Lead Opinion
This сase turns on the validity of a $5 million life insurance policy issued in 2007 by PHL Variable Life Insurance Company (PHL) insuring the life of William Close. When Close died in 2011, the policy was a stranger-owned-life-insurance policy
I.
A “viatical settlement” permits a dying insured to obtain continued medical care and other provisions by sеlling his life insurance policy at a discount to a purchaser who will pay more than the cash surrender value the insurer would pay. “The viatical settlements industry was born in the 1980s in response to the AIDS crisis.” Life Partners, Inc. v. Morrison,
Investor demand for life insurance policies insuring the terminally ill exceeded supply as the treatment of AIDS became more effective. To meet this lucrative demand, life insurance agents and life settlement brokers changed the name of the practice from “viatical settlements” to “life settlements” and undertook on a massive scale to persuade senior citizеns to purchase life insurance policies in high-value amounts “not for the purpose of protecting his or her family, but for a current financial benefit.” Martin, swpra at 187. The practice poses risks and rewards for insurers, insureds, and investors that are well illustrated by the facts of this case.
In 2006, William Close, a 74-year old retiree, was persuaded by a referring broker to meet with Brad Friedman, an agent of Lextor Financial, an agency licensed to sell insurance for PHL. Close completed an application for a $5 million life insurance policy, far more than he could afford. As submitted to PHL, the policy application falsely stated that Close had a net worth ten times greater than actual and an annual income of $350,000, and failed to disclose his prior felony conviction for receiving illegal kickbacks as a union pension fund trustee; With Friedman’s guidance, Close submitted a loan application falsely stating his net worth and obtained a two-year, $300,225 premium financing loan from CFC of Delaware. Funding for the loan came from New Stream Insurance, LLC (New Stream), .a now-bankrupt hedge fund that invested in life settlements and premium finance loans. The policy was pledged as collateral for the non-recourse loan; Close personally guar
PHL had previously approved CFC as a funding source for the purchase of PHL policies. PHL approved Close’s application with minimal investigation and issued the $5,000,000 policy in September 2007. From the loan proceeds, PHL received insurance premiums of $272,025; CFC received $14,200 in origination and closing fees; and Friedman and a CFC employee split substantial commissions for procuring the policy.
As part of the Financing Arrangement with CFC, Close formed an irrevocable trust to own the insurance policy, naming Mrs. Close as trust beneficiary. The trustee was BNC National Bank. A Minnesota lawyer was named Trust Protector, a position intended to “give the insured and his family some input over the ongoing trust administration.” In March 2009, six months before the loan was due, BNC sent Close a letter explaining his options for repaying it — refinance with the lender or a third party, sell the policy and use the sale proceeds to repay the loan, or relinquish his interest in the policy to the lender. Close sought Friedman’s help in selling the policy, but the secondary market had crashed by the fall of 2009, and Friedman’s efforts were unsuccessful. Unable to sell the policy, Close surrendered the policy to New Stream in full satisfaction of the loan.
PHL’s claim investigation revealed the fraudulent misrepresentations on Close’s policy application. But any claim to rescind the policy for fraud in its procurement was foreclosed by the two-year incontestability provision in Minn.Stat. § 61A.03, subd. 1(c). See Sellwood v. Equitable Life Ins. Co. of Iowa,
II.
This diversity action is governed by Minnesota law. The securitization of life settlements for purchase by investors, and the dramatic increase in suspect marketing practices to sell STOLI policies, raise legitimate public policy and legislative concerns that have led to legislation and regulation in nearly every State, and have prompted a raft of litigation around the country, illustrated by this case. See generally Martin, supra at 197-216. The fact patterns in many cases were similar to this
The Anglo-American principle that an insurable interest is required to purchase a life insurance policy dates from the Life Assurance Act of 1774, enacted by the British Parliament to regulate a pоpular English gambling activity-using insurance to bet on strangers’ lives. Martin, supra at 176. The principle was universally adopted in this country and became a part of federal common law (pre-Erie) and the common law of the States, including Minnesota. Many States enacted statutes defining the elusive term “insurable interest.” Minnesota did not, until the Legislature, responding in 2009 to problems created by STOLI marketing practices, enacted the Minnesota Insurable Interest Act. Minn.Stat. §§ 60A.078 et seq. This Act is prospective only and thus does not apply to the policy here at issue. See 2009 Minn. Sess. Law Serv. Ch 52, § 11. Thus, this case is governed solely by Minnesota common law. Decisions from other jurisdictions having relevant statutes or differing judicial precedents must be applied with great care.
