Court Opinion

ID: 4737918
Source: CourtListenerOpinion
Date Created: 2021-08-12 17:32:29.161764+00
Date Added: 2024-06-11T08:08:19.749558
License: Public Domain

Armstrong, C.J.
(concurring) — I concur with the result reached by the majority. I write separately because I disagree with the majority’s reasoning. I would hold that the attempts by Abbott and Ketchum to purchase insurance on the life of Epperly are void because neither had an insurable interest in Epperly’s life. And, because Abbott and Ketchum were intended to be the actual beneficiaries of the insurance, the fact that each credit union may, in theory, have had an insurable interest does not save the transactions. For simplicity, I will discuss only Abbott’s *533transaction with the Educational Employees Credit Union; the other transactions are similarly flawed.
The majority rejects CUNA’s argument that the transaction is void because Abbott had no insurable interest in Epperly’s life. Rather, the majority concludes that the transaction is valid, reasoning that the Credit Union, as a creditor of Epperly, had an insurable interest in his life. The only problem, according to the majority, is that the wrong party is claiming the benefits of the insurance. Thus, if the Credit Union claimed the insurance proceeds, CUNA would be liable.38
This reasoning ignores the economic reality of the transaction. If the Credit Union did collect the insurance proceeds, it would be required by statute to use the funds to pay off Abbott’s loans.39 But the benefit to the Credit Union would be either minimal or nonexistent.
The Credit Union had no risk of loss because Abbott used her credit union account of $149,000 as collateral for the five loans totaling $149,008.40. In contrast, the indirect benefit to Abbott would be enormous: she would realize $149,000, less any interest and principal paid on the loans and premiums paid for the credit life insurance.40
*534The law requires an insurable interest for at least two reasons: (1) to prevent gambling on another’s life, Washington State Public Employees’ Board v. Cook, 88 Wn.2d 200, 204, 559 P.2d 991 (1977), and (2) to avoid the risk that persons might purchase insurance without an insurable interest and then intentionally destroy lives or property, Gossett v. Farmers Insurance Co., 133 Wn.2d 954, 969, 948 P.2d 1264 (1997). Abbott’s scheme violated the first policy reason41 and created at least the appearance of a conflict of interest as to the second.
Whether the insurance was of any benefit to the Credit Union is closely related to the question of whether the Credit Union had an insurable interest in Epperly’s life. The Credit Union had such an insurable interest if it had “a lawful and substantial economic interest in having the life... of the individual insured continue.” RCW 48.18.030(3)(b). And, while a creditor-debtor relationship may in general provide the creditor with an insurable interest in the life of the debtor, it does so only if the risk of loss on the loan is increased by the death of the debtor.42 Under the peculiar circumstances of Abbott’s loan, the *535Credit Union had no risk either before or after Epperly’s death.
Abbott’s peculiar circumstances are as follows. Abbott deposited all of the funds in the account. She then took five small loans in the full amount of the account (life insurance could not be purchased on one large loan), pledging the account as collateral. She added Epperly’s name to the account, and Epperly signed the promissory notes on the loans. To conclude the transaction, Abbott purchased credit life insurance on Epperly’s life. Abbott used the loan proceeds to remodel her house and pay bills.
Epperly was a quadriplegic on a ventilator, who required 24-hour care. He received $1,400 per month, which was paid directly to his wife. The State paid Abbott $500 per day to care for him. The trial court found that Epperly received no proceeds or benefit from the loans, and there is no evidence that he did or could have made any payments on the loans. The trial court also found that Abbott was the primary obligor on the promissory notes.
In theory, it is possible to argue that the Credit Union was at greater risk on the loans by the death of Epperly, the secondary obligor; in reality it was not. The Credit Union was completely secure on the loans by Abbott’s pledge of her account proceeds. If a payment were not made, the bank could simply deduct the amount due from the account. Under these circumstances, I question whether the Credit Union had any insurable interest in Epperly’s life.
More importantly, it is beyond dispute that the actual beneficiary of the insurance was intended to be Abbott. Although the proceeds of the policy were payable to the Credit Union, it was required to pay off Abbott’s loan with the proceeds. And, if the Credit Union was never at risk on the loan, no benefit accrued to it from the payoff. Abbott, on the other hand, would have been $149,000 ahead, less principal, interest, and premiums paid. Under these circumstances, we should require the true beneficiary of the loan — Abbott—to have an insurable interest in the life insured.
*536As the court recognized in Leuning v. Hill, 79 Wn.2d 396, 404, 486 P.2d 87 (1971), allowing the primary obligor to avoid her obligation for the indebtedness, at the expense of the insured’s death, would indirectly make her a beneficiary under the insurance policy. This results in unjust enrichment of the primary obligor and, in Leuning, entitled the estate of the surety to reimbursement. Leuning at 405. There, a true surety relationship existed. And, the surety purchased credit life insurance on his own life to protect his wife and estate in the event of default by the primary obligor. Id. at 402. Here, Abbott purchased the insurance on Epperly’s life not to protect against default, but to gain from Epperly’s death.
Clearly, Abbott’s attempt to purchase insurance is a wager contract. By validating the transaction, the majority allows Abbott to potentially benefit from the insurance on Epperly’s life. Although Epperly’s estate may, if it knows of the transaction, have a claim against Abbott for reimbursement, this is far from clear. Leuning is significantly different, because it involved a real debt with real risk of loss to the surety. And, the surety in Leuning obtained the insurance on his own life to protect his estate from the risk of loss. Id. Most importantly, by validating Abbott’s purchase of insurance on Epperly’s life, the majority fails to deal with the wagering temptation inherent in the scheme.
In the context of life insurance, the insurable interest rule is designed to protect human life. See 3 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 41:17 (3d ed. 1995). Abbott had no insurable interest in the life of Epperly. Her attempted purchase of insurance on his life was a gambling transaction — the very evil proscribed by the insurable interest doctrine. I would, therefore, hold the transaction void.

