First-ever court ruling examines agent/broker duties to murdered life policyholders

In a number of states, courts have held that insurance companies can in certain circumstances be held liable for negligently issuing a life insurance policy to someone who is subsequently murdered, or the victim of a murder attempt.

But the question of whether life insurance agents can be found liable for negligence in similar circumstances–of interest to specialty property-casualty insurers who write life agents’ professional liability coverage–had not been answered until April of this year.

Claims arising from alleged negligence in issuing a life insurance policy can include claims for personal injuries suffered as a result of the murder attempt, emotional distress and wrongful death.

In those cases where courts have held that an insurance company can be liable for negligent issuance of a life insurance policy, the courts generally have concluded that such liability can attach in three situations:

(1) Where the beneficiary who procured the insurance lacks an insurable interest.

(2) Where there is a lack of knowledge and consent to the policy by the insured.

(3) Where the insurer has actual notice of a plot by the beneficiary to murder the insured. (See Bajwa v. Metropolitan Life Ins. Co., Sup. Ct. Ill. 2004.)

Looking at the question of “insurable interest,” the reason why an insurer’s duty to confirm the insurable interest of the beneficiary of a life policy has been held to exist was perhaps best summed up by the United States Supreme Court almost 100 years ago in Grigsby v. Russell (1911). In that ruling, the court said: “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter-interest in having the life come to an end. And although that counter-interest always exists,…the chance that in some cases it may prove a sufficient motive for crime is greatly enhanced if the whole world of the unscrupulous are free to bet on what life they choose.”

Similarly, where someone takes out a policy of insurance on someone else’s life, even where there is an insurable interest–such as, for example, a wife taking out a life insurance policy on her husband–the courts have noted that, generally (except in the case of life insurance policies taken out on infants), “to allow the insuring of the life of a person without his knowledge or consent could likely be a contributing factor toward the commission of a crime and could create a substantial risk to the unknowing insured person.” (Wren v. New York Life Ins. Co., N.D. Ga. 1973.)

Insurers who issue life insurance policies without confirming the knowledge and consent of the person whose life is being insured have been deemed to have breached a duty of care to the unwitting insured. As the Illinois Supreme Court noted in Bajwa v. Metropolitan Life, this is because “it is reasonably foreseeable that a policy taken out on someone’s life without his knowledge or consent could lead to injury or death at the hands of the person who procured the policy, and that there is sufficient likelihood of injury.”

Obviously, for the same reason, where the insurer has been informed about the murderous intentions of an insurance beneficiary toward an insured, courts have found that such knowledge triggers a duty to investigate the circumstances of the coverage and to take steps to remove the threat to the insured by, for example, canceling the coverage or notifying the beneficiary of an intent to scrutinize carefully any claim of accidental death by the insured. (See, for example, Life Ins. Co. of Georgia v. Lopez, Sup. Ct. Fla. 1983.)

In these circumstances, while the courts addressing this issue generally have noted that insurers cannot in the usual course of business be held to be guarantors of their customers’ good intentions, neither can they be relieved of a duty to investigate when a beneficiary’s criminal motive in purchasing the policy is known.

What about the question of an agent or broker’s duty to an insured who was allegedly murdered by the beneficiary of the life policy?

The question was considered in April 2005 by the New York Supreme Court of Kings County in Katchalova v. Borger. The case involved a Ukrainian immigrant, who had purchased life insurance from Borger, a broker, and subsequently died in circumstances which led to the belief that she had been murdered. Further, the administratrix of the deceased woman’s estate believed that the man who had killed the policyholder had acted as her translator when she purchased the policy–and had her name a non-existent person, which the administratrix alleged was really just a pseudonym for the translator–as the beneficiary.

The administratrix asserted a claim for wrongful death against the broker, alleging he was negligent in procuring the policy.

After first noting that New York had yet to consider either a case involving, or to recognize, a claim for negligent issuance of a life insurance policy, the court then went on to consider the claims. In taking note of prior decisions on this issue, however, the court pointed out that, in fact, courts had recognized a cause of action for negligent issuance of a life insurance policy, limited to the three situations detailed above.

Under the circumstances presented, the court in Katchalova found that a cause of action for negligent issuance of a life insurance policy could not be found to have been stated properly in this case. The court noted that in the three above-referenced circumstances where courts have found such a cause of action to be viable, the “common factor” is that the insured has no knowledge that a policy on his/her life has been purchased. In this case, however, the decedent was present at–and participated in–the meeting with the broker during which the policy was purchased.

That fact notwithstanding, the decedent’s administratrix argued that the decedent’s use of a translator in obtaining the policy, together with discrepancies in the decedent’s application, should have led the broker to investigate the matter. Such investigation, it was claimed, would have alerted the broker to the danger into which the decedent was putting herself.

Having failed to investigate, and consequently, having failed to alert the decedent to the dangers she faced, the administratrix argued that the broker should be held responsible for her death.

The Katchalova court concluded that it could not find that a cause of action for negligent issuance of a life insurance policy could be stated on those grounds. In reaching this holding, the court stated that “the cause of action that the plaintiff asks the court to recognize would require brokers to substitute their judgment of a policy’s beneficiaries for that of the insured.”

The court determined that “this would be too great a burden to impose on insurance brokers and that it would displace an insured as the best arbiter of his or her beneficiaries.” Accordingly, the court dismissed the administratrix’s action.

Looking at the Katchalova decision, it can be seen that the court appeared to struggle with the issue somewhat, and implicitly recognize that, in certain circumstances, as with insurers, brokers should, in fact, be subject to liability for negligence in procuring life insurance for their clients. However, at least in the circumstances presented, the court was reluctant to make the broker responsible for investigating who the insured chooses to use as a translator, and whether the translator is acting in the insured’s best interest, or is plotting to have the insured murdered for his benefit.

For the same reasons that insurers may be found to owe a duty of care to their insureds in connection with the issuance of a life policy, it should be assumed, nonetheless, by brokers, that they also need to exercise care in procuring life insurance for their clients.

While one would hope there aren’t thousands of people sitting at home just waiting for the opportunity to be named as a beneficiary on a life policy so they can murder someone and collect benefits, the threat exists, and the consequences can be devastating.

The lesson learned in all this is that, as with all other lines of insurance offered by brokers, care must be exercised in taking in the application. Liability insurers and brokers providing coverage for life insurance agents should educate their insured–the life agents–about potential liability triggers and how to avoid them:

o Efforts must be made to confirm the existence of an insurable interest in the insured’s life.

o Extra vigilance should be applied in cases where a translator is involved.

o Under no circumstances should a life policy be procured for someone without the insured person being aware of this–and in this regard, vigilance must be exercised to have the insured sign off on the application in your presence.

o If the broker learns at any time that the insured believes himself/herself to be the subject of a murder plot, the broker must take steps to help the insured remove the threat to his/her life by working with the insured to have the coverage cancelled, or the beneficiary changed, as soon as possible.

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith LLP. He can be reached at BIGING@lbbslaw.com.

While a recent court ruling held that a life insurance agent could not be held liable for negligently issuing a life insurance policy to someone who is subsequently murdered in one set of circumstances, prior rulings finding that life insurance companies can be liable hold lessons for life agents and their E&O insurers.