PHL Variable Insurance Company v. Bank of Utah
780 F.3d 863
8th Cir.2015Background
- William Close (age 74) obtained a $5 million PHL life policy in 2007 after agent-assisted application and premium-financing; application misrepresented his finances and omitted a felony conviction.
- A two-year, non-recourse premium-finance loan funded premiums; Close personally guaranteed 25% and the policy was collateral for the loan.
- Secondary market collapse prevented sale; Close surrendered the policy to the lender/financer (New Stream), which later sold the policy; Bank of Utah held the policy as custodian when Close died in 2011 and claimed the death benefit.
- PHL discovered procurement misrepresentations but was barred from rescission by Minnesota’s two-year incontestability statute; PHL sued for declaratory judgment that the policy was void ab initio for lack of an insurable interest (a STOLI claim).
- District court granted PHL summary judgment that the policy was void ab initio and that incontestability did not bar PHL’s claim; the Eighth Circuit reviewed de novo.
Issues
| Issue | Plaintiff's Argument (PHL) | Defendant's Argument (Bank of Utah) | Held |
|---|---|---|---|
| Whether a policy procured by or pursuant to a scheme to transfer to a stranger is void ab initio for lack of insurable interest | The policy was procured under a STOLI scheme and thus is a wagering contract void as against public policy | Policy purchased by insured on his own life is valid; assignment to a stranger does not render it void absent clear evidence the insured and third party agreed to a wager-type cover | Reversed: Minnesota common law would not declare the Close policy void ab initio; assignment after issuance is generally valid unless narrow "cover for a wager" shown |
| Whether incontestability bars an insurer’s post-incontestability claim that the policy was void ab initio | A void-ab-initio policy never came into force, so the incontestability statute does not apply | Incontestability protects insureds/beneficiaries and requires insurers to timely investigate; defense is subject to the statute absent a statute to the contrary | Reversed: Minnesota’s incontestability statute bars this late challenge; PHL’s claim is time-barred absent statutory exception |
| Standard for when an assignment/policy transfer defeats validity | Any scheme or intent to transfer to investors (STOLI/premium financing) suffices to void the policy | Void-for-wager exception limited to transactions made in bad faith as a cover for a wager; requires stronger proof (e.g., agreement to assign to an identified stranger) | Court adopts narrow view: void-for-wager is a limited exception; general intent to resell or use premium financing insufficient |
| Whether Minnesota common law supports declaring contracts void for STOLI absent legislative change | PHL: common-law public policy grounds permit voiding STOLI policies | Bank: Minnesota precedent and Grigsby favor free transferability; public-policy voidance is "very delicate" and doubtful absent statute | Court: Minnesota Supreme Court would decline to declare such policies void ab initio; legislative action (2009 Insurable Interest Act) is the appropriate means to address STOLI |
Key Cases Cited
- Grigsby v. Russell, 222 U.S. 149 (1911) (an insured’s ownership/assignment of a policy is permissible; caveat about assignments that are covers for wagers)
- Christenson v. Madson, 127 Minn. 225, 149 N.W. 288 (Minn. 1914) (policy procured by insured sustains beneficiary’s claim; insurable-interest rule targets stranger-originated policies)
- Peel v. Reibel, 205 Minn. 474, 286 N.W. 345 (Minn. 1939) (assignment valid if made in good faith and not a cover for a wager)
- Rahders, Merritt & Hagler v. People’s Bank of Minneapolis, 113 Minn. 496, 130 N.W. 16 (Minn. 1911) (courts condemn policies issued for the purpose of having them assigned; good faith required)
- Gordon v. Ware Nat’l Bank, 132 F. 444 (8th Cir. 1904) (assignee’s insurable interest not essential if original insured had interest and assignment was not a cover for a wager)