Life Insurance Attorney – Insurable Interest – Invalidate The Policy

What happens if the beneficiary of a policy does not have an insurable interest in the life of the insured?  Is the policy still valid?  If not, who gets the life insurance proceeds?
Here is a 1998 opinion from the Tyler Court of Appeals that addresses this issue.  The opinion is styled, Stillwagoner v. Travelers Insurance Company.
The decedent was a registered nurse employed by Advantage Medical Services, Inc.  Unbeknownst to the decedent’s family, the employer took out a $200,000 life insurance policy insuring against accidental death, dismemberment and total disability from Travelers designating Advantage as the beneficiary of the policy.  Advantage purchased such life insurance policies covering all of its employees.  The decedent was killed in a car accident while driving a company car.  Although Travelers disputed that the decedent was in the course and scope of her employment at the time of her death, Travelers eventually settled with Advantage and paid Advantage $190,000.  The decedent’s husband discovered the policy and sued Advantage and Travelers.  Judgment in favor of Advantage and Travelers is reversed and rendered.  Advantage did not have an insurable interest and, therefore, the proceeds belong to the decedent’s estate.
The Texas rule requires the designated beneficiary to 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.  If the insurance benefits are paid to a beneficiary without an insurable interest, the beneficiary holds the proceeds for the benefit of those entitled by law to receive them.  In 1921, the legislature enlarged the class of persons considered to have an insurable interest by enabling corporations to protect themselves in the event of the death of a valuable executive under certain circumstances.  The decedent’s estate has standing to raise the issue of Advantage’s lack of an insurable interest.  The beneficiary’s lack of an insurable interest does not invalidate the life insurance policy.  In order to have an insurable interest on the life of another, the beneficiary must (1) be so closely related by blood or affinity that he wants the other to continue to live, (2) be a creditor, or (3) have a reasonable expectation of pecuniary benefit or advantage from the continued life.  The mere existence of an employer/employee relationship is never sufficient to give the employer an insurable interest in the life of the employee.  In this case, the proceeds must be paid to the estate of the “person insured” – the decedent’s estate.
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