Seventh Circuit: No Insurable Interest, No Problem (For the Beneficiary, That Is!)

The Seventh Circuit recently affirmed a district court decision upholding payment under a life insurance policy purchased by a securities intermediary. The decision first addressed the common law’s prohibition on wagering contracts, or stranger-originated life insurance, and the traditional remedy which invalidates any such policy of insurance. However, this case was subject to Wisconsin law, whose legislature places the risk on the insurer for issuing a policy to someone without an insurable interest by refusing to invalidate such contracts. Specifically, the Wisconsin statute reads (Wis. Stat. § 631.07(4)):



No insurance policy is invalid merely because the policyholder lacks insurable interest or because consent has not been given, but a court with appropriate jurisdiction may order the proceeds to be paid to someone other than the person to whom the policy is designated to be payable, who is equitably entitled thereto, or may create a constructive trust in the proceeds or a part thereof, subject to terms and conditions of the policy other than those relating to insurable interest or consent.


The insurer began an investigation into the validity of the policy and refused to pay the proceeds to the beneficiary, the securities intermediary. The insurer relied in part on another Wisconsin statute which voids all gambling contracts and that the Wisconsin constitution which forbids the authorization of gambling in any form. The court held that when a section of the insurance code conflicts with a section of another code, the insurance code provision controls. Further, the court stated that the legislature has not authorized gambling, as “gambling contracts, including life insurance policies that lack an insurable interest are still forbidden.” The Wisconsin statute merely changes the remedy for violation “from invalidation of the policy to requiring the insurer to cough up the proceeds.”

The district court ruled that the beneficiary was entitled to the policy proceeds, $6 million, plus statutory interest along with “bad faith” damages for the insurer’s delay in paying its obligation. The Seventh Circuit affirmed, finding that the failure to pay within 30 days was a violation of the prompt pay statute due to the insurers lack of reasonable proof that it did not have to pay the claim. This violation entitled the beneficiary to an award of interest at a rate of 12 percent. Further, the court affirmed the bad faith finding which required a showing that the insurer lacked a reasonable basis for the delay in payment and acted with “knowledge or reckless disregard” of the lack of basis.

Sun Life Assur. Co. of Can. v. U.S. Bank Nat’l Ass’n
U.S. Ct. Apps., 7th Cir., Oct. 12, 2016