www.rivkinradler.com December 2002   Life Insurance Policies As An Incentive To Murder, And The Duty Of Reasonable Care   By: Norman L. Tolle     [Editor's Note: Mr. Tolle is a partner in the Uniondale, New York, office of Rivkin Radler LLP. He represents life, health, and disability insurance carriers on a broad range of issues. Mr. Tolle may be reached at norman.tolle@rivkin.com. Copyright 2002 by the author. Responses to this commentary are welcome.]   Over the years, a number of state courts have recognized the validity of wrongful death claims against life insurance companies for their improper issuance of life insurance policies.[1]In particular, several state courts have permitted these actions to proceed under general tort law principles.[2] These court decisions suggest that life insurers should make certain that they exercise reasonable care when underwriting policies so as not to provide an incentive to murder through the issuance of their life insurance policies. The concern is more than theoretical. Recently, for example, federal officials in New York charged that two men had obtained hundreds of thousands of dollars in insurance proceeds by obtaining insurance policies on "a large number" of individuals who thereafter had been killed.[3]Although public policy is rather clear that a life insurance policy obtained by one having no insurable interest in the life of the insured is void at its inception,[4]an insurer that issues such a policy may face liability for wrongful death in the event that the insured is murdered by someone who receives the benefits of the policy -- and damages may well exceed the policy's face amount. Three Theories Generally speaking, courts have recognized the validity of wrongful death claims in these circumstances on three different grounds. The first is where the insurance company should have known that the individual who procured and owned the policy, and named himself or herself as the beneficiary, had no insurable interest in the life of the insured. The second is where the insurance company had knowledge that the insured was unaware of the existence of the policy. The third factual predicate is where the insurance company had actual knowledge of the beneficiary's intent to murder the insured and failed to take action. Insurable Interest Courts have imposed liability on insurance companies for breaching a duty of reasonable care not to issue a policy of life insurance in favor of an individual who applied for and owned the policy, named himself or herself as beneficiary and had no insurable interest in the life of the insured. The case of Liberty National Life Insurance Co. v. Weldon[5]often is cited in support of this proposition. In Weldon, an aunt-in-law obtained several life insurance policies on her 2 1/2-year-old niece, paid the policies' premiums, and named herself the beneficiary of each policy. She then poisoned the child to collect the insurance proceeds. The aunt-in-law was convicted of the child's murder. The child's father filed suit against the insurance companies, arguing that they knew or should have known that the aunt-in-law had no insurable interest in the life of the child, that they failed to exercise "reasonable diligence" to ascertain whether an insurable interest had existed even though they had a duty to do so, and that their failure to perform that duty proximately caused the child's death. The Alabama Supreme Court found that the aunt-in-law did not have an insurable interest in the life of her niece under Alabama law and, thus, was not an appropriate beneficiary. Moreover, the court ruled, the insurance companies that had issued the policies had been aware that the child did not live with the aunt-in-law, that the aunt-in-law did not support the child, and that the child lived with her parents. Despite this knowledge, none of the insurance companies required that the child's parents sign the insurance application on the child's life. Indeed, the child's parents were not aware of the policies issued on their daughter's life until after her death. The Alabama Supreme Court considered the issue of the insurance company's duty as a matter of first impression and held: "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."[6] The Weldon court explained the basis for its finding of such duty, stating, "we are of the opinion that such a duty exists, for there is a duty upon all to exercise reasonable care not to injure another."[7] Duty To Advise Insured Of Policy On His Or Her Life Courts also have imposed liability on insurers based on a second ground, namely that they have a duty to ensure that insureds are aware that policies insuring them had been procured and that they consent to the issuance of the policies. A South Carolina case, Ramey v. Carolina Life Ins. Co.,[8]explains this rationale. In that case, a wife obtained a life insurance policy on the life of her husband without his consent, forged his signature on the policy application, and named herself the beneficiary of the policy. She then attempted to murder her husband by poisoning him. According to the South Carolina Supreme Court, the insurance company knew that the husband was unaware of the policy and that the wife had forged his signature. The husband filed suit against the insurance company for the injuries he sustained, alleging that the insurance company's negligent issuance of the policy on his life induced his wife to attempt to murder him for the proceeds. The South Carolina Supreme Court recognized that a wife generally has an insurable interest on the life of her husband, but nevertheless concluded that, even with the existence of an insurable interest, insurance taken out on the life of another, without consent, was against public policy and void.