Dallas Fort Worth Insurance Lawyer Blog

Going back to the 1894, Texas Supreme Court opinion, Cheeves v. Anders, it is a well settled proposition in Texas law that it is well-settled that a life insurance beneficiary must have an insurable interest in the insured’s life.

The basis for the rule is twofold: no should have a financial inducement to take the life of another; and a life insurance policy for the benefit of one without an insurable interest is a wagering contract.

As an example, in the 1998 Houston Court of Appeals [14th.] opinion, Tamez v. Certain Underwriters at Lloyd’s, London Int’l Acc. Facilities, an employer bought a life insurance policy on the life of its employee.  The employer argued that the Texas Insurance Code does not require an insurable interest.  The court held that the statute does not eliminate the judicial requirement of a beneficiary’s insurable interest in the insured’s life.

Pursuant to Texas Insurance Code, Section 1103.151 and Section 887.205, a life insurance beneficiary who willfully participates in bringing about the insured’s death, either as a principle or as an accomplice, forfeits any right to benefits.  The benefits are payable to any innocent contingent beneficiary or to the insured’s nearest relative.  This is discussed in the 1987, Texas Supreme Court opinion styled, Crawford v. Coleman.

Sandra Shoaf was stabbed to death by her husband, Cornelius Shoaf.  Sandra’s life was insured under four insurance policies, each designating Cornelius as the primary beneficiary.  The trial court disqualified Cornelius from receiving Sandra’s death benefits because the jury found that Cornelius willfully caused Sandra’s death.  The contingent beneficiaries under the policies are Sandra’s parents, Phynies and Flora Crawford (the Crawfords) and Sandra’s stepson, Cornell.  Cornell is Cornelius’s son by a prior marriage. Martha Coleman is Cornell’s mother.

After disqualifying Cornelius, the trial court awarded the proceeds of two of the four policies to the Crawfords as the contingent beneficiaries under those policies.  Those proceeds awarded to the Crawfords are not a part of this appeal.  The trial court also awarded the proceeds of the remaining two policies, Equitable Life Insurance Society of the United States and Metropolitan Life Insurance Company, to Cornell Shoaf as the contingent beneficiary.  The Crawfords dispute the award of the benefits of these two policies to Cornell.

What are some of the rules related to the naming of a spouse as the beneficiary in a life insurance policy?

One spouse can designate his or her estate as the beneficiary of the policy, at the expense of the other spouse, absent a showing of actual or constructive fraud.  This was the opinion is a 1994, Fort Worth Court of Appeals opinion styled, Street v. Skipper.

Policies may contain provisions automatically divesting a spouse of any interest in the proceeds, if the parties are “legally separated” or divorced.  This is what was stated in the 1981, Eastland Court of Appeals opinion styled, Pilot Life Insurance Co. v. Koch.  Also, the divorce decree may divest the former spouse of any right to the insurance proceeds, pursuant to the opinion issued in the 1987, Houston [14th] Court of Appeals opinion styled, Novotny v. Wittner.  By statute, Texas Family Code, Section 9.301, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, 1) unless the former spouse is re-designated, 2) the insured redesignates the former spouse as the beneficiary after rendition of the decree, or 3) the former spouse is designated to receive the proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.  If the pre-divorce designation is invalidated, the proceeds go to any alternate beneficiary or to the insured’s estate.  If the insurer pays the former spouse based on an invalidated designation, the insurer is liable to pay the proper beneficiary.

Who is entitled to life insurance benefits?  This may seem an easy answer and is most of the time, but not always.

According to the Texas Supreme Court and Texas Insurance Code, Section 1103.102, the designated beneficiary of a life insurance policy generally is entitled to the proceeds upon the death of the insured.  Absent an adverse claim, the insurance company may pay the benefits to the designated beneficiary.

However, the insured’s pledge of the policy proceeds may give a creditor rights superior to the named beneficiary’s according to the 1968, Texas Supreme Court opinion, McAllen State Bank v. Texas Bank & Trust Co.

