Articles Posted in Life Insurance

Arlington life insurance lawyers know the requirements insurance companies must meet to successfully defend a life insurance case based on the defense of misrepresentation.  Misrepresentation in the policy application is the most common reason for denial of a claim for benefits.

The Texas Insurance Code, Sections 705.001 to 705.005, prohibits a defense to coverage based on misrepresentations in an application, unless the application is attached to the policy.  The statute is affirmed in the 1994, Texas Supreme Court opinion, Fredonia State Bank v. General American Life Insurance Co.

As was stated in another Texas Supreme Court opinion in 1975 styled, Johnson v. Prudential Insurance Co. of America, “Applications for insurance and other written statements made in that connection are often filled out or written by insurance agents or others and only signed by the insured.  It has often been held that it is the underlying legislative intention to require that the insured have the material terms of the contract at hand during his lifetime in order that he might examine and correct any misrepresentations which have been made the basis of the insurance coverage.”

Grand Prairie life insurance lawyers know that for a life insurance company to establish misrepresentation as a defense for refusing to pay on a claim, that the life insurance company must plead and prove five elements:

  1.  the making of the misrepresentation;
  2.  the falsity of the misrepresentation;

A 1982, 14th Court of Appeals opinion recognizes and upholds that life insurance policies typically exclude suicide as an assumed risk of the carrier.  The opinion is styled, Parchman v. United Liberty Life Insurance Co.

In Parchman the policy excluded suicide as an assumed risk for two years from the policy date and provided a reduced benefit of the premiums paid if death resulted from suicide within that period.

As another example, a 1986, Amarillo Court of Appeals opinion styled, Southern Farm Bureau Life Insurance Co. v. Dettle, provided:  If the insured within two years from the date of issue of this policy shall die by his own hand or act whether sane or insane, the liability of the Company shall be limited to an amount equal to the premiums actually paid, without interest.

The Texas Insurance Code, Section 1101.055 limits the permissible life insurance exclusions to suicide, stated hazardous occupations, and aviation activities.  Courts have construed this list to render void other exclusions, such as one excluding a loss caused by a preexisting condition.  This preexisting condition exclusion is discussed in the 1921 Texas Supreme Court opinion, First Texas State Insurance Co. v. Smalley and in the 1935 opinion, Atlanta Life Insurance Co v. Cormier.  It is also discussed in the 1942 Austin Court of Appeals opinion, Cook v. Continental Casualty Co. and the 1938 Dallas Court of Appeals opinion, Universal Life Insurance Co. v. Grant, which discussed an exclusion for death while committing crime.

In First Texas State when discussing the exclusion, the court stated: “It was formerly usual for policies of life insurance to contain numerous conditions on which the amount or amounts paid on the death of the insured might be reduced or entirely defeated.  Among common conditions were those related to the insured’s occupation, habits, residence, and suicide.  Not infrequently the amount of the insurance was stated in bold type, on the face of the policy, while the conditions were inconspicuously put on the back.  Such policies could be used to lead the unwary into the belief that they held enforceable promises of real and substantial benefits, when the promises were so limited and conditioned as to have slight actual value.  In this way premiums could be collected from the insured in exchange for apparent, rather than real, obligations on the part of the insurers.  The above were evils to be remedied by the statute, which was enacted in the interest of the insured.  To accomplish the legislative intent, the language of the statute must be given such signification as to afford a reasonable remedy for these evils.  The public policy declared is that the amounts promised to be paid on the death of the insured are not to be withheld nor diminished under limitations or conditions, except to the extent of subsisting the indebtedness to the insurer, including premiums, save in the specially enumerated instances of the insured’s death by suicide or from following specified hazardous occupations.  In this way the contract in this state as to benefits from life insurance is rendered simple and easily understood by all, including those lacking legal or business experience ….  Provisions inconsistent with the statute are void.”

For a beneficiary to recover death benefits, the insured must be dead.  Doubt may arise when the insured disappeared or when there is uncertainty over the identity of the dead body.  This is illustrated in the 1987 Texas Supreme Court case, Davidson v. Great National Life Insurance Co. and in the 1892 U.S. Supreme Court opinion, Mutual Life Insurance Co. of New York v. Hillmon.

Proof of the insured’s death may be aided by a legal presumption.  After a person is absent for seven years, the law will presume the person is dead.  This is pursuant to the Texas Civil Practice and Remedies Code, Section 133.001.

In Davidson, the insured traveled to Tel Aviv, leaving behind some questionable financial dealings.  A badly disfigured body was found near the hotel where he was registered.  His wife claimed the body was his, and she sought death benefits.  The insurer asserted there was a conspiracy to commit fraud and to fake the insured’s death.  Relevant evidence included testimony from an Israeli police officer identifying photos of the body as being photos of the insured.

If insurance benefits are paid to a beneficiary who does not have an insurable interest, that beneficiary holds the proceeds for the benefit of those entitled by law to the proceeds according to a 1894, Texas Supreme Court opinion styled, Cheeves v. Anders.  This proposition was upheld in a Tyler Court of Appeals opinion from 1998, styled, Stillwagoner v. Travelers Insurance Co.

An insurer that knows of an adverse claim but pays the proceeds to someone without an insurable interest may be liable to the proper beneficiary or to the insured’s estate for the full amount of the benefits.

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 of payment.  When an insurer issues a policy to someone without an insurable interest, the insurer must pay, and the law will decide who gets the proceeds.  This is also from the Cheeves case and the Stillwagoner opinions.

Who has an insurable interest in the life of someone else?

The Texas Supreme Court in 1968, declared that 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.  The opinion is styled, McAllen State Bank v. Texas Bank & Trust Co.

In 1942, the Texas Supreme Court said a person that has a reasonable expectation of pecuniary benefit or advantage from the insured’s continued life has an insurable interest.  This was in Drane v. Jefferson Standard Life Ins. Co.

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.