Certiorari to Court of Special Appeals (Circuit Court for Washington County), Frederick C. Wright III, JUDGE.
Murphy, C.J., and Eldridge, Cole, Rodowsky, McAuliffe, Adkins and Blackwell, JJ.
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).
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.
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
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 Bachtell farm. By public sale, Beard sold all his machinery, feed
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 counter-claimed 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 lack of insurable interest, and that the incontestability
clause contained in the policies did not apply. We granted certiorari to decide the significant issues raised in the case.
Under the common law, "[b]efore 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) ("[b]ecause 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
against public policy and void.*fn1 Id. See also Appleman, supra, § 761, at 102-03.
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 generally 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:
"(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 ...