Beard v. American Agency Life Insurance

MURPHY, Chief Judge. Maryland Code (1957, 1986 Repl.Vol.) Art. 48A, § 366(a) requires that a person, who procures an insurance contract upon the life of another, have an “insurable interest” in the insured individual. This case focuses upon whether a tenant farmer, who leased his landlord’s farm, and who possessed an oral option to purchase the farm, had an insurable interest in the life of the landlord under § 366(a). I. In the spring of 1981, L. Neal Beard began farming approximately 150 acres of land in Washington County, which was owned by David E. Bachtell.

In February 1982 Beard and Bachtell formalized their relationship by entering into a lease under which Beard undertook to cultivate the land and to keep the buildings, fences and other structures in good repair. Beard also agreed to indemnify Bachtell for any expenses, costs or losses resulting from his operation of the farm. The lease obligated Beard to pay Bachtell an annual cash rent of $7,800 in monthly installments of $650 each. Bachtell reserved the right to occupy and use the dwelling house, yard, garage, and a one-quarter acre plot. ²⁴⁰ The parties further agreed that the lease was to remain in effect for a term of one year with automatic renewals each year unless terminated by either party upon six months’ notice prior to the beginning of the succeeding lease year.

The lease provided that its terms were binding upon both Beard’s and Bachtell’s heirs and successors. Shortly after he began farming the Bachtell property, Beard discussed with Bachtell the possibility of purchasing the farm after Bachtell’s death. Because Bachtell’s children were not interested in operating the farm, Bachtell was receptive to Beard’s purchase offer. While the parties orally agreed on a purchase price of $400,000, Beard was uncertain that he could obtain the necessary financing for the transaction.

Bachtell suggested that Beard might fund the purchase by obtaining an insurance policy on Bachtell’s life. Bachtell indicated that he would not secure the policy nor pay any premiums on the policy. Beard contacted an insurance agent, Ronald Snyder, and explained his and Bachtell’s plan to fund the purchase of Bachtell’s farm by obtaining insurance on Bachtell’s life. Snyder provided Beard and Bachtell with applications for the purchase of insurance, which were signed by both Beard and Bachtell.

Subsequently, Snyder arranged for Bachtell to be examined by Dr. Robert Campbell, a Hagerstown physician. Campbell submitted the results of this examination to Snyder for use in procuring the insurance. In March 1982, Snyder contacted another insurance agent, Robert Zimmerman, who was affiliated with the American Agency Life Insurance Company (American), a company which accepted risks which other companies refused to underwrite. Zimmerman invited Snyder to meet with Tom Higgins, the chief underwriter for American to discuss the possibility of Beard insuring the life of Bachtell.

The three men were aware that the law required the purchaser of life insurance to have an insurable interest in the insured individual. They reviewed the landlord-tenant relationship which existed between Beard and Bachtell, as well as Beard’s option to purchase Bachtell’s farm upon his ²⁴¹ death. The underwriter suggested that “business partners” would be the best description to use in designating the type of insurable interest which Beard had in Bachtell. Higgins, Snyder and Zimmerman agreed that American would accept the risk and insure the life of Bachtell upon the receipt of a signed application and a check for the first year’s premium of $12,855.

After receiving the premium check, the signed application, and the physical examination report, American promptly issued a policy in the face amount of $200,000 on the life of Bachtell with Beard named as the beneficiary and owner of the policy. In late April, American issued a second policy for an additional $200,000 based upon an application signed by Beard which indicated his relationship with Bachtell to be that of “business partner” and which was accompanied by a $3,833.00 premium check. This policy was converted to a policy for the same face amount but issued by the Life Insurance Company of Virginia (Virginia). Subsequently, Beard as owner and beneficiary procured additional insurance on Bachtell’s life from two other insurance companies, but the proceeds from these policies are not at issue in this suit.

Thus, Beard obtained a total of $1,000,000 in insurance coverage upon the life of Bachtell. As beneficiary of these policies, Beard planned to use the proceeds to purchase the farm and additional machinery, to construct improvements on the property, and to discharge his own farming debts. In accordance with the lease, Beard operated the Bachtell farm from February 1982 until March 1984. During this time, Beard spent approximately $20,000 of his own money for improvements to the milking parlor, the silo, and the other dairy facilities.

