PHL VARIABLE INSURANCE COMPANY, Plаintiff-Appellee v. BANK OF UTAH, Defendant-Appellant. Institutional Longevity Markets Association, Amicus on Behalf of Appellant.
No. 14-1210.
United States Court of Appeals, Eighth Circuit.
Submitted: Oct. 8, 2014. Filed: March 13, 2015. Corrected: March 17, 2015.
Rehearing and Rehearing En Banc Denied April 20, 2015.*
863 F.3d 863
* Judge Colloton would grant the petition for rehearing by the panel.
III.
The judgment is affirmed.
Robert Mark Loeb, argued, Washington, DC, (Thomas Franklin Nelson, Timothy Kadee J. Anderson, Patrick Griffin, Minneapolis, MN., Philipp Smaylovsky, Stephen Foresta, Marc R. Shapiro, Alec Orenstein, Shaila Rahman Diwan, New York, NY. Khai LeQuang, I, Irvine, CA., Nancy E. Harris, San Francisco, CA., on the brief), for Defendant-Appellant.
Before LOKEN, COLLOTON, and SHEPHERD, Circuit Judges.
LOKEN, Circuit Judge.
This case 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 selling 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, 484 F.3d 284, 287 (4th Cir.2007). By the mid-1990s, the market had expanded to includе other terminal illnesses, and there were some sixty companies in the viatical settlement business. See Martin, Betting on the Lives of Strangers: Life Settlements, STOLI, & Securitization, 13 U. Pa. J. Bus. L. 173, 185-86 (2010). Supporting the practice, Congress amended the Internal Revenue Code in 1996 to exclude from an insured‘s taxable income qualifying proceeds received from a licensed viatical settlement provider. Many States responded to the new industry with viatical settlement statutes regulating the impact of the practice on insureds and insurers. See Life Partners, 484 F.3d at 294-300.
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 citizens 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, supra 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 submittеd 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.1 New Stream filed for bankruptcy in June 2011. Its portfolio of life insurance policies, including the Close policy, was sold to Limited Life Assets Services Limited (LLAS). When Close died in November 2011 from lung cancer, Bank of Utah held the policy as securities intermediary for LLAS. Bank of Utah filed a claim for the death benefit in January 2012.
PHL‘s claim investigation revealed the fraudulent misrepresеntations 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
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 wеre 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 popular 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.
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, 127 Minn. 225, 149 N.W. 288, 289 (1914). In this country, the dominant public policy underlying the rule is to eliminate a form of “moral hazard.” As the hazard was graрhically described by one commentator, “Insurance policies that compensate beneficiaries upon the death of a person or destruction of property that the beneficiary does not have an interest in preserving give beneficiaries an incentive to murder the insured person or destroy the insured property.”2 Justice Holmes succinctly stated this public policy in Grigsby v. Russell, 222 U.S. 149, 155, 32 S.Ct. 58, 56 L.Ed. 133 (1911): “The very meaning of an insurable interest is an interest in having the life continue, and so one that is opposed to crime.” Note that the policy is based upon the relationships between the insured, the person purchasing a lifе insurance policy, and the death benefit beneficiary. It does not address whether the insurer should be permitted to renege on its contractual obligations.
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, 94 U.S. 457, 460, 24 L.Ed. 251 (1876). In Grigsby, the Supreme Court noted that, “[s]o far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property.” 222 U.S. at 156, 32 S.Ct. 58. Applying this somewhat countervailing public policy, the Court overruled prior dicta and held that a man who purchased insurance on his own life could validly assign or sell the policy to a person lacking an insurable interest in the insured‘s life. But the Court noted a caveat
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 vоid ab initio is never “in force” and therefore PHL‘s defense to paying the death benefit is not barred by the incontestability provision in
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, 2008 WL 451054, at *2 (D.Minn. Feb. 15, 2008). But that categorical statement does not reflect the Supreme Court of Minnesota‘s far more nuanced discussion in Christenson, a case in which the insured‘s children claimed a life insurance policy death benefit because the woman named as beneficiary had no insurable interest:
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 оf 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.