The core of the common law insurable interest rule is “that a policy, issued to one who has no interest in the continuation of the life of the person insured, is both a gambling contract, and a contract which creates a motive for desiring the termination of such life.” Christenson v. Madson,
The insurable interest rule is satisfied when a person purchases insurance on his or her own life. See Conn. Mut. Life Ins. Co. v. Schaefer,
III.
PHL’s claim is based on two contentions: (A) that the Close policy was “void ab initio ” for lack of an insurable interest, and (B) that any policy void ab initio is never “in force” and therefore PHL’s defense to paying the death benefit is not barred by the incontestability provision in Minn.Stat. § 61A.03, subd. 1(c).
A. The district court did not discuss the first question, simply accepting PHL’s assertion that life insurance policies lacking an insurable interest violate public policy and are void ab initio, an assertion PHL supported entirely by citing cases from other jurisdictions. In an earlier District of Minnesota diversity case in which an insurer sought to invalidate a life policy on this ground, the district court properly looked to Supreme Court of Minnesota common law decisions and concluded:
Under Minnesota law, an insurance policy is void ab initio if, at the time of the policy’s issuance, the insured has no insurable interest. Cf. Christenson v. Madson, [127 Minn. 225 ,]149 N.W. 288 , 289 (Minn.1914).
Sun Life Assur. Co. of Canada v. Paulson, No. 07-3877,
Plaintiffs invoke the rule ... that the beneficiary under a policy of life insurance, in order to recover thereon, must allege and prove an insurable interest in .the life of the insured. This rule is based on the theory that a policy, issued to one who has no interest in the continuation of the life of the person insured, is both a gambling contract, and a contract which creates a motive for desiring the termination of such life, and is therefore against public policy and void.... [B]ut where the insured himself procures the insurance, the contract is between him and the insurer, not between the beneficiary and the insurer, and his interest in his own life sustains the policy and need not be proven. In such case he has the right to appoint the person to whom the proceeds of the policy shall go.149 N.W. at 289 .
Nоwhere in this discussion is there even a hint that a policy purchased by an insured on his own life would ever be “void ab initio ” at the instance of the insurer.
As the Court explained in Christen-son, when a person other than the insured purchases life insurance on a stranger, naming himself as beneficiary, the insurance policy is “against public policy and void.” But when a person purchases insurance on his own life and later assigns it to a stranger, the contract between the-insured and insurer is valid unless voidable for fraud or other defenses that are subjeсt to the incontestability bar. This court had earlier applied the same principle in Gordon v. Ware Nat’l Bank,
We acknowledge the caveat stated in Grigsby and restated more than once by the Supreme Court of Minnesota and by this court — an assignment of a life insurance policy is valid if “made in good faith and not as a mere cover for taking out insurance in the beginning in favor of one without insurable interest.” Peel,
In Sun Life v. Paulson, the district court applied this oft-repeated caveat and concluded that a scheme or agreement between the insured and a third person at the time the policy is рrocured to transfer or assign the policy to an identified person who lacked an insurable interest would render the policy void ab initio under Minnesota common law.
In this context, the Supreme Court of Minnesota has recognized “the theory that a policy, issued to one who has no interest in the continuation of the life of the person insured, is ... against public policy and void.” Christenson,
If our disagreement with the decision in Sun Life v. Paulson is debatable, we further note the district court went far beyond that limited ruling when it concluded that PHL was entitled to summary judgment despite the absence of proof of an agreement to resell the policy to an identified person. Relying on cases applying Delaware and New York law that were governed by quite different statutes and judicial precedents, the district court declared the Close policy void as against public policy because it “was procured by a scheme to assign it to a party lacking an insurable interest and with the mutual intent of circumventing the law against wagering policies.” This reasoning bears little if any relationship to the “moral hazard” on which both federal and Minnesota common law are grounded. Moreover, it would permit life insurers to resist paying a death benefit any time there is some evidence that an insured used premium financing tо obtain a policy he or she planned to sell. Subjecting insureds and their beneficiaries to this inquiry cannot be squared with the public policy declaration in Grigsby that “it is desirable to give to life policies the ordinary characteristics of property.”
