Opinion ID: 2325732
Heading Depth: 3
Heading Rank: 3

Heading: The Delaware common law required an insurable interest

Text: Phoenix and ACLI argue that the statutory language prohibits entering into a life insurance contract with the intent immediately to transfer the policy to someone without an insurable interest. The United States District Court for the District of Delaware has reached the same conclusion. [46] ACLI correctly points out that under Delaware common law, an assignment may not be used as a formalistic cover for what in substance amounts to a wager. [47] Phoenix and ACLI also argue that ignoring intent would result in an illogical triumph of form over substance that would completely undermine the policy goals behind the insurable interest requirement. [48] We agree. For nearly one hundred years, Delaware law has required an insurable interest as a way to distinguish between insurance and wagering contracts. In Baltimore Life Ins. Co. v. Floyd , the court explained: [T]he legitimate scheme of life insurance is inclined to be distorted and to some it affords an invitation for a mischievous kind of gambling. To avoid this misuse of a most useful character of undertaking, in which a beneficiary may become interested in the early death of the insured, it is held that the insurance upon a life shall be effected and resorted to only for some benefit incident to or contemplated by the insured, and that insurance procured upon a life by one or in favor of one under circumstances of speculation or hazard amounts to a wager contract and is therefore void, upon the theory that it contravenes public policy. The presence of an insurable interest on the part of the beneficiary is urged as a request to avoid the appearance of a wager contract, holding that without such an interest, the interest in the beneficiary is speculative. An insurable interest of the beneficiary may be shown by proof of the fact of relationship between the beneficiary and the insured within certain degrees, and by proof of pecuniary interest, such as arise between partners and between debtors and creditors. Evidence of such an insurable interest is evidence that the contract is not a wager and is evidence of the contracts validity. If the beneficiary has an insurable interest and the transaction is otherwise legal, the policy is valid; if he has not such an interest the policy may be valid, if the transaction is bona fide and free from speculation. [49] In Floyd, the court analyzed the intricacies of the insurable interest requirement in detail, including the general rule that, where the transaction is bona fide, a person may take insurance upon his own life for the benefit of one having no insurable interest in his life. [50] This general rule is based upon the theory that it is not reasonable to suppose that a person will insure his own life for the purpose of speculation. [51] However, the identity of the contracting party is not dispositive to the determination of whether an insurance policy is bona fide. One of the tests as to the validity of the contract is to determine by whom the premiums are to be paid. If the one taking the insurance pays the premiums, the transaction is generally upheld. But there is a strong, though not universal, tendency to condemn contracts in which the premiums are paid by the beneficiary [who holds no insurable interest]. [52] In 1968, the General Assembly codified the insurable interest requirement, [53] in a statute which essentially restated the substantive considerations of Floyd. [54] When the General Assembly enacted section 2704 in 1968, it specified categories of persons who have an insurable interest in the life of the insured and who may procure or cause to be procured life insurance on the insured. These categories include anyone having a lawful and substantial economic interest in the insured's life, parties to a contract for the purchase or sale of a business interest, and any relatives having a substantial interest engendered by love and affection. [55]