Origin Of The Insurable Interest Doctrine

     It is well-understood in modern society that a person may not use an insurance policy to profit from another's loss of life or property. One cannot, for example, insure the life of a NASCAR driver with the hope that he will be killed in the next race. Likewise, one cannot insure his neighbor’s house and then burn it down to receive the policy benefits. Modern laws exist to remove the incentive for wrongdoing through insurance policies. But using life and property insurance contracts to benefit from another person's misfortune has not always been prohibited. And that which we now accept as forbidden was, at one time, commonplace.

     The insurable interest doctrine, as recognized today, originated in English statutes designed to remove insurance contracts from the environment of gambling and the misconduct commonly associated with one having the ability to profit from another’s loss. As described in the Appleman insurance treatise, English underwriters of the eighteenth century insured marine risks without requiring the policy beneficiary to have an interest in the vessel or its cargo. The practice created an incentive to destroy the insured property by those expecting to receive insurance benefits from the loss. The English Parliament reacted to the situation in 1749 by enacting the Statute of George II (19 Geo. 2, ch. 37 (1746)), which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed . . . .” The statute sought to remedy the situation by declaring that assurances for shipping risks not supported by an interest, or by way of gaming or wagering, would be “null and void to all intents and purposes.”

     According to Appleman, enterprising Englishmen insured the lives of famous persons reported to be seriously ill and the “unfortunate gentlemen” accused of crimes punishable by death. The amount wagered was the policy premium and the gamble, obviously, was whether the insured person lived or died. 

     The wagers had a substantial, negative impact on the persons whose lives were insured. In his 1761 publication “The Mystery and Inquiry of Stock Jobbing,” Thomas Mortimer wrote:

The inhuman sport affected the minds of men depressed by long sickness; for when such persons, casting an eye over a newspaper for amusement saw that their lives had been insured in the Alley at 90 per cent, they despaired of all hopes; and thus their dissolution was hastened.

In 1774, Parliament enacted a statute (14 Geo. 3, ch. 48 (1774)) to discourage the “mischievous kind of gaming” on human life:

no insurance shall be made . . . on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest . . .. 

            The English Statutes of George II and George III form the fundamental principles of the insurable interest doctrine by requiring owners of property and life insurance to have an “interest” the subject matter of those contracts. The insurable interest requirements were promptly announced in the United States, even though American courts did not embrace the English statutes and, in some instances, rejected them. In the 1806 case Russel v. Union Ins. Co., the United States Supreme Court addressed the necessity of an insurable interest in property insurance.  Similar opinions soon followed in the context of life insurance.

How Much Are Citigroup's Former Employees Worth Dead?

     Since the beginning of 2008, Citigroup has made thousands of employee layoffs and is poised to discharge thousands more by year’s end. The layoffs may ultimately total between 17,000 to 24,000 employees due to subprime and credit-related losses, according to CNBC.

     The layoffs raise the interesting question, “how much are Citigroup’s former employees worth dead?”

     Citibank, N.A., like many national banks, invests heavily in policies of bank owned life insurance or “BOLI.” BOLI policies insure the lives of the bank’s employees, but unlike traditional life insurance name the bank as the policy beneficiary. When the bank employee dies, the insurance benefits are paid to the bank. 

     Banks, like Citibank, are required to report their life insurance holdings through reports filed with the Federal Financial Institutions Examination Council and report those holdings on line five of a schedule called “RC-F—Other Assets.” Those reports demonstrate that Citibank has acquired billions of dollars of BOLI coverage on the lives of its employees since 2006. Citibank possessed $2.215 billion in BOLI coverage as of March 31, 2006, $3.325 billion as of March 31, 2007, and $3.99 billion as of December 31, 2007. Notably, banks report their life insurance assets in terms of cash surrender value, meaning that the policy benefits due from employee deaths are likely far greater than the amount reported on the schedules. 

     BOLI policies remain in force even if the insured person’s employment with the bank ends. Thus, Citibank will receive insurance benefits upon the deaths of its former employees who were insured by a BOLI policy. As the employees who were laid off in 2008 die, policy benefits will flow to Citibank. And from a pool of 17,000 to 24,000 former employees, those benefits may be significant, even by Citibank’s standards.