Creditor's Insurable Interest in the Life of the Debtor

Turning now to a consideration of the subject from the standpoint of insurance taken out by persons on the lives of other persons, we unfortunately meet with a great variety of court decisions. This lack of harmony in the court law presents itself in nearly all relationships which may arise out of commercial dealings or out of the ties of affection or kinship.

With respect to creditor and debtor "the rule is well settled that a creditor has an insurable interest in the life of his debtor which is said to survive a discharge in bankruptcy or general assignment for creditors. And the rule applies whether the creditor is assignee or insures his debtor's life; and although the debt is voidable, or not enforceable on account of the statute of limitations." In this respect, however, the important question is the amount of insurance, as compared with the amount of the debt, which the creditor shall be allowed to take on the life of the debtor. Manifestly, the creditor's insurable interest should not be limited to the face of the indebtedness, because under such circumstances the creditor, upon the death of the debtor, would be enabled to indemnify himself only to the extent of the debt, and would be unsecured as regards the premiums paid together with interest thereon. Many courts have therefore-held that creditors should be permitted to provide themselves with insurance on the debtor's life to an amount equal to the debt and interest thereon, plus all premiums (with interest thereon) required to keep the policy alive. The Pennsylvania Court, for example (Wheeland v. Atwood] 192 Pa. St. 237), laid down the rule that the debtor's life may be insured by the creditor for an amount equal to the debt plus all premiums payable during the life expectancy of the insured according to the Carlisle table, together with interest on the debt and premiums. Such attempts to define precisely the creditor's insurable interest, however, have not met with the favorable opinion of legal critics; but, instead, have been opposed on the grounds that " the validity of the contract should be determined according to the motives of the parties and the prospect as viewed at its date rather than after the death of the insured; and second, the total amount of premiums as thus viewed with interest thereon will always exceed the whole face of the policy leaving to the creditor nothing at all to apply upon the debt."

As contrasted with the aforementioned attempts to fix a definite test for the creditor's insurable interest, two other lines of decisions should be mentioned. One of these, adopted by the United States Supreme Court, places an indefinite restriction upon the insurable interest of the creditor by providing that the relationship between the amount of insurance and the amount of the debt must not be so disproportionate as to make the policy take on the appearance of a wagering contract as distinguished from its legitimate purpose, viz, security for the indebtedness. In Cammack v. Lewis (15 Wall 643) the court, for example, declared a policy of $3,000 taken out by a creditor to secure a debt of $70 to be "a sheer wagering policy, without any claim to be considered as one meant to secure the debt." Mr. Justice Miller stated in his opinion that "to procure a policy for $3,000 to cover a debt of $70 is of itself a mere wager. The disproportion between the real interest of the creditor and the amount to be received by him deprives it of all pretense to be a bona fide effort to secure the debt, and the strength of this proposition is not diminished by the fact that Cammack was to get only $2,000 out of $3,000; nor is it weakened by the fact that the policy was taken out in the name of Lewis and assigned by him to Cam-mack" But while making the relationship between the amount of insurance and the amount of the debt an important factor, to be considered on the merits of each case, the Supreme Court has never undertaken to define this relationship precisely.

Opposed to the foregoing rule are those decisions which, while limiting the creditor in his interest in the recovery on a policy, permit him to secure as much insurance on the debtor's life as he may choose to take out. His right to recover, however, is limited to the amount of the debt and the premiums plus interest thereon, the balance, if any, passing to the debtor. This rule, sometimes referred to as the Texas rule, is well exemplified by Cheeves v. Anders (87 Tex. 287). Here the court declared that "the limit of interest of a creditor in a policy upon the life of his debtor is the amount of such debt and interest plus the amount expended to preserve the policy with interest thereon." The remainder of the proceeds of the policy, the court held, should go to the estate of the insured on the ground that " if the person named as beneficiary, or the assignee of such policy, has no insurable interest in the life of the insured, he will hold the proceeds as the trustee for the benefit of those entitled by law to receive it."