Articles Posted in Life Insurance

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).

Married persons naming their spouse as a beneficiary in a life insurance policy is common and maybe even the most often seen beneficiary under a life insurance policy.

However, Texas law makes clear that a 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 made clear in the 1994, Fort Worth Court of Appeals opinion styled, Street v. Skipper.

In the 1981, Eastland Court of Appeals opinion styled, Pilot Life Insurance Co. v. Koch, the policy at issue contained provisions automatically divesting the spouse of any interest in the proceeds, if the parties are “legally separated” or divorced.  Also, the divorce decree may divest the former spouse of any right to the insurance proceeds.  This was made clear in the 1987, 14th Court of Appeals opinion styled, Novotny v. Wittner.  By statute, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, unless the former spouse is re-designated.  If the pre-divorce designation is invalidated, the proceeds may 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.  This is made clear in the Texas Family Code, Section 9.301.

Are spouses entitled to life insurance benefits?  That is a normal question in a lot of life insurance cases.  Here is some law in that regard.

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

The 1981, Eastland Court of Appeals opinion styled, Pilot Life Insurance Co. v. Koch, says, policies may contain provisions automatically divesting a spouse of any interest in the proceeds, if the parties are “legally separated” or divorced.  Also, according to the 1987, 14th District Court of Appeals opinion styled, Novotny v. Wittner, the divorce decree may divest the former spouse of any right to the insurance proceeds.  By statute, Texas Family Code, Section 9.301, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, unless the former spouse is redesignated.  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 is not always an easy answer.

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 insurer may pay the benefits to the designated beneficiary.   This is not a difficult concept but is affirmed in the 1967, Texas Supreme Court opinion, McFarland v. Franklin Life Insurance Co. and in the Texas Insurance Code, Section 1103.102.

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