[9]The court went on to hold that "an insurance company has a duty to use reasonable care not to issue a policy of life insurance in favor of a beneficiary who has obtained such policy without the knowledge or consent of the insured, and this would especially be true, where as here, the company knew or had reason to know that such was the situation."[10] In reaching this conclusion, the Ramey court relied on and quoted Hack v. Metz,[11]which noted that "it has been broadly stated that insurance taken out on the life of another, without the latter's consent is against public policy and void." It further relied on and quoted Holloman v. Life Ins. Co. of Virginia,[12]where the court stated that "the authorities generally are to the effect that except in the case of an infant, a policy of life insurance taken out without the knowledge or consent of the insured person is not enforceable." The Ramey court also observed that the reasoning of the Alabama Supreme Court in Weldon was "pertinent" in finding a duty on the part of an insurance carrier not to issue a policy without the insured's knowledge or consent. In doing so, the Ramey court highlighted the Weldon court's reasoning that a duty exists because "there is a duty upon all to exercise reasonable care not to injure another." The Ramey court summarized its position on the issue of duty, stating that: "[A]n insurance company has a duty to use reasonable care not to issue a policy of life insurance in favor of a beneficiary who has obtained such policy without the knowledge or consent of the insured. . . . The rule against issuing policies on the life of a person without his knowledge or consent is 'designed to protect human life.' Policies issued in violation of this rule are not dangerous because they are illegal; they are illegal because they are dangerous.'"[13] In another case, Williams v. John Hancock Mutual Life Ins. Co.,[14]the Missouri Court of Appeals considered a case where the plaintiff alleged that he was shot and partially paralyzed due to the defendant insurance company's negligent issuance of a policy on his life. In Williams, Angela Franks, an agent for the defendant insurance company, who was acquainted with the plaintiff through other business dealings, submitted an application to the insurer on the life of the plaintiff without the plaintiff's knowledge or consent. Although the policy application was purported to be signed by the plaintiff, his testimony indicated that he never had signed the forms, and a handwriting expert corroborated this testimony, opining that the signatures were forged. Notably, the defendant's internal protocol required that an insurance agent witness the signing of an insurance application. The named beneficiary on the policy was originally the plaintiff's wife, but later was changed to Caroline Hinton, a friend of both the plaintiff and Franks. The insurance company did not contact the plaintiff when this change of beneficiary occurred. Fewer than four years after the policy was issued, the plaintiff was shot in the back and partially paralyzed. It was the plaintiff's theory that Franks, Hinton and two other individuals involved in his shooting conspired to kill him to obtain the insurance benefits of the policy issued by the defendant. The plaintiff then filed a negligence action against the defendant for issuing the policy. In considering whether the defendant was negligent, the Missouri court held: "[T]he negligent issuance of a life insurance policy is unlikely to lead to an attempt on the insured's life. However, murder is such a serious crime that it is against public policy not to discourage any act which even marginally increases the risk that murder will be attempted. We therefore refuse to hold that an insurance company has no liability if it negligently issues an insurance policy which acts as an incentive for murder or attempted murder. The increased risk caused by the negligent issuance of life insurance may be slight, but it is certainly foreseeable."[15] In addition to the holdings in Ramey and Williams, the duty of an insurance company to determine whether an insured is aware of and has consented to the issuance of a policy on his life was recognized several years ago by the Massachusetts Supreme Judicial Court in Bacon v. Federal Kemper Life Assur. Co.[16]There, the facts showed that the decedent's business partner forged the decedent's name on a change of beneficiary form, named himself the beneficiary and then murdered the decedent for the policy proceeds. The decedent's wife filed a wrongful death negligence action against the insurance company alleging that the insurer breached its duty of care to the decedent when effectuating the change of beneficiary request. The court found that there was enough evidence to show that the insurer owed a duty to the decedent, although the evidence was insufficient to establish a breach of that duty.[17]In reaching its conclusion that a duty existed, the Bacon court specifically recognized that the law imposes a duty on an insurance company to protect its insured by taking "reasonable steps to determine whether the insured has consented to the policy or the change of beneficiary."[18] Knowledge Of Intent To Murder At least one court has ruled that a life insurance company that has actual knowledge of the beneficiary's intent to murder the insured may face liability if it fails to take action.