Effect of lack of Insurable Interest for a Beneficiary
October 24, 2016
Policyholder, who was also the beneficiary of a life insurance policy, brought action against the insurer for policy proceeds, which insurer was withholding pending its investigation as to whether the policyholder had an insurable interest in the subject of the life insurance policy. The case is Sun Life Assurance Co. of Canada v. U.S. Bank Nat'l Ass'n, 2016 WL 3671466.
In 2007 Sun Life Assurance Co. issued a $6 million life insurance policy on a wealthy older gentleman who died in 2014. U.S. Bank had purchased the policy in 2011, becoming the policy's beneficiary. U.S. Bank is designated as a securities intermediary because the life insurance policy was bundled together with other life insurance policies to create a security and the policy was purchased by U.S. Bank functioning as an intermediary on behalf of another investor.
When U.S. Bank attempted to pursue its policy proceeds, Sun Life refused to pay until it conducted an investigation about the validity of the policy. Sun Life would profit from this delay because even if they had to return the $2.5 million premiums that had been paid into the policy they would not have to pay out the $6 million for the policy proceeds. Wisconsin law dictates that insurance policies must be paid out within thirty days of the claim. U.S. Bank thinks they have exclusive right to the policy because although the statute specifies that if the beneficiary of the policy does not have an insurable interest the proceeds should go to someone else equitably entitled to the policy. In this case, no one else was equitably entitled to the proceeds from the original policy so U.S. Bank retains a right in that property.
Sun Life relied in part on another Wisconsin statute that banned gambling. The Supreme Court has previously stated that “a contract of insurance upon a life in which the insured has no interest is a pure wager,” which in theory would void the life insurance policy in question. The court held that when a section of the insurance code conflicts with any other part of the code, the insurance code section wins. The court also clarified that the insurance code does not validate gambling, even on life insurance policies, it just requires that insurers pay what they promised to pay to an individual who has an insurable interest.
The district court had ruled that the beneficiary was entitled to the $6 million from the policy proceeds, plus statutory interest and bad faith damages from the delay in payment, and the Seventh Circuit affirmed, finding that the insurer did not have a reasonable basis for delay in payment and acted with “knowledge or reckless disregard” of the lack of basis.
Editor's Note: The U.S. Court of Appeals, Seventh Circuit, noted that while usually no life insurance policy is invalid merely because the policyholder lacks an insurable interest or because consent has not been given, a court with appropriate jurisdiction may order that those proceeds are allocated to an individual other than the policyholder who is equitably entitled. The proceeds can also be placed in a constructive trust subject to all of the terms and conditions of the policy except for those terms and conditions relating to insurable interest or consent. In this case the policyholder ended up being able to receive the policy proceeds despite lacking an insurable interest because there was no other person with an insurable interest and saying that the insurer did not have to pay the policy proceeds would result in their unjust enrichment.