A federal court decision in Pennsylvania has notched a win for life settlement investors, deflating carriers' argument that it is permissible for an insured person to apply for a life settlement with the express intent to sell it to a third party.
In a suit filed by Principal Life Insurance Co. against brothers Matthew and Mark DeRose, trustees of their mother's family
trust, Judge Christopher C. Conner of the U.S. District Court for the Middle District of Pennsylvania in Harrisburg ruled that under state statute, insurable interest is determined solely based on the relationship between the insured person and the policy beneficiary.
State laws don't refer to the “intent of the parties” at the time coverage begins, nor does it require that the transfer of a policy must be in “good faith,” the judge wrote in his Oct. 5 ruling.
That finding on “intent” is similar to recent rulings made in Delaware State Supreme Court (PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust) and in the New York Court of Appeals (Alice Kramer vs. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York).
The fact that several courts have already rejected the “intent” argument could shape the outcome of other stranger-originated-life-insurance lawsuits filed by carriers which claim that an insured person applied for a policy with a plan to sell it to an investor in the secondary market, lawyers say.
“There aren't any states that outright address intent; all of the statutes are within three or four degrees of everyone else's,” said Jule Rousseau, partner with Arent Fox LLP. “These decisions are really coming together to build a body of law.”
The Principal-DeRose case concerns JoAnn DeRose, who in 2006 applied for three policies with a total of $35 million in death benefits. The JoAnn DeRose Family Trust was the intended owner and beneficiary of the policy, and Ms. DeRose's sons Matthew and Mark were beneficiaries of the
trust, according to court documents. The policies were funded through non-recourse premium financing provided by First Priority Bank, and the $1.51 million loan to cover the premiums was secured by the policies.
A credit approval memorandum from First Priority stated that the principal source of repayment for the loan is “the sale of the three assigned life insurance policies in the secondary market, via a life settlement transaction,” according to court documents.
Principal subsequently filed an instant declaratory judgment action against the DeRose brothers, claiming they bought the policies as part of a Stoli scheme and hid their use of non-recourse financing on the application for the policies. The insurer sought to have the policies voided because they lacked insurable interest at inception and the application documents had material misrepresentations. Principal also sought to retain the premiums to offset its expenses.
Judge Conner set aside the DeRoses' alleged intent to sell the policies in the secondary market, and instead based insurable interest on the fact that Ms. DeRose's sons were the beneficiaries of the
trust, which in turn was the beneficiary of the insurance policies. Indeed, a parent-child relationship forms the basis for insurable interest, he wrote.
Still, Judge Conner is allowing Principal to move forward with claims aiming to void the policies based on misrepresentations on the application. He is also permitting the carrier to seek retention of the premiums to offset the costs related to issuing the policies.
Attorney F. Warren Jacoby, who is representing the DeRoses, noted that the decision thus far is still a win. “There's still an issue on misrepresentation in the application, and we believe we'll prevail on that,” he said. “Judge Conner did the right calculus and wasn't distracted by the insurer's saber rattling.”
“While we can't comment on pending litigation, The Principal does not support any form of investor-initiated life insurance where individuals or investors purchase insurance solely to bet on the early demise of an insured,” spokeswoman Joelle Kirchoff wrote in an e-mail. “We closely monitor our business for these types of policies. In policies where investor-initiated life insurance is suspected, lawsuits have been filed.”