Beard filed income tax returns for the years 1981-1984 which designated his farm profit or loss as solely personal. During this period, no partnership returns were ever prepared by or on behalf of Beard or Bachtell. In March 1984, Beard ceased operating the Bach-tell farm. By public sale, Beard sold all his machinery, feed ²⁴² and other equipment.

He also cancelled the lease with Bachtell’s concurrence. Subsequently, on November 5, 1985, Bachtell died. Following Bachtell’s death, Beard’s sister, Betty J. Monninger, brought suit in Circuit Court for Washington County against Beard and American; she claimed that she was owed one half of the insurance proceeds payable under the policies issued on Bachtell’s life because she had supplied Beard with part of the funds which were used to pay the premiums on the insurance policies. American counterclaimed against Monninger and cross-claimed against Beard; it sought a judgment declaring that Beard had no insurable interest in Bachtell and that the policy was therefore null and void.

Virginia intervened in the action, asserting claims and defenses similar to those made by American. American and Virginia thereafter moved for summary judgment. The trial.court (Wright, J.) granted the motions, finding as a matter of law that Beard did not have an insurable interest in Bachtell’s life. It found that the rights and duties created by the 1982 farm lease failed to establish a substantial economic interest on the part of Beard in having Bachtell’s life continue and that the purchase option agreement for the farm, which was unwritten and therefore unenforceable, did not create such an interest.

The court found no evidence that Bachtell was himself engaged in the business of farming with Beard or that Beard had a contract or option to purchase any business and hence there was no business partnership extant between Beard and Bachtell. In granting summary judgment, the court further held that the doctrines of waiver and estoppel were not applicable to the defense of lack of an insurable interest. Beard appealed. The Court of Special Appeals affirmed the judgments in an unreported opinion, concluding that Beard did not have an insurable interest in Bachtell, that waiver and estoppel did not bar the insurer’s defense of lade of insurable interest, and that the incontestability ²⁴³ clause contained in the policies did not apply.

We granted certiorari to decide the significant issues raised in the case.

II

Under the common law, “[hjefore a person can validly procure insurance upon the life of another, he must have an insurable interest in that life.” 2 J. Appleman, Insurance Law and Practice § 761, at 101 (1966). This rule is premised upon the view that contracts in which the procurer lacks an insurable interest in the insured are mere gambling contracts and as such are against the public interest; it rests “ ‘upon the theory that the public has an interest, independent of the consent and concurrence of the parties,’ ” in discouraging one party from wagering upon the life of another. Interstate Life & Accident Co. v. Cook, 19 Tenn.App. 290 , 86 S.W.2d 887, 889 (1935), quoting, 1 Couch, Cyc. of Insurance Law, § 295, at 769-70. In light of the strong public interest which underlies the insurable interest doctrine, courts have held that “ ‘[t]he parties to a contract of insurance cannot, even by solemn agreement, override the public policy which requires the beneficiary to have an insurable interest.’ ” Id.

See also Rubenstein v. Mutual Life Ins. Co. of New York, 584 F.Supp. 272, 279 (E.D.La. 1984) (“[bjecause an insurable interest is required by law in order to protect the safety of the public by preventing anyone from acquiring a greater interest in another person’s death than in this continued life, the parties cannot, even by solemn contract, create insurance without an insurable interest”). The common law rule was first adopted in Maryland in Rittler v. Smith, 70 Md. 261 , 16 A. 890 (1889); we there noted that “one who has no insurable interest in the life of another cannot insure that life.” Id. at 263 , 16 A. 890 . In addition we recognized the general common law rule that if a person enters into a contract for insurance upon the life of another while lacking an insurable interest in that individual, the contract is a mere gambling contract which is ²⁴⁴ against public policy and void. 1 Id.

See also Appleman, supra, § 761, at 102-08. A. In 1956, the Legislature codified these common law principles when it enacted what is now Code, Art. 48A, § 366(a), which provides: - “Any individual of competent legal capacity may procure or effect an insurance contract upon his own life or body for the. benefit of any person. But no person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under such contract are payable to the individual insured or his personal representatives, or to a person having, at the time when such contract was made, an insurable interest in the individual insured.” Although we have not previously interpreted § 366, the federal courts have considered this provision and found it to be consistent with the common law rules set forth in Rittler. See National Life Insurance Co. v. Tower, 251 F.Supp. 215, 221 (D.Md.1966), aff'd in part, rev’d in part (other grounds) sub nom.