It is not an issue seen often by life insurance lawyers, but it does come up.  When is the date coverage is in effect?

Most policies expressly state the “effective date” of coverage.  This date may be earlier than, or later than, the date the first premium is paid or the dates the policy is issued or delivered.  Often, a policy may have an effective date, an issue date, and a policy date — and they may all be different, causing confusion or misunderstanding.  If the dates differ, disputes may arise over when the policy actually took effect or terminated.  The effective date can be important in setting the due date for subsequent premiums and thus the date of any lapse for failure to pay a premium.

For example, in the 1980, Texas Supreme Court case, Life Insurance Company of the Southwest v. Overstreet, a policy provided that its effective date was March 15th and each annual premium was due on the anniversary of that date.  The insured did not pay his first premium until April 18th.  Two years later, the insured died while his premium was due.  If the effective date was measured from March 15th, he died outside the grace period and had no coverage.  If measured from April 18th, he died within the grace period, and within coverage.  The Texas Supreme Court held there was no coverage, following the majority rule that “a definite statement in the policy of the date on which annual premiums will be due is the due date.  Such a statement of the due date controls even over a provision stating that a policy will not be in force until it is initially delivered and the first premium is paid during the good health of the insured.”

The Texas Insurance Code spells out in law a few things that life insurance companies cannot do in their life insurance policies.  Between the Texas Department of Insurance and the Texas Legislature here are a few things that are written into law.

A policy of life insurance cannot limit the time to sue to a period of time of less than two years.  This is found in the Texas Insurance Code, Section 1101.053.  A person needs to be aware that there are situations where the insurance company limits the time to sue to two years and one day.  While this is not common, it does happen, so be aware and don’t delay in talking to an attorney if your claim gets denied.  Procrastination could result in being out of court on a claim you may be able to prevail on.

Section 1101.054, states that a policy cannot purport to take effect more than six months before the original application date, if that would qualify the insured for a rate based on a younger age group.  For purposes of this section, the age of the insured on the date of the application is the age of the insured on the birthday of the insured that is nearest to the date of the application.  The benefit to the insurance company is that they get a higher premium from the owner of the policy.

Life insurance coverage is fairly straightforward.  If the insured dies during the policy term, the insurer pays the benefits.  The following reasons are some ways that disputes may arise:

•  An agent may misrepresent the benefits of his insurer’s policy to induce the insured to switch from another company.
• An agent may fail to disclose that health conditions may cause the insured’s application to be rejected.  If the insured was induced to let a rival policy lapse based on the expectations of replacement coverage, the insured may have no insurance.

Common life insurance types are term, whole life, and universal life.

“Term” policies simply provide a death benefit in return for a premium payment.  At the end of the policy year, or “term,” the insurance ends, and the policy has no value.  Term policies do not accrue cash value.  Because the insured is only paying for the death benefit, term policies are cheaper in the early years.  As the insured gets older, the risk of death increases and so does the premium, so term may become more expensive than the other types.  Insurers typically sell term policies that promise a fixed premium for a set number of years.  For example, an insurer may sell a 10 year term policy that the insured may purchase and renew for the same annual premium during those years, without having to re-qualify.

“Whole life” policies typically charge more in premiums than term policies, so that the premium pays for the death benefit and provides an excess that allows the policy to accrue a “cash value.”  This cash value is an investment, in addition to the benefits if the insured dies.  The policies derive their name from the fact that the insurer offers to insure the insured for her “whole life” — based on a certain stream of premiums.  An insurer may offer illustrations at the time the policy is sold showing how much cash value will accrue based on the premium payments, if the certain interest rates apply.  The illustrations usually project the expected value of the policy over time, and often contain disclaimers and numerous assumptions, making comprehension difficult.  This complexity causes insureds often to rely heavily on oral explanations by the agent, which may be inaccurate or misunderstood.  This can be a source of trouble if the policy’s actual performance does not match the insured’s expectations.