For centuries, life insurance was viewed as merely a means of providing a safety net in the event of a death in the family. However, by the 18th century in England, life insurance had become a form of gambling. Policies were purchased on the lives of others—sometimes even well-known public figures—without the knowledge of the person whose life was being insured as a wager on when that person would die. To address public concerns about the implications of wagering on a stranger’s death, Parliament responded by enacting one of the first “insurable interest” laws.
Most U.S. states now require that the owner or beneficiary of a policy have an insurable interest in the insured at the time the policy is purchased. People are always considered to have an insurable interest in their own lives. Generally speaking, another person is considered to have an insurable interest when that person has an identifiable and acceptable interest in the life of the person being insured (such as a spouse, a child or even a business partner).
More recently, some states have broadened the definition of insurable interest and a few have basically eliminated the requirement and thus allow investors to own life insurance on individuals who are essentially strangers. However, no state has gone as far as Texas to eliminate the traditional concept of insurable interest. Under the liberal insurable interest law of Texas, any person (or corporation for that matter) may buy a policy insuring any individual’s life as long as the individual consents in writing to the policy’s purchase.
The Texas Insurance Code includes the following:
An individual of legal age may in a single written document:
(1) consent to the purchase of or application for an individual or group life insurance policy by a third party; and
(2) designate or consent to the designation of any individual, partnership, association, corporation, or legal entity as:
(A) a beneficiary of the policy;
(B) an absolute or partial owner of the policy; or
(C) both a beneficiary and an absolute or partial owner of the policy
Tex. Ins.Code § 1103.056.
In short, Texas law provides that an individual may consent to another person purchasing insurance on his or her life. Under Texas law, “[a] beneficiary … who is designated in a life insurance policy has an insurable interest for the face amount of the policy and is entitled to collect that amount.” Tex. Ins.Code § 1103.002. An individual applying for a policy on his or her own life may “designate in writing in the application for the policy any individual” as beneficiary, owner, or both. Tex. Ins.Code § 1103.054. An individual may designate a third party to submit an application on his or her behalf, or consent to the designation of a third party as a beneficiary or owner, but this consent must be in writing. Tex. Ins.Code § 1103.056.
In Texas, “the legislature has conferred an insurable interest on those persons named by an insured as beneficiaries in a policy on his own life and on those named by a person to whom the insured has granted the power to make such a designation.” Allen v. United of Omaha Life Ins. Co., 236 S.W.3d 315, 323 (Tex.App.–Fort Worth 2007, pet. denied). Thus, under Texas law, a so-called “stranger-originated life insurance” (or STOLI) policy will be enforced as long as the insured consents.
Texas law also allows owners of life insurance policies to sell existing life insurance policies to entities called viatical or life settlement providers. In 2011, Texas enacted the Life Settlements Act. Tex. Ins.Code §§ 1111A.001 et seq. The Texas Act is based on—and largely tracks— the NCOIL Life Settlements Model Act.
The Model Act is frequently described as effectively prohibiting most STOLI policies because the Model Act makes it unlawful for any person to “issue, solicit, market or otherwise promote the purchase of an insurance policy for the purpose of or with an emphasis on settling the policy.” NCOIL Model Act, at § 13(A)(4). The Texas law includes this prohibition:
PROHIBITED PRACTICES. (a) A person may not: … (4) issue, solicit, market, or otherwise promote the purchase of an insurance policy for the purpose of, or with an emphasis on, settling the policy.
Tex. Ins.Code § 1111A.017(a)(4). Of course, as discussed above, Texas law expressly sanctions many transactions that would be considered improper STOLI schemes in most jurisdictions.
Interestingly, although the Texas Act includes the Model Act’s prohibition against promoting or purchasing a policy with an emphasis on settling the policy, the Texas legislature omitted the Model Act’s definition of STOLI. It would seem that Texas lawmakers were trying to avoid a conflict between the Model Act’s efforts to curb STOLI schemes and existing Texas law which expressly permits an insured to consent to a stranger having an insurable interest in his life. However, by including the prohibition of § 1111A.017(a)(4), it appears a conflict was created. At the very least, there is considerable tension between Tex. Ins.Code § 1103.056 allowing one to consent to a third-party investor owning or benefiting from a policy on his life, and § 1111A.017(a)(4) making it illegal to “issue, solicit, market, or otherwise promote the purchase of an insurance policy for the purpose of, or with an emphasis on, settling the policy.”
In any event, the actual consent of the insured is clearly required under Texas law. If a policy has been purchased through fraud and consent was lacking, the insurance company can contest the policy even if the policy has an incontestability period that has already passed. See, e.g. Massachusetts Mut. Ins. Co. v. Mitchell, 859 F.Supp.2d 865 (S.D.Tex. 2012). The Texas Insurance Code provides:
Misrepresentation in Application for Life Insurance
A defense based on a misrepresentation in the application for, or in obtaining, a life insurance policy on the life of a person in or residing in this state is not valid or enforceable in a suit brought on the policy on or after the second anniversary of the date of issuance of the policy if premiums due on the policy during the two years have been paid to and received by the insurer, unless:
(1) the insurer has notified the insured of the insurer’s intention to rescind the policy because of the misrepresentation; or
(2) it is shown at the trial that the misrepresentation was:
(A) material to the risk; and
(B) intentionally made
Tex. Ins.Code § 705.104.
But does Texas law even apply to a given life insurance policy or life settlement contract? Because of the unique aspects of Texas insurable interest law, whether Texas law governs a particular policy or transaction may end up being the most important issue in a policy dispute. Will the dispute be governed by the law where the insured lived or died? The state where the policy was purchased? The state where a life settlement was purchased? The answer will depend on the particular facts of a given dispute as well as the choice of law rules that are applied by the forum where the dispute arises. It is a complex question that only attorneys well-versed in life settlement litigation can properly answer.
Heygood, Orr & Pearson has filed numerous lawsuits on behalf of investors in life settlements and owners of policies where the insurance carrier has refused to pay the claim after the insured passes away. If you or your company have had a policy claim denied based on allegations of STOLI or lack of insurance interest, you need representation from a sophisticated law firm such as Heygood, Orr & Pearson that is experienced in this area of the law. For more information and a case evaluation that will help determine your legal rights, please contact us by calling toll-free at 1-877-446-9001, or by filling out the free case evaluation form located on this page.