Other Estate Planning Matters

Life Insurance

Insurable Interest

Certain Underwriters at Lloyd’s London v. Smith, 77 S.W.3d 859 (Tex. App.—Houston [14th Dist.] 2002, no pet.).


Convenience Store purchased a life insurance policy on the life of Employee payable to Convenience Store should Employee be killed on the job. After Employee was killed in the course and scope of his employment, Insurer paid Convenience Store the proceeds of the policy. Employee’s Wife sued Insurer and Convenience Store. The trial court awarded Wife the proceeds along with attorney’s fees and prejudgment interest.

The appellate court began its analysis by examining whether Convenience Store had an insurable interest in Employee’s life. The court held that Convenience Store had no insurable interest. The court recognized that an employer may have an insurable interest in an employee’s life but that this relationship by itself is insufficient. Convenience Store would not suffer a great loss by reason of Employee’s death. The unstated basis was likely to be that Employee was a mere clerk and a replacement could be hired almost immediately. The court discussed other cases which indicate that arrangements like this are actually wagering contracts on the lives of the insureds. Accordingly, Convenience Store holds the proceeds in trust for Wife.

The court also determined that the award of attorneys’ fees against Convenience Store was proper, that the trial court needs to recalculate prejudgment interest, and that Insurer was not liable to Wife because Insurer paid the insurance proceeds to Convenience Store without notice of Wife’s adverse claim.

Moral: An employer must be certain to have an insurable interest in an employee’s life before purchasing a life insurance policy on the employee’s life.