Formation of a Life Insurance Contract

Insurable Interest Requirement

The Alabama Insurance Code defines an insurable interest, with respect to personal insurance, as “an interest based upon a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety of another person and consequent loss by reason of his or her death or disability or a substantial interest engendered by love and affection in the case of individuals closely related by blood or by law.” Ala. Code §27-14-3(a). Alabama law has long recognized life insurance policies issued to a person lacking an insurable interest in the life of the insured as a “wager on the life of another” that violates public policy. Ex parte Liberty Nat’l Life Ins. Co., No. 1140612, 2016 WL 1171505 (Ala. Mar. 25, 2016) (citing Helmetag’s Adm’x v. Miller, 76 Ala. 183 (1884); Commonwealth Life Ins. Co. v. George, 248 Ala. 649, 28 So. 2d 910 (1947)). Accordingly, an insurance policy that lacks an insurable interest at the time it is procured is void. Ala. Code §27-14-3(g). “In the case of a void contract, the insurer shall not be liable on the contract but shall be liable to repay to the person, or persons, who have paid the premiums, all premium payments without interest.” Id. However, the existence of an in-surable interest is required only when a life insurance policy becomes effective, not at the time of an actual loss under the policy. Ala. Code §27-14-3(f); Liberty Nat’l, 2016 WL 1171505 at *6–7.

Republished with permission. The complete chapter appeared in The Law of Life Insurance: Key Issues in Each State, published April 2017, and is available for purchase at the DRI online bookstore.