Life Insurance – Insurable Interests

Ask someone in Dallas, Fort Worth, Arlington, Grand Prairie, Mansfield, Duncanville, Azle, Crowley, Cedar Hill, Saginaw, Flower Mound, or any other place in Texas, what an insurable interest in a life insurance policy is, and the chances are that they will not be able to tell you. This has been discussed in a couple of earlier blogs.
As stated before, those who have an insurable interest in the life of another falls into three general classes:
1) one so related by blood or affinity that he or she wants the other to continue to live, irrespective of monetary considerations;
2) a creditor; and 3) one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another.
Well, what about corporations? Do they have an insurable interest?
The answer is yes, according to the Texas Supreme Court. They decided a case in 1942, wherein that was the answer. The case is, McBride v. Clayton. The court said 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 was also held to be the case in the 1998, Tyler Court of Appeals case, Stillwagoner v. Travelers Ins. Co. 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.
Also stated in the Stillwagoner case, a corporation does not have an insurable interest in all its officers and employees, only those of “extensive experience and skill on whom the corporation depended for its continued success.”
The Texas Supreme Court has also said that a tenant holding property or an estate during the life of another has an insurable interest in the latter’s life. For this example, see, Empire Life Ins. Co. v. Moody, decided by the Texas Supreme Court in 1979.
But what happens if the insurance company finds out the insured did not an insurable interest? Does the insurance company get away without having to pay? This was answered in the Stillwagoner case and an 1894 Texas Supreme Court case.
The answer is, no the insurance company does not get away without having to pay on the policy. In saying this, Texas courts have said generally that while Texas law requires that the designated beneficiary have an insurable interest, it is not essential to the validity of the contract, and the insurance company may not raise the beneficiary’s lack of an insurable interest as a defense to payment. When an insurer issues a policy to someone without an insurable interest, the insurer still must pay, and the law will decide who gets the proceeds.
As recently as 2009 there were many thousands of disputes about whether or not someone was entitled to the proceeds of a life insurance policy. When, or if you find yourself in a position regarding who should receive the proceeds, you should consult with an experienced Insurance Law Attorney.