Maryland National Bank v. Tower, 374 F.2d 381 (4th Cir.1967). While the courts and legislatures of this country, including those of Maryland, have generálly agreed that an insurable interest is required for an individual to procure insurance upon the life of another, they have experienced some difficulty in determining what interest constitutes an insurable interest. The Maryland statute, § 366, provides in subsection (c) that an insurable interest includes only the following: ²⁴⁵ “(1) In the case of individuals related closely by blood or by law, a substantial interest engendered by love and affection. (2) In the case of other persons, a lawful and substantial economic interest in having the life, health, or bodily safety of the individual insured continue, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the individual insured.

(3) An individual heretofore or hereafter party to a contract or option for the purchase or sale of an interest in a business partnership or firm, or of shares of stock of a closed corporation or of an interest in such shares, has an insurable interest in the life of each individual party to such contract and for the purposes of such contract only, in addition to any insurable interest which may otherwise exist as to the life of such individual.” Section 366(c)’s definition of an insurable interest is consistent with that formulated by the courts under the common law. See, e.g., Warnock v. Davis, 104 U.S. 775, 779 , 26 L.Ed. 924 (1882) (“[i]t may be stated generally ... to be such an interest, arising from the relations of the party obtaining the insurance, either as creditor of or surety for the assured, or from the ties of blood or marriage to him, as will justify a reasonable expectation of advantage or benefit from the continuance of his life____there must be a reasonable ground, founded upon the relations of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the continuance of the life of the assured”); Rubenstein, supra, 584 F.Supp. at 278 (defining insurable interest as existing where there are ties of blood or marriage or where the beneficiary “has a reasonable expectation of pecuniary gain from the continued life of the insured, or reasonable expectation of sustaining loss from his death”); Drane v. Jefferson Standard Life Ins. Co., 139 Tex. 101 , 161 S.W.2d 1057, 1058-59 (1942) (defining the three general classes of individuals having an insurable interest in another as “(1) one so closely related ²⁴⁶ by blood or affinity that he wants the other to continue to live, irrespective of monetary considerations; (2) a creditor, and (3) one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another”) (citations omitted); G. Couch, Couch on Insurance § 24:120, at 208-09 (2d ed. 1984) (“[a] person has an insurable interest in the life of another if he can reasonably expect to receive pecuniary gain from the continued life of the other person and conversely, if he would suffer financial loss from the latter’s death”). Beard concedes that he does not have an insurable interest in Bachtell of the type described in § 366(c)(1) which requires an individual to share ties of blood or affection with the insured.

Thus, Beard had to establish an insurable interest of the type defined in either subsection (c)(2) or (3) of § 366. In this regard, as the trial court granted summary judgment against Beard, we must view the record in a light most favorable to Beard. See Maryland Rule 2-501; Berkey v. Delia, 287 Md. 302 , 413 A.2d 170 (1980). Drawing all inferences in favor of Beard, we nevertheless conclude for reasons hereafter stated that, as a matter of law, Beard failed to establish an insurable interest in Bachtell’s life.

As already observed, § 366(c)(2) requires a person to have a substantial economic interest in having the life of the individual insured continue, rather than an interest which would become more valuable as a result of the insured’s death. The Texas Supreme Court in Drane, supra, provided a more definitive explanation of what is meant by an insurable interest which is derived from a reasonable expectation of pecuniary benefit or advantage from the continued life of another. It said that it is an interest determined by monetary considerations, viewed from the standpoint of the beneficiary — would the beneficiary regard himself as better off from the standpoint of money, would he enjoy more substantial economic returns should the insured continue to live, or would he have more ²⁴⁷ in the form of the proceeds of the policy should the insured die. 161 S.W.2d at 1059 . Applying this concept, Beard would enjoy a more substantial economic return from the death of Bachtell.