B. We likewise disagree with the district court’s answer to the second issue on which PHL must prevail — that its claim to avoid paying the death benefit for lack of an insurable interest is not foreclosed by Minnesota’s incontestability statute. Adopting what it described as the majority view from other jurisdictions, the district court concluded, “A policy that is void ab initio never comes into force, and so the incontestability provision of such policy
We conclude the Supreme Court of Minnesota would not agree. The purpose behind Minn.Stat. § 61A.03, subd. 1(c), is “to protect an insured (and designated beneficiaries) from a dilatory challenge to the insurance policy while also encouraging the insurer to be diligent in performing its duty to investigate within a specified period, and to penalize it if it does not.” PHL Var. Life Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 10-1197,
IV.
Without question, an aggressive secondary market for life insurance policies raises seriоus public policy issues. While passive investors of securitized policies are unlikely to murder the insureds, the life settlement market functions in part on the truism that a policy is worth more to an investor if the insured is elderly or in poor health. See Martin,
The judgment of the district court is reversed and the case is remanded with directions to dismiss PHL’s complaint for declaratory judgment relief, and for further proceedings not inconsistent with this opinion.
Notes
. New Stream acquired CFC in June 2009. CFC’s only asset was a portfolio óf loans made to a Minnesota irrevocable life insuranee trust under the premium finance program funded by New Stream.
. Loshin, Insurance Law’s Hapless Busybody: A Case Against the Insurable interest Requirment, 117 Yale L.J. 474, 476-77 (2007).
. This statute provides in relevant part that a life insurance policy issued in Minnesota must contain a provision "that the policy ... is incontestable after it has been in force ... for two years from its date, exсept for nonpayment of premiums and except for violation of the conditions of the policy relating to naval and military services in time of war.”
. Brown v. Equitable Life Assur. Soc.,
. As one commentator has noted, “The insurable interest doctrine creates an opportunity for insurers to exploit less sophisticated insurance purchasеrs by acquiring what amounts to an embedded option while capturing the entire value of that option. Thus, the insurable interest doctrine ... impedes goals of fairness and equity in the insurance market.” Loshin, supra at 494.
. The court noted the Supreme Court of Minnesota “has not yet opined on the question” whether PHL's insurable interest claim was barred by § 61A.03, subd. 1(c), and declined to address it.
. The life insurance industry persuaded the Minnesota Legislature to override § 61A.03, subd. 1(c), in the prospective 2009 Insurable Interest statute, which provides that an insurer "prior to the payment of death benefits” may bring a declaratory judgment action seeking a court order declaring "void” a policy that was "initiated by [prohibited] STOLI practices.”
Concurrence Opinion
concurring in the judgment.
The dispositive question on this appeal is whether the life insurance policy issued by
This appeal is governed by Minnesota law. In my view, the district court in Sun Life Assurance Co. of Canada v. Paulson, Civil No. 07-3877,
In applying the Minnesota rule to the record in this case, however, PHL is not entitled to summary judgment. To establish that an insurance contract is void ab initio as a cover for a wagering contract, the Minnesota court likely would require an insurer to show that the scheming parties agreed that the insured would resell the policy to an identified person without' an insurable interest. A broader rule— that the insurer need only show that the parties intended that the insured would resell the policy to someone without an insurable interest — would interfere with the ability of insureds to use premium financing, аnd could not meaningfully be distinguished from the generally accepted rule that permits an insured to purchase a life insurance policy with his own funds while harboring a unilateral intent to resell the policy to a stranger. See Grigsby v. Russell,
On the contrary, my assessment of the record leads to the conclusion that Bank of Utah is entitled to judgment, because there is no evidence that Close intendеd from the outset to transfer the policy to CFC of Delaware, the premium financing
For these reasons, I concur in the judgment.