[19] In that case, Jim Lopez filed suit against a life insurer, claiming the company's negligence had endangered his life and caused him injury. In the complaint, Lopez alleged that his total family income amounted to $9,000 per year. Nonetheless, he alleged, the insurance company issued to Lopez's wife insurance coverage on his life with a total face value of $130,000 and $260,000 for accidental death. The annual premiums, paid out of family income, were $7,464. Lopez further alleged that he was not aware that his wife was purchasing life insurance; he claimed to have been tricked into signing the forms, believing his wife was purchasing a health insurance policy. The complaint stated that Lopez overheard his wife and her brother plotting to kill him. Lopez allegedly called his insurance agent immediately, informing him of the conspiracy, but the insurance company made no inquiry into the matter. Lopez's wife and brother-in-law thereafter abducted him, it was alleged, and were attempting to drown him when a deputy sheriff happened upon the scene and rescued him. The complaint charged the insurance company with negligence in failing to discover the disproportion of the coverage to the family's financial circumstances and negligence in failing to investigate the conspiracy to murder Lopez after receiving actual notice. The trial court dismissed Lopez's complaint, with prejudice, for failure to state a cause of action. The appellate court reversed the order dismissing the complaint and remanded the cause to the trial court. The case reached the Florida Supreme Court, which affirmed, finding that an insurer can be liable in tort to the insured where the beneficiary attempts to murder the insured to collect the policy proceeds and where the insurer had actual notice of the beneficiary's murderous intent. The court observed that insurance companies "cannot in the usual course of business dealings be held to be guarantors of their customers' good intentions," but added that neither can they be relieved of "a duty to investigate when a beneficiary's criminal motive in purchasing the policy is made known." It stated that the "pivotal issue" in the case was the allegation that the insurance company had actual notice of the beneficiary's murderous intentions toward the insured. In the court's view, this notice "should have triggered an investigation which would in its earliest stages have uncovered the disproportion between the insured's economic worth to the beneficiary dead and alive, the insured's lack of consent to the issuance of the policy, and the financial impossibility of the couple meeting the premium payments for any extended period of time." The court concluded that this "aggregation of suspicious circumstances" imposed on the insurance company "a duty to eliminate any motive for effecting the insured's death, if not by withdrawing the coverage as void for reasons of public policy, then at least by warning the beneficiary that no proceeds would be payable if she in fact murdered the insured." The Bajwa Case Recently, an Illinois appellate court analyzed the validity of a wrongful death action against a life insurer based on its allegedly improper issuance of an insurance policy.[20]The court's decision is a current opinion applying the various theories seeking to impose liability on an insurer in these circumstances, and suggests a roadmap for insurance companies to follow to limit their potential liability. According to the complaint filed by Khalid J. Bajwa, administrator of the estate of Muhammad Cheema (the "decedent"), against Metropolitan Life Insurance Company, Muhammad U. Cheema ("Cheema") approached Imtiaz Sheik, a MetLife account representative, and filled out an application for a life insurance policy on the life of the decedent. Cheema, whose name was nearly identical to the decedent's, represented himself as the decedent's son and provided Sheik with personal information about the decedent necessary for the policy application. Cheema also designated himself as the beneficiary of the policy and arranged for the policy premiums to be automatically deducted from his bank account, but listed the decedent as the "owner" of the policy on the application. Cheema then told Sheik that he would take the application to his "father" and obtain his "father's" signature, and Sheik agreed to this arrangement even though MetLife company procedure required that an insurance agent personally meet with the insured and witness the insured signing the policy application. Cheema returned the application to Sheik with a signature bearing the decedent's name. Much of the information provided by Cheema on the policy application was incorrect. For example, the decedent's home address, occupation, years of employment, annual income, insurance status, and medical information were misstated. Further, the application wrongly indicated that Cheema was the decedent's son. As part of the application process, the insured was required to submit to a medical examination conducted by EMSI, a paramedical company hired by MetLife. The individual who identified himself as the decedent was examined by EMSI and produced a State of Illinois identification card that identified him as the decedent. A MetLife investigator contacted the Secretary of State's office and confirmed that an identification card was issued to an individual with the same name as the decedent. The individual examined by the EMSI paramedic