have their request for help with a
claim properly considered by the union is a benefit, rendering the contract one of insurance
under the 1974 Act.

HOLDING

It was held that to constitute a contract of insurance under the general law and within the
1974 Act, there must be, on the occurrence of some event, a right to receive money or
money's worth. If the entitlement is merely to some benefit other than money or money's
worth, the contract is not one of insurance.

The court held that a member's right to have their application for help (the right to request
for help) with a claim properly considered by the union did not meet the criteria for a
contract of insurance.

Therefore, the union is not considered an insurance company carrying on an insurance

business within the 1974 Act.

The union was entitled to a declaration to that effect.

KEY PRINCIPLE

In order for a contract to be considered a contract of insurance under the general law and
within the scope of relevant legislation, there must be a right to receive money or money's
worth upon the occurrence of a specific event. The court clarified that entitlement solely to
a benefit other than money or money's worth does not suffice to categorize the contract as
one of insurance.

In other words, for a contract to fall within the realm of insurance, the policyholder or
beneficiary must have a tangible right to receive a monetary payout or its equivalent when a
defined event takes place. The court distinguished between benefits that are monetary in
nature and those that are of a different kind. In this case, the court held that a member's
right to have their request for assistance with a claim properly considered by the union,
while a benefit, did not meet the criteria of a contract of insurance because it did not entail
a right to money or money's worth.

QUOTE

. “The central question emerged as being whether each contract was a contract ‘of
insurance’, and so the main issue comes down to the meaning of the one word ‘insurance’ in
the expression ‘contract of insurance’.

The leading authority, I think, is the judgment of Channell J in Prudential Insurance Co v

Inland Revenue Comrs, as read in the light of Gould v Curtis (Surveyor of Taxes). From these
cases it appears that a contract is a contract of insurance if three elements are
present. There has been no dispute about the second and third of these, and the first is also
common ground, save as to one point. It is round that point that the argument has centered.
Before I turn to the terms of the three elements, I should say that from Gould v Curtis it
appears that there are two categories of insurance which may respectively be called
indemnity insurance and contingency insurance. Indemnity insurance provides an
indemnity against loss, as in a fire policy or a marine policy on a vessel. Within the limits of
the policy the measure of the loss is the measure of the payment. Contingency insurance
provides no indemnity but instead a payment on a contingent event, as in a life policy or a
personal injury policy.”

“With these two categories of insurance in mind, the three elements in a contract of insurance
may be expressed as follows: and in this I draw largely on what Channell J said in the
Prudential case ([1904] 2 KB 658 at 663).”

1. First, the contract must provide that the assured will become entitled to something on

the occurrence of some event.

2. Second, the event must be one which involves some element of uncertainty

3. Third, the assured must have an insurable interest in the subject-matter of the

contract.