Insurable Interest And Employer

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.

The policy provided that Travelers would pay the benefit upon the on-the-job accidental death of an employee.  The policy provision requiring benefits under the policy to be paid to the insured persons or their beneficiaries and giving the insured person the right to change beneficiaries had been amended by rider to provide that all benefits under the policy should be payable to the policy holder and deleting the insured person’s right to change the beneficiary.

The legislature has, on several occasions, enlarged the class of persons considered to have an insurable interest.  Although the class of persons and entities having an insurable interest has been expanded, the insurable interest requirement has not been abrogated, and the rule is still strictly followed by the courts of this state.

The insurable interest requirement for beneficiaries of life insurance rests on two coexisting policy considerations: (1) that no inducement be offered to one person to take the life of another; and (2) that no one should be permitted to wager on the continuation of a human life.  A rule that limits the right to raise the issue to the insurance carrier suggests that the basis for the insurable interest requirement in life insurance policies is the protection of insurance companies.  But the rationale reiterated in our case law for over a hundred years tells us that the rule was not devised as a shield for insurance companies but for the protection of human life.

An insurable interest is an essential characteristic of probably all insurance contracts, whatever the subject matter.  But it is necessary to distinguish between property insurance and life insurance in defining what constitutes an insurable interest.

So did Advantage have an insurable interest in the life of its employee?  To prove an insurable interest in the life of another, the putative beneficiary must fall into one of three general classes: (1) one so closely related by blood or affinity that he wants the other to continue to live, irrespective of the monetary considerations; (2) a creditor; and (3) one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another.

The mere existence of an employer/employee relationship is never sufficient to give the employer an insurable interest in the life of the employee.

Peggy was a temporary employee hired two months before her death. She was replaced the day after her death.  It was claimed that like Advantage’s other employees, Peggy would have had the opportunity to produce business through her friendships and professional contacts.  However,  there is no identify of any referrals produced by Peggy or a showing of any diminution in Advantage’s business referable to her death.  The “referrals” anticipated from the employees personal and business contacts seem no more than what an employer might ordinarily expect from any conscientious employee.  In this context, it is worth noting that Advantage insured the lives of all its employees.  Even in the absence of evidence we may assume that Peggy’s death forced some readjustments which normally accompany the death of an employee.  But an insurable interest does not result from the cessation of ordinary service.  Other than the bald assertion that she might have been expected to produce new business for her employer, there is no showing that Advantage’s success or failure was dependent upon Peggy.

Other issues are discussed in this case but the bottom line was the court awarded the life insurance proceeds to the family of the employee.