Nowhere in this discussion is there even a hint that a policy purchasеd by an insured on his own life would ever be “void ab initio” at the instance of the insurer.
As the Court explained in Christenson, 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 subject to the incontestability bar. This court had earlier applied the same principle in Gordon v. Ware Nat‘l Bank, 132 F. 444, 448 (8th Cir.1904), explaining that “an insurable interest in the assignee of a policy of life insurance is not essential to the validity of the assignment if the party to whom it was originally issued had such an interest, and the assignment is not made as a cover for the issue of a wager policy.”
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 thе beginning in favor of one without insurable interest.” Peel, 286 N.W. at 346; see Rahders, 130 N.W. at 17; Bankers’ Reserve Life Co. v. Matthews, 39 F.2d 528, 529 (8th Cir.1930) (“Any person has a right to procure an insurance on his own life and assign it to another provided it be not done by way of cover for a wager policy.).” As articulated by the Supreme Court of Minnesota, this exception to the free transferability of life insurance policies is narrow.
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 procured 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. 2008 WL 5120953, at *5. This is a plausible application of the dicta in Peel and Rahders and Grigsby. But we conclude it would not be adopted by the Supreme Court of Minnesota because it ignores an overriding principle of Minnesota law: “The court‘s power ‘to declare a contract void for being in contravention of sound public policy is a very delicate and undefined power, and ... should be exercised only in cases free from doubt.‘” Katun Corp. v. Clarke, 484 F.3d 972, 976 (8th Cir.2007) (Supreme Court of Minnesota quotation omitted).
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 declarеd 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 to 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.”5 We conclude this is not a result the Supreme Court of Minnesota would find acceptable in exercising its “very delicate and undefined power” to declare a contract void as contrary to sound public policy.
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
IV.
Without question, an aggressive secondary market for life insurance policies rais-
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.
COLLOTON, Circuit Judge, 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 Assurancе Co. of Canada v. Paulson, Civil No. 07-3877, 2008 WL 451054 (D.Minn. Feb. 15, 2008), was correct in its prediction that “the Minnesota Supreme Court would consider a life insurance policy void as against public policy if the policy was procured under a scheme, purpose, or agreement to transfer or assign the policy to a person without an insurable interest in order to evade the law against wagering contracts.” Id. at *2 (internal quotation omitted). The stated rule is the better reading of the Minnesota Supreme Court‘s considered dicta on the subject in Peel v. Reibel, 205 Minn. 474, 286 N.W. 345 (1939) and Rahders, Merritt & Hagler v. People‘s Bank of Minneapolis, 113 Minn. 496, 130 N.W. 16 (1911). In Rahders, the court emphasized that “good faith in the transaction is required, and the courts do not hesitate to condemn a policy issued for the purpose of having it assigned.” 130 N.W. at 17. In Peel, the court said that an assignment of life insurance 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].” 286 N.W. at 346 (emphasis added). The Minnesota court thus has stated its view that the case for declaring an insurance contract void in these circumstances is free from doubt. The Paulson rule, moreover, was expressly accepted by appellant Bаnk of Utah in this case. Appellant‘s Br. 20-21 & n.9. The Bank never urged the contrary position adopted by the court, and PHL had no occasion to address it.
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 intеnded that the insured would resell the policy to someone without an insurable interest—would interfere with the ability of insureds to use premium financing, and 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, 222 U.S. 149, 155-56, 32 S.Ct. 58, 56 L.Ed. 133 (1911). The district court thought it undisputed that Close intended to transfer the policy to “a third party lacking an insurable interest on his life,” R. Doc. 174 at 23, but that conclusion is insufficient to render judgment for PHL.
On the contrary, my assessment of the recоrd leads to the conclusion that Bank of Utah is entitled to judgment, because there is no evidence that Close intended from the outset to transfer the policy to CFC of Delaware, the premium financing
For these reasons, I concur in the judgment.
Ken R. Sorenson, AAG, argued, Bismarck, ND, for Respondent-Appellee.
Before MURPHY, MELLOY, and BENTON, Circuit Judges.