was listed in the report as standing 5 feet 11 inches tall and weighing 195 pounds. At the time of his death, less than a year after the paramedical examination, the decedent stood 5 feet 8 inches tall and weighed 213 pounds. The insurance application in question, including the parts containing the paramedical examiner's certification, was submitted to a MetLife underwriter prior to issuance of the policy. The underwriter noticed anomalies in the policy application that required further investigation. Specifically, the underwriter questioned why Cheema, rather than the insured's wife, was the policy beneficiary and why the beneficiary, rather than the insured, was paying the monthly policy premiums. The underwriter also questioned why the policy amount was $200,000 when the decedent's income, pursuant to MetLife financial guidelines, qualified him for a policy in the amount of $150,000. The underwriter confronted Sheik with these discrepancies and was told that the son was the beneficiary because the wife lived in Pakistan and foreign beneficiaries were discouraged by the company. Sheik also advised the underwriter that, despite information in the application suggesting otherwise, the insured would be paying the policy premiums with some assistance from his son. Sheik explained that the increase in the policy amount was necessary because the decedent was supporting his wife and children in Pakistan and would be buried in Pakistan upon his death. Based on these explanations, the underwriter decided that the application was acceptable and issued the policy. The underwriter never asked Sheik if he personally met with the decedent. MetLife issued its policy insuring the life of the decedent in the amount of $200,000. After the policy was issued, an individual purporting to be the insured called MetLife four times with hypothetical questions concerning the payment of claims under the policy. MetLife's records concerning these calls noted that the caller asked whether the policy would pay if the insured were injured in a car accident in another country, returned to this country, and then died. Another notation indicated that a call was received in which the caller asked "detailed questions about if he goes to Pakistan and dies will we [MetLife] pay the claim." The notation further indicated that the caller "had specific hypothetical situations that he wanted to know if we would pay or not." Another call was received in which the caller asked whether MetLife would pay if he was in a car accident or his house was robbed and he was killed in Pakistan. Six days after these calls were made to MetLife, the decedent was stabbed and beaten to death in his apartment. Cheema was the suspected murderer; however, he never was convicted of the offense and apparently fled to Pakistan after the decedent's murder. Bajwa, the administrator of the decedent's estate, filed suit against MetLife, alleging, among other things, that the insurer had negligently and carelessly issued a life insurance policy on the decedent's life without investigating the veracity of the information on the insurance application or personally meeting the insured; issued a policy in favor of a beneficiary who did not possess an insurable interest on the life of the insured; and failed to warn the decedent of suspicious phone calls that suggested that he was in imminent danger. The trial court dismissed certain counts of the complaint and the plaintiff appealed. The appellate court first analyzed the plaintiff's claims under the "insurable interest" test. According to the court, although Illinois law clearly states that an individual must have an insurable interest in the life of another to obtain an insurance policy on that life, there is no provision in Illinois law that states that insurance companies have a duty to refrain from issuing life insurance policies to the person whose life is being insured, who may then designate a beneficiary without an insurable interest. In other words, the court stated, the requirement of having an insurable interest is imposed only with respect to the procurer of the policy, not the ultimate beneficiary. The court then found that the plaintiff's complaint did not allege that MetLife issued an insurance policy to an individual who did not possess an insurable interest but, rather, alleged only that MetLife allowed the policyowner to designate a beneficiary who did not possess an insurable interest. The court said that, as pled, these allegations would impose liability even if the policy was procured by the decedent himself, so long as the beneficiary lacked an insurable interest. "These allegations fail to establish a violation under Illinois law of the insurable interest requirement," the court held. As a result, it ruled, the allegations were insufficient to establish a cause of action. Importantly, the court emphasized that its conclusion did not mean that it disagreed with the general proposition that would impose liability upon an insurer, under a negligence theory, where the insurer permits procurement of a policy in violation of the insurable interest requirement under state law in the event that such violation becomes the proximate cause of the insured's murder. The Illinois appellate court then turned to the plaintiff's efforts to impose liability on MetLife for failing to advise the decedent of the policy on his life. After agreeing with other court decisions that have found that a duty exists on the part of an insurance carrier to ascertain whether the insured is aware