He would not receive any particular economic benefit from BachtelPs continued life; at best, he would remain a tenant on the farm, owing Bachtell a monthly rental, and holding an oral option to purchase the farm upon BachtelPs death. Only upon BachtelPs death would Beard gain an economic benefit from their relationship for then Beard could claim $1,000,-000 in insurance proceeds. While Drane provides a useful test for determining the existence of an insurable interest, such an interest is not measured solely by comparing the benefit which the beneficiary receives from the insured’s continued life with that realized upon the insured’s death. As the court recognized in Cooper’s Adm’r v. Lebus’ Adm’rs, 262 Ky. 245 , 90 S.W.2d 33 (1935), whether an individual has an insurable interest in another also may be determined by examining the “ ‘loss or disadvantage [which] will naturally and probably arise, to the party in whose favor the policy is written, from the death of the person whose life is insured.’ ” Id. 90 S.W.2d at 36 , quoting, Adams’ Adm’r v. Reed, 18 Ky.L. Rptr. 858, 38 S.W. 420 , 422 (App.1896).

Beard claims that he will suffer a substantial loss from BachtelPs death because he has expended capital funds on improving the farm and might have to leave the farm if BachtelPs heirs choose to terminate the lease or sell the property. Beard, however, would run a like risk of loss even if Bachtell continued to live since under the terms of the lease, Bachtell could have cancelled the lease upon six months’ notice. Moreover, nothing in the record discloses that Beard would have suffered any loss directly as a result of BachtelPs death. As the lease was binding upon BachtelPs heirs and successors, they would have the same rights and would owe Beard the same obligations as would Bachtell himself. ²⁴⁸ Thus, Beard would have the same interest and rights in the property and the same relationship with its owner whether Bachtell lived or died.

Therefore, we think the trial court correctly concluded, as a matter of law, that Beard failed to establish a special loss resulting from Bachtell’s death which would warrant a finding that he had an insurable interest in Bachtell’s life. Because the lease was binding upon Bachtell’s heirs, the present case is distinguishable from those cases, relied upon by Beard, in which the beneficiary holds property subject to a life estate in the insured. See, e.g., Sides v. Knickerbocker Life Ins. Co., 16 F. 650 (C.C.W.D.Tenn.1883) (holding that tenant farmer who leased property from owner with life estate interest in property had an insurable interest in the life of the owner); De Long’s Adm’r v. Arnold, 306 Ky. 290 , 206 S.W.2d 928 (1947) (holding that beneficiary who held property during the life of the insured possessed an insurable interest in the insured); see also Empire Life Ins.

Co. of America v. Moody, 584 S.W.2d 855 (Tex.1979) (holding that assignee of trust beneficiary’s life income had an insurable interest in the life of the trust beneficiary). In these cases, the beneficiary held the property only so long as the owner of the life estate remained alive so that the beneficiary’s interest in the property ended automatically upon the death of the owner. Thus, in each of these cases, the duration of the beneficiary’s estate was determined by the death of the owner and the beneficiary’s interest was therefore tied directly to the life of the owner. Consequently, in these cases, the beneficiaries had a substantial economic interest in having the life of the owner continue.

Beard failed to demonstrate an insurable interest under § 366(c)(3). This subsection provides that “a party to a contract or option for the purchase or sale of an interest in a business partnership or firm ... has an insurable interest in the life of each individual party to such contract and for the purposes of such contract only, in addition to any insurable interest which may otherwise exist as to the life of such individual.” Beard argues that his lease and ²⁴⁹ option to purchase Bachtell’s farm gave rise to the type of insurable interest which exists when two parties have “a contract or option for the purchase ... of an interest in a business partnership or firm.” Id. Assuming arguendo that a farm operation may constitute a business, 2 to be within § 366(c)(3), Beard had to establish that under his contracts with Bachtell, he was acquiring an interest in a business partnership or firm. For the proposition that an individually owned farm may be a “firm,” Beard relies upon State v. Case, 132 Md. 269 , 103 A. 569 (1918).

In that case, referring to the provisions of a Maryland statute, we noted that ordinarily “ ‘[t]he singular always includes the plural, and vice versa, except where such construction would be unreasonable.’ ” Id. at 273 , 103 A. 569 , quoting, Section 7 of Article 1 of the Maryland Code. Based on this statute, the Court concluded that “[t]he word ‘firms,’ as used in the title [of a statute regulating ‘Construction Firms or Companies’], is the plural of ‘person’ and, under the rule, includes it, if to so construe it is not unreasonable.” Id. at 273 , 103 A. 569 . However, this definition of “firm” is hardly the only definition of the word. In McCosker v. Banks, 84 Md. 292 , 35 A. 935 (1896) we said that “[t]he word firm is equivalent to partnership and signifies the name under which any house of trade is established or conducts business.” Id. at 294 , 35 A. 935 .

