Insurable Interest Issues In Life Insurance

Who has an insurable interest in a life insurance policy?

The Texas Supreme Court, in 1979, in the case styled, Empire Life Insurance Co. v. Moody, held that a tenant holding property or an estate during the life of another has an insurable interest in the latter’s life.

Is an insurable interest essential to the validity of the life insurance contract?

This is discussed in the 1894, Texas Supreme Court opinion styled, Cheeves v. Anders.  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.

What happens when payment is made to a beneficiary who lacks an insurable interest?

According to the Cheeves v. Anders opinion, if insurance proceeds 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.

As stated in the 1998, Tyler Court of Appeals opinion, 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.

When an insurance company is unsure about who to pay, their recourse is to interplead the funds into the registry of a court.  This action protects the insurance company from exposure to having to pay twice on the policy.

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