of and has consented to the policy, the appellate court stated that whether such a duty exists is contingent upon several factors, and the weight accorded to each factor depends upon the specific circumstances of each case. In the court's view, in determining whether a duty exists, it had to consider: (1) the reasonable foreseeability of injury; (2) the likelihood of injury; (3) the magnitude of the burden of guarding against the injury; and (4) the consequences of placing that burden on the insurer. In examining these factors in this case, the court first concluded that the injury was reasonably foreseeable, stating that the issuance of a life insurance policy to someone with no interest in the life of the insured is "a pure wager" that creates "a sinister counter interest in having the life come to an end." Moreover, the court continued, the fact that the injury occurred through the intervening act of a third party was not, by itself, sufficient to break the causal relationship or otherwise render the injury unforeseeable. Next, the Illinois court found that there was a likelihood of injury when an insurance policy is issued without the knowledge and consent of an insured because a beneficiary of a life insurance policy cannot collect the proceeds unless the insured party is deceased. The risk of injury to an insured, the court added, could be reduced if insurance companies were required to make reasonable efforts to ensure that the insured party is aware of any policy issued upon his or her life. Apparently, it added, such a requirement would "not be overly burdensome" to insurance companies, noting that the agent in this case was required to meet with the prospective insured and certify his signing of the insurance application before submitting it to the underwriter who would, in turn, investigate any discrepancies or abnormalities in the application. "These factors suggest that there is a duty upon an insurer to determine whether an insured is aware of a policy procured upon his life," the court stated, asserting that the recognition of such a duty "would be consistent with general negligence principles and would implement the recognized public policy of this state to preclude sales of insurance that would unnecessarily endanger the life of the insured." For these reasons, it concluded, an insurer may not insure someone's life without undertaking reasonable precautions to ascertain whether the insured is aware of and has consented to the issuance of the policy. Thus, it held, where a policy of life insurance was procured on the decedent's life by someone other than the decedent, MetLife had a duty of care to ascertain that the decedent was aware of and agreed to the issuance of the policy. Finally, the appellate court stated that it did not have to decide whether the insurer could be held liable based on its alleged failure to investigate the suspicious phone calls it received after the policy was issued because the plaintiff waived that issue. However, it said, where an insurance carrier takes all necessary and reasonable precautions at the time of its issuance of the policy to assure that the insured is aware and acquiesces to the policy, it would be reluctant to recognize a follow-up duty to monitor the conduct of the beneficiary or to warn the insured of any potential risk to his life. "Once a policy is properly issued, it may be reasonably argued that the insurer has no greater duty than any other person or entity to warn the insured of a potential risk to his life," the Illinois court observed. Accordingly, the appellate court reversed the trial court's decision on the "failure to advise" theory and remanded the case to the trial court for further proceedings. Conclusion Although life insurance policies procured by a person who does not have an insurable interest in the insured's life may be void, they still can lead to an insurer's liability under various theories adopted by a number of courts across the country. Insurers, therefore, should put appropriate procedures in place -- and require that the procedures are followed -- to help make certain that life insurance policies only are issued to those who have an insurable interest in the life of the insured and that the insured is aware of the existence of the policy. - top - NOTES: [1] See, e.g., Life Insurance as Motive for Murder, 29 Tort & Ins. L.J. 761 (1994). [2] See, e.g., Williams v. John Hancock Mutual Life Insurance Co., 718 S.W.2d 611 (Mo. 1986); Life Insurance Co. v. Lopez, 443 So. 2d 947 (Fla. 1983); Ramey v. Carolina Life Ins. Co., 135 S.E.2d 362 (S.C. 1964); Liberty National Life Insurance Co. v. Weldon, 100 So. 2d 696 (Ala. 1957); see, also, Insurer's Tort Liability for Wrongful or Negligent Issuance of Life Policy, 37 A.L.R.4th 972 (1985). [3] See, Anthony DeStefano, "Pair Accused In Plot To Kill For Insurance," Newsday, Sept. 4, 2002. [4] See, e.g., Ramey, 135 S.E.2d at 365. [5] 100 So. 2d 696 (Ala. 1957). [6] Weldon, 100 So. 2d at 708. [7] Id. [8] 135 S.E.2d 362 (S.C. 1964). [9] Ramey, 135 S.E.2d at 364. [10] Id. at 366. [11] 176 S.E. 314, 316 (1934). [12] 7 S.E. 2d 169, 170-71 (1940). [13] Ramey, 135 S.E.2d at 366-67, quoting Weldon, 100 So. 2d at 708. [14] 718 S.W.2d 611 (Mo. 1986). [15] Williams, 718 S.W.2d at 613. [16] 512 N.E.2d 941 (Mass. 1987). [17] Bacon, 512 N.E.2d at 943. [18] Bacon, 512 N.E.2d at 944. [19] Life Ins. Co. of Georgia v. Lopez, 443 So. 2d 947 (Fla. 1983). [20] Bajwa v. Metropolitan Life Ins. Co., 2002 Ill. App. Lexis 700 (August 13, 2002).Knowledge Of Intent To Murder