In the present case where the statute at issue uses the word “firm” in the conjunctive with the word partnership, it is more reasonable to use the definition given in McCosker and to construe the word “firm” as meaning a partnership rather than an individual. Thus, we conclude that the word “firm” as used in § 366(c)(3) refers to a business or trade which is operated by two or more individuals and which is in the nature of a partnership. ²⁵⁰ It is thus not sufficient for Beard to show that his oral option to purchase Bachtell’s farm (even assuming its legality) was an option to purchase an individually owned business. Instead, to establish an insurable interest of the type defined in § 366(c)(3), it was requisite for Beard to show that his option to purchase Bachtell’s farm constituted an option to purchase a business partnership. Generally, the burden of proving a partnership is on the one who alleges its existence, M. Lit, Inc. v. Berger, 225 Md. 241, 247 , 170 A.2d 303 (1961) and depends upon the intention of the parties, Miller v. Salabes, 225 Md. 53, 55 , 169 A.2d 671 (1961).

Ordinarily, the parties’ intention is proved by their expressed agreement, or inferred from their acts and conduct as disclosed by all of their transactions. Id. at 55-56 , 169 A.2d 671 . We have held that the relationship of landlord and tenant under an agreement for the lease of a farm does not result in the creation of a partnership. Tomlinson v. Dille, 147 Md. 161, 164-65 , 127 A. 746 (1925).

See also Cline v. Fountain, Etc., Company, 214 Md. 251, 257 , 134 A.2d 304 (1957) (noting that “the receipt by a person of a share of the profits of a business is prima facie evidence , that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment of rent to a landlord”; and concluding that “the same rule should apply to a landlord receiving a share of the profits as rent when a joint adventure is claimed to exist as when a partnership is claimed to exist”); Code (1975, 1985 Repl.Vol.) § 9-201(4) of the Corporations and Associations Article (stating that “[t]he receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if the profits were received in payment ... as ... rent to a landlord”). This rule applies even where the parties agree that the landlord shall receive a share of the farm’s profits in place of rent or in addition to a specified rent. Tomlinson, supra, 147 Md. at 164-65 , 127 A. 746 . ²⁵¹ As found by the trial judge, the record is devoid of any evidence that Beard and Bachtell intended to create a partnership or in fact operated the Bachtell farm as partners. As earlier stated, neither Beard nor Bachtell reported any partnership income on their tax returns during the years 1981-84 when Beard leased the farm from Bachtell.

No partnership returns were ever prepared by or on behalf of Beard or Bachtell, and Beard filed income tax returns during this period which reported his profits and losses from the farm operation as being solely personal. The only written expression of Beard’s and Bachtell’s intent with respect to the farm is contained in the lease agreement which described their relationship as landlord and tenant, rather than business partners. We thus conclude that the mere farm rental agreement executed by the parties is insufficient to establish a partnership relationship. Therefore, because no partnership relationship existed between Beard and Bachtell, Beard did not have an insurable interest in Bachtell’s life under § 366(c)(3).

Even if a partnership existed between Beard and Bachtell, this finding alone would not establish that Beard had an insurable interest in his landlord’s life. In providing that an insurable interest exists where one party insures the life of another individual with whom the party has a contract or option to purchase an interest in a business partnership or firm, § 366(c)(3) is in accord with the common law rule that ordinarily a partner has a pecuniary interest in the continuance of the partnership and therefore has an insurable interest in the life of the co-partner. See Connecticut Mut. Life Ins.

Co. v. Luchs, 108 U.S. 498, 505-06 , 2 S.Ct. 949 , 27 L.Ed. 800 (1883). Nevertheless, in some cases, “a partner’s expectation of benefit or advantage could lie not in the continuance of the lives of his partners but rather in the possibility of their deaths prior to his own.” Block v. Mylish, 351 Pa. 611 , 41 A.2d 731, 735 (1945). Consequently, courts have held that “[t]he mere existence of a legal partnership does not establish an insurable interest.” Sun Life Assur. Co. of Canada v. Allen, ²⁵² 270 Mich. 272 , 259 N.W. 281, 283 (1935).

See