Articles Posted in Life Insurance

Who has an insurable interest in a life insurance policy?

The Texas Supreme Court, in 1979, in the case styled, Empire Life Insurance Co. v. Moody, held that a tenant holding property or an estate during the life of another has an insurable interest in the latter’s life.

Is an insurable interest essential to the validity of the life insurance contract?

Life insurance lawyers can tell you that sometimes a corporation can be a beneficiary to a life insurance policy.  The key word here is “sometimes” because it does not mean a corporation can always be a beneficiary of a life insurance policy.

Corporations may name themselves beneficiaries of policies they buy on the lives of their important officers, directors, and stockholders, but that insurable interest does not survive the relationship that created it, and if the relationship has been terminated or the business entity no longer exists, the proceeds go to the insured’s estate.  This is discussed in a 1942, Texas Supreme Court opinion styled, McBride v. Clayton and the 1998, Tyler Court of Appeals opinion styled, Stillwater v. Travelers Insurance Company.  Historically, this type of insurance has been called “key man” coverage, because the business has an economic interest in those officers, directors, and shareholders that are “key” to the operation of the business.

A corporation does not have an insurable interest in all its officers and employees, as stated in the McBride and Stillwagoner opinions, only those of “extensive experience and skill on whom the corporation depended for its continued success.”

A 1938, opinion from the Amarillo Court of Appeals helps answer the above question.  The case is styled, Smith v. Metropolitan Life Ins. Co. et al.

This lawsuit is a contest over the proceeds of a life insurance policy in the sum of $500 issued upon the life of John Wesley Smith by Metropolitan.  At the time the policy was issued the insured was an employee of Southern Pacific Railway Company, but prior to his death, he had been retired by the railway company and collecting a $40 a month pension.

The record reveals that in June, 1927, the insured was married to Jessie Smith, who was plaintiff in the trial court.  Long prior to the issuance of the policy the insured had ceased to live with the Smith, although they were never divorced.  The policy was originally payable to Emaline Bell and Ella White, who were shown by the record to be the nieces of the insured.  In March, 1936, the insured designated his niece, Ella White, as the sole beneficiary in the policy, such designation having been authorized by the terms of the policy.  The contest over the proceeds of the policy was therefore between the Smith, and Ella White joined by her husband, Rolly White.  The insurance company acknowledged its liability upon the policy, paid the $500 into the registry of the court and was therefore discharged with $50 attorney’s fee allowed it as a stakeholder in the controversy.  The trial court rendered judgment for the White, from which judgment Jessie Smith appealed.

What happens when a beneficiary has an insurable interest when the life insurance policy is obtained but later on, that insurable interest no longer exists?  That question is answered in an 1894, opinion from the Texas Supreme Court styled, Cheeves v. Anders.

Anders was the Administrator of the Estate of the deceased, L.B. Chilton.  Chilton and Cheeves were business partners and Chilton took out the life insurance policy for the benefit of Cheeves due to this partnership interest.  Later the partnership was dissolved whereby Chilton sold his interest in the partnership to Cheeves.  The partnership had paid for the life insurance policy.

This Court started its opinion by stating the law in this State. “It is against the public policy of this state to allow any one who has no insurable interest to be the owner of a policy of insurance upon the life of a human being.”

When an employer takes out life insurance on an employee and names itself (the employer) as the beneficiary, it there an insurable interest.  Each case needs to be looked at on its on merits.

A 1998, Tyler Court of Appeals is good case to read.  It is styled, Stillwagoner v. Travelers Insurance Company.

The decedent’s employer procured a policy upon the lives of its employees without their knowledge, and named itself the beneficiary.  The case presents the question of whether the employer had an insurable interest in the life of the decedent, and who is entitled to raise the issue of lack of insurable interest.  Decedents surviving spouse and children contend that Travelers should have paid the $200,000 death benefit to the decedent’s estate, because her employer, Advantage Medical Services, Inc., had no insurable interest in the decedent’s life.  Travelers insists that the beneficiary’s lack of an insurable interest is an issue that can only be raised by the insurance company, and that, in any event, the proceeds were properly paid to the employer because the employer had an insurable interest in the life of its employee.

Here is an interesting case from the 14th Court of Appeals.  It is a 1998, opinion styled, Tamez v. Certain Underwriters at Lloyd’s.

Two employees of a Stop-n-Go (NCS) store were killed while on duty.  NCS, as the employer had life insurance policies on the employees and made a claim for benefits and were paid by Lloyd’s.  The representatives of the estates of the employees sued NCS and Lloyd’s.

Summary judgments were granted in favor of NCS.

Life Insurance Lawyers can inform their clients that a creditor can have an insurable interest in a life insurance policy.  There is a caveat.  A creditor may designate itself the beneficiary of a policy purchased by it on the life of its debtor, but its insurable interest is limited to the loan balance at the insured’s death; the rest of the policy proceeds belong to the insured’s estate.  This is confirmed in the 1968, Texas Supreme Court opinion styled, McAllen State Bank v. Texas Bank & Trust Co.

The bank asserted rights to the life insurance policy as a beneficiary of the proceeds of the policy in this case.  The insured had pledged policy proceeds as security for the debt.

The assignment or pledge of a policy as security creates a lien on the proceeds on behalf of the assignee.  While some authorities limit the rule, it is generally held that the rights of an assignee under a valid assignment of the policy for security are superior to those of the beneficiary to the extent of the indebtedness secured where the policy provides that insured has the right to change the beneficiary, especially where the beneficiary joins in the assignment; but the beneficiary is entitled to the excess of the proceeds over the amount of the indebtedness secured.

Life insurance lawyers will see fights over who is entitled to life insurance proceeds.  One of the fights is over whether or not the named beneficiary had an insurable interest in the life of the insured.

The main case cited for dealing with this issue is a 1942, Texas Supreme Court opinion styled, Drane v. Jefferson Standard Life Insurance Co.

In the Drane case, Harry E. Ezell, Jr. was named as the beneficiary under two policies insuring the life of Dorothy A. Drane.  Hugh Drane, the executor of Dorothy’s estate filed a lawsuit seeking to prevent Ezell from recovering the money and for the money to go to Dorothy’s estate.

Not just anybody can be a beneficiary to a particular life insurance policy.  The person must have an insurable interest.

A 1894, Texas Supreme Court case styled, Cheeves v. Anders, makes clear that it is well settled that a life insurance beneficiary must have an insurable interest in the insured’s life.

The basis for this rule is twofold: 1) no one should have a financial inducement to take the life of another; and 2) a life insurance policy for the benefit of one without an insurable interest is a wagering contract.  (It should be pointed out there are legal ways to have a life insurance policy on another).