 Here, the Credit Union did claim against CUNA for payment of the insurance proceeds, but CUNA denied coverage. The majority recognizes that it was only after the denial of coverage that the Credit Union satisfied the loans from the secured accounts. Fortunately, the Credit Union noticed the “unusual circumstances surrounding this claim” and informed CUNA that “although Ms. Abbott may have played by the rules this is still a fraudulent situation.”

 Under RCW 48.34.090(2), a credit fife policy “shall state that the benefits shall be paid to the creditor to reduce or extinguish the unpaid indebtedness and, wherever the amount of insurance exceeds the unpaid indebtedness, that any such excess shall be payable to a beneficiary, other than the creditor, named by the debtor or to the debtor’s estate.”

 The majority argues that Abbott cannot benefit from the insurance because, based on a principal/surety relationship between Abbott and Epperly, Abbott should pay the debt and Epperly’s estate should have all of his credit life insurance. The majority relies on Leuning v. Hill, 79 Wn.2d 396, 486 P.2d 87 (1971), and characterizes the holding as follows: “a deceased debtor’s credit life insurance is supposed to pay the debt to the extent that the insured debtor owes it. The deceased debtor’s insurance is not supposed to pay the debt to the extent that someone else owes it.” Majority at 529. Leuning does not so hold. As the court recognized, regardless of whether or not the insured is a surety for the debt, the *534insurer’s obligation is to pay the primary beneficiary and then pay any excess to the secondary beneficiary. See Id., 79 Wn.2d at 402-03. The question in Leuning was whether, after the insurance proceeds are used to discharge the debt, the estate of the deceased debtor/surety was entitled to reimbursement from the primary obligor. The court recognized that this is a factual question based on the intent of the parties. See Id., 79 Wn.2d at 400, 403. In Leuning, the court found that the parties did not intend that the Hills, the primary obligors, would be relieved of their obligation by Leuning’s death. Id., 79 Wn.2d at 403. Both Leuning and Hill obtained insurance on their own lives. Leuning, 79 Wn.2d at 399. The trial court found that Leuning applied for the insurance to protect the interests of his wife and his estate. Id. at 402. Here, it cannot be seriously argued that Epperly, who apparently had no assets, was a true surety for Abbott’s debt. And, the trial court found that Abbott procured the insurance on Epperly’s life and paid all of the insurance premiums. Under these circumstances, it is not clear that Epperly’s estate would be entitled to reimbursement if the credit life proceeds had been used to pay Abbott’s debt.

 During the last five months of Epperly’s life, Abbott and Ketchum obtained approximately $250,000 of creditor’s life insurance on Epperly through credit union accounts. Abbott also arranged a number of other creditor’s life transactions involving Epperly’s life.

 “[I]f a creditor insures his or her debtor’s life for a sum grossly in excess of any loss that he or she can possibly suffer by the debtor’s death, the policy is a wager and invalid.” 3 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 41:2 (3d ed. 1995); see also 43 Am. Jur. 2d Insurance § 992 (1982).