Life Insurance Owner Should Usually Have an Insurable Interest in the Insured Life

Oct 14, 2016 | Blog |

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The United States Court of Appeals for the Seventh Circuit issued a decision in Sun Life Assurance Co. of Canada v. U.S. Bank National Association on October 12, 2016 affirming the district court’s judgment.  The Court’s decision begins, “A common law principle that so far as we know is in force in every state of the United States forbids a person to own an insurance policy that insures someone else’s life unless the policy owner has an insurable interest in that life. Ohio National Life Assurance Corp. v. Davis, 803 F.3d 904, 907–08 (7th Cir. 2015).  So you are allowed to own an insurance policy on your spouse’s life because the death of the spouse is likely to impose costs on you, but you cannot own an insurance policy on the life of a stranger who you happen to know is in poor health and likely to die soon; for cashing in such an insurance policy would give you a pure windfall.”

Despite this general rule, the district court did not err in granting plaintiff’s (purchaser of life insurance policy) motion for summary judgment in an action seeking declaration that plaintiff was entitled to proceeds of the life insurance policy, even though plaintiff, which had purchased policy as part of investment vehicle, did not have insurable interest in insured who had died seven years after policy had been issued.  Under Wisconsin law (Wis. Stat. § 631.07(4)), no policy is invalid merely because the policyholder had no insurable interest in insured, and defendant-insurance company could pay proceeds to someone other than policy owner, who had equitable claim to said proceeds.  However, plaintiff was entitled to the proceeds since no one who was equitably entitled to the proceeds claimed entitlement to said proceeds.  The Court rejected defendant’s argument that its refusal to pay death benefits was authorized by Article IV, section 24, of the Wisconsin Constitution that voided all gambling contracts.

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