When Insurance Companies are Liable

When Insurance Companies are Liable

Some state courts have recognized that there are times when an insurer should be aware when something fishy is going on—when a person named as the beneficiary had no “insurable interest” in the insured.
New York lawyer Norman L. Tolle, who represents health and life insurance carriers, and has written on the subject of insurance-related murder and the obligations insurers have to be on the lookout for shady behavior.

In this article, Tolle notes an important case, Liberty National Life Insurance Co. v. Weldon, in which the Alabama Supreme Court held that insurers have a responsibility to “use reasonable care not to create a situation which may prove to be a stimulus for murder.”

The 1957 case involved the murder of a 2-year-old by her aunt, who had been named a beneficiary on a life insurance policy for the child despite having no role in the child’s upbringing. The father of the child sued the insurer for failing to exercise “reasonable diligence” in ensuring the aunt had an insurable interest in her niece’s life.

Here’s what the court found:

It has long been recognized by this court and practically all courts in this country that an insured is placed in a position of extreme danger where a policy of insurance is issued on his life in favor of a beneficiary who has no insurable interest. . . . Where this court has found that such policies are unreasonably dangerous to the insured because of the risk of murder and for this reason has declared such policies void, it would be an anomaly to hold that insurance companies have no duty to use reasonable care not to create a situation which may prove to be a stimulus for murder.

In this case, the company didn’t even bother to notify the child’s parents that the aunt was taking out an insurance policy of their daughter. The parents found out about the policy only after the death of their child.