After months of relative calm on the life settlement / STOLI[1] front, the Eighth Circuit Court of Appeals recently issued a significant ruling limiting insurers’ options to challenge life insurance policies based on a lack of insurable interest. In PHL Variable Ins. Co. v. Bank of Utah, 780 F.3d 863 (8th Cir. 2015) (PHL), the Court of Appeals reversed a district court decision holding a life insurance policy was void due to a lack of insurable interest based upon a finding that the insured had intended to transfer the policy to a third party investor without an insurable interest in his life at the time he purchased the policy. In rejecting the district court’s opinion, the court instead held that the insurable interest requirement is met when a person purchases a life insurance policy insuring his own life, regardless of whether he intended to transfer the policy to a third party without an insurable interest at the time the policy was purchased.
In doing so, the Eighth Circuit disapproved the Minnesota district court’s holding in the often-cited (at least by insurers) case of Sun Life Assur. Co. of Canada v. Paulson, 2008 U.S. Dist. LEXIS 11719 (D. Minn. Feb. 15, 2008). In Paulson, the district court reached the opposite conclusion and voided the policy at issue relying upon the long-recognized caveat to the general rule that a policy taken out by an insured on his own life would not satisfy the insurable interest requirement if it were a “mere cover” for a wager. Paulson, at *2, citing Grigsby v. Russell, 222 U.S. 149, 155 (1911). In reversing the lower court and rejecting Paulson, the Eight Circuit reasoned that public policy supported an insured’s ability to exploit the secondary market for insurance policies whether or not the insured had already agreed to transfer the policy to a third party at the time it was purchased and that such an arrangement did not clearly implicate the “moral hazard” concern at the heart of the insurable interest requirement.
The PHL court also rejected the district court’s finding that an insurance company may challenge a policy for lack of insurable interest even beyond the two-year “contestability period” established by Minnesota state law. The district court reasoned that a policy that is found to be void ab initio could not be revived by a provision found within the policy itself. The Eighth Circuit disagreed, finding that Minnesota’s two-year incontestability statute was designed to protect insureds from “a dilatory challenge to the insurance policy” and to encourage insurers to promptly investigate within the specified period. The Eighth Circuit found no reason to exempt challenges under the insurable interest doctrine from the two-year limitation, holding that insurers must bring claims against policies based on a lack of insurable interest within the two-year contestability period.
The PHL decision is a clear set-back to the life insurance industry’s efforts to halt STOLI schemes. Although the opinion is limited to Minnesota state law, it may have far-reaching effects beyond the courts of that state. Of particular interest in the near term is the Eleventh Circuit Court of Appeals’ recent certification to the Florida Supreme Court of identical questions regarding the requirement of a good faith intent on the part of the insured and the ability to challenge a policy on insurable interest grounds after the expiration of the two-year contestability in Pruco Life Ins. Co. v. Wells Fargo Bank, NA, 780 F.3d 1327 (11th Cir. 2015). In light of the volume of life settlements emanating from Florida, the life settlement and life insurance industries will both want to keep a close watch on the Florida Supreme Court.
>[1] STOLI, or “Stranger Owned Life Insurance,” is defined as “a practice or plan in initiate a life insurance policy for the benefit of a third party investor who, at the time the life insurance policy is originated, has no insurable interest in the insured.” NCOIL Model Act.