Timing an Insurable Interest in a Life Insurance Policy
Ex parte Liberty National Life Insurance Company: The Alabama Insurance Code requires only that an insurable interest in a life insurance policy exists when the policy becomes effective.
In March 2016, the Supreme Court of Alabama decided the matter of Ex parte Liberty National Life Insurance Company (arising out of Misty Ann Barton v. Liberty National Life Insurance Company), holding, as a matter of first impression, that the Alabama Insurance Code (in pertinent part, Ala. Code (1975) § 27-14-3(f)) does not require an insurable interest in a life insurance policy to exist at a point other than the time at which the policy becomes effective. Ex parte Liberty National Life Ins. Co. [Ms. 1140612], — So.3d —, 2016 WL 1171505 (Ala. 2016).
Liberty National Life Insurance Company (“Liberty National”) issued a life insurance policy to Benjamin H. Miller, Sr. for the life of his son Benjamin H. Miller, Jr. Initially, the named beneficiary on the policy was Benjamin Jr.’s grandmother, Nona June Miller. Sometime thereafter, Benjamin Sr. altered the policy to name himself as the beneficiary. In January 2011, Benjamin Sr. died, and his widow Leanne Miller (step-mother to Benjamin Jr.), upon receiving the letters of administration, substituted herself as the named beneficiary on the life insurance policy for Benjamin Jr.’s life. Benjamin Jr. died in July 2011, and subsequently Leanne Miller made a claim for the life insurance proceeds under the policy.
Barton, the administratrix for Benjamin Jr.’s estate, sued both Liberty National and Leanne Miller, alleging (1) that the policy was void because Leanne Miller had no insurable interest in her stepson, (2) that Liberty National was negligent in failing to determine at the time of the beneficiary change request that Leanne Miller had no insurable interest in Benjamin Jr., and (3) that Liberty National’s negligence deprived Benjamin Jr.’s estate of the policy proceeds to which it was entitled. Ultimately, the trial court dismissed the suit pursuant to Liberty National’s Rule 12(b)(6) motion.
Barton appealed to the Alabama Court of Civil Appeals, which held that that Alabama Code (1975) § 27-14-3(f) does not allow for the change of a beneficiary on the life insurance policy of another when the proposed new beneficiary does not possess an insurance interest in the insured. The Court of Civil Appeals interpreted the statute to mean that Benjamin Jr.’s stepmother Leanne Miller did not have an insurable interest in Benjamin Jr. either when the policy was issued or at any time thereafter. Liberty National appealed to the Alabama Supreme Court.
As a matter of public policy, only a person with an insurable interest in another, can take out a policy of insurance in the other, so as to prevent wagering or speculating on human life and profiting therefrom. However, a life insurance policy taken out by a person with an insurable interest (such as in this case) may in good faith assign the policy to anyone regardless of whether the assignee has an insurable interest in the insured person. See Ala. Code (1975) § 27-14-21(b). The question before the Alabama Supreme Court in this case is “whether, akin to an assignment, a validly issued life-insurance policy may, in good faith, if the policy does not provide otherwise, be modified to substitute a beneficiary, regardless of whether that beneficiary has an insurable interest in the life of the insured.”
Alabama Code (1975) § 27-14-3(f) requires that an “insurable interest shall exist at the time the contract of personal insurance becomes effective, but this requirement need not exist at the time the loss occurs.” It does not place any restrictions on a subsequent change of beneficiary for a validly issued life insurance policy, and the Court in interpreting the statute as it was written found that requiring an insurable interest to exist beyond the time the policy is procured and/or becomes effective would require the Court to add words to the statute. Alabama Code (1975) § 27-14-3(g) further specifies that an insurance policy obtained on the life of another is only valid if at the time the contract is made, the benefits are payable to a person having an insurable interest in the insured. Therefore, the court held that an insurable interest in a life insurance policy need exist only at the time the policy becomes effective and not at the time the loss occurs. To that effect, the Supreme Court of Alabama reversed the Alabama Court of Civil Appeals.