Mayo v. Hartford Life Insurance
2004 WL 14654, 354 F.3d 400 (2004)
Rule of Law:
Under Texas law, which governs company-owned life insurance (COLI) policies taken out on employees by an employer without the employee's consent, an employer generally lacks an insurable interest in the life of an ordinary employee, and claims by the employee's estate for unjust enrichment or conversion of policy proceeds are subject to a two-year statute of limitations.
Facts:
- In 1993, Wal-Mart Stores, Inc. established a trust to hold life insurance policies on its employees and named itself as the beneficiary, a practice known as company-owned life insurance (COLI).
- The trust instrument stipulated that Georgia law would govern its construction, validity, and administration.
- Wal-Mart’s COLI policies insured the lives of all employees with sufficient service time for enrollment in its health plan, unless they opted out of a special death benefit program.
- Douglas Sims was a Wal-Mart associate from May 1987 until his death on December 1, 1998, and was insured under one of Wal-Mart's COLI policies from December 21, 1993, until his death.
- After Congress and the IRS eliminated tax advantages for Wal-Mart's COLI program, Wal-Mart began unwinding it, surrendering the last policies by 2000.
- Wal-Mart collected benefits from the COLI policy insuring Douglas Sims's life at some point in 1999.
- Sims's estate discovered the existence of this COLI policy after his death.
Procedural Posture:
- Douglas Sims' estate sued Wal-Mart Stores, Inc. in the United States District Court for the Southern District of Texas, alleging a violation of the Texas insurable interest doctrine.
- Wal-Mart moved for summary judgment, arguing that Georgia law applied or, alternatively, that the Texas statute of limitations barred the estate's claims.
- The district court denied Wal-Mart's initial motion for summary judgment.
- Wal-Mart moved for reconsideration, reiterating its choice of law argument and adding new arguments based on recent developments in Texas law.
- Sims's estate filed a motion for partial summary judgment, seeking a declaration that Wal-Mart lacked an insurable interest in Sims's life.
- Wal-Mart responded with a cross-motion for summary judgment, arguing it did possess an insurable interest in Sims.
- The district court granted Wal-Mart’s motion for reconsideration but, in an amended opinion, again denied Wal-Mart's summary judgment on all grounds.
- The district court then granted partial summary judgment in favor of Sims's estate.
- The district court certified its order under 28 U.S.C. § 1292(b) for interlocutory appeal on three issues: (1) which state’s substantive law applies, (2) whether Wal-Mart had an insurable interest in Sims’ life, and (3) whether the statute of limitations barred Sims’ claims.
- The United States Court of Appeals for the Fifth Circuit granted Wal-Mart (Defendants-Appellants) leave to appeal the district court order (in favor of Sims, Plaintiff-Appellee).
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Issue:
Does Texas law, requiring an insurable interest, apply to a company-owned life insurance (COLI) policy taken out by an employer on an ordinary employee, and if so, does an employer have an insurable interest in an ordinary employee under Texas law, and is a claim by the employee's estate for unjust enrichment or conversion of policy proceeds barred by a two-year statute of limitations if the defendant fails to prove the precise date of receiving the benefits?
Opinions:
Majority - E. Grady Jolly
Yes, Texas law applies to determine the validity of the COLI policy; no, Wal-Mart did not have an insurable interest in Douglas Sims's life under Texas law; and no, Wal-Mart failed to meet its burden of proving the statute of limitations had run. The court determined that, as a federal court sitting in diversity, it must apply Texas's choice of law rules, which employ the 'most significant relationship' test from the Restatement (Second) of Conflict of Laws. Applying this test, the court found that Texas's interest in seeing its insurable interest policy correctly applied overwhelmingly outweighed other considerations. All applicable Restatement sections (tort, contract, unjust enrichment, life insurance) pointed to the application of Texas law, particularly given Sims's domicile in Texas and the nature of the claim, which was not a contract dispute between the original parties to the insurance policy. Regarding insurable interest, Texas common law dictates that a person insuring the life of another must have an insurable interest, as policies without one are deemed against public policy and unenforceable. Texas recognizes insurable interests for close relatives, creditors, or those with a reasonable expectation of financial gain from the insured's continued life. The court affirmed that the mere existence of an employer/employee relationship is never sufficient to establish an insurable interest in an ordinary employee. Wal-Mart's arguments regarding costs associated with employee death (e.g., productivity loss, hiring costs) were rejected, as Texas courts have consistently held that such general costs do not create a sufficient pecuniary interest for an ordinary employee. The court reviewed Texas legislative enactments concerning insurable interests and found that none applied to Sims's situation, nor did they provide a basis for expanding the common law doctrine to cover ordinary employees without their consent. The court emphasized it would not contradict established Texas precedent or expand legislative enactments. Finally, the court held that Sims's claim was for unjust enrichment or conversion, not merely declaratory judgment or a constructive trust (which are remedies). The applicable statute of limitations for unjust enrichment and conversion claims in Texas is two years, as established by Tex. Civ. Prac. & Rem. Code § 16.003(a). The cause of action accrues under Texas's 'legal injury' test when facts come into existence that authorize a claimant to seek a judicial remedy, which in this case was when Wal-Mart received the policy proceeds. Wal-Mart, as the party asserting the limitations defense, failed to provide sufficient evidence (specifically, the exact date of receiving the policy proceeds, beyond 'some point in 1999') to prove that the two-year period had run before Sims's estate filed suit on June 28, 2001. Therefore, Wal-Mart failed to carry its burden of proof on the limitations defense.
Analysis:
This case significantly reinforces the public policy underpinnings of Texas's insurable interest doctrine, particularly against 'dead peasant' or COLI policies on ordinary employees without their consent. It clarifies that federal courts, when exercising diversity jurisdiction, will rigorously apply state choice of law principles and defer to state supreme court interpretations of common law. The ruling serves as a cautionary tale for corporations, establishing that the generalized costs associated with employee turnover do not create an insurable interest in rank-and-file workers. Furthermore, it highlights the stringent burden on defendants to precisely prove the accrual date for an affirmative defense like the statute of limitations, especially when the underlying claim is characterized as unjust enrichment or conversion.
