Will Insurable Interest Case Be Sea Change Or Mere Ripple? Estate planning could be altered in many states
by Jim Connolly
Will a Maryland court case turn out to be a sea change or merely a ripple?
Those watching a case currently before the Court of Appeals in Richmond, Va., seem to be divided on the impact on the estate planning market and professionals who sell products in that market, according to interviews with National Underwriter.
The case, Vera Chawla v. Transamerica Occidental Life Insurance Company, addresses the issue of whether a life insurance trust has an insurable interest in the life of a decedent. An opinion issued by United States District Judge Claude Hilton in the Eastern District of Virginia, argues that under Maryland law, such a trust does not have an insurable interest. The opinion could impact such trusts in states with laws similar to Maryland.
The American Council of Life Insurers, Washington, says about 30 states have laws similar to Marylands.
The policy was sold in Virginia, but the plaintiff, Vera Chawla, lived in Maryland where the policy was delivered, so Judge Hilton applied Maryland law.
The case addressed two issues: misrepresentation on the application and the insurable interest of a life insurance trust.
Harold Geisinger applied for a $1 million life insurance policy on May 4, 2000, in which he named Chawla owner and beneficiary. Transamerica Occidental refused to issue the policy because of a lack of insurable interest. Geisinger then changed the proposed owner and beneficiary to the Harold Geisinger Special Trust, naming both Chawla and himself as trustees, the opinion states.
According to the court opinion issued on Feb. 3, Geisinger did not detail his health in the application, failing to note health concerns including “a diagnosis of chronic alcohol abuse” and surgery in which “doctors inserted a shunt into his head to drain the excess fluid that had accumulated after his brain surgery.” The opinion also states that Chawlas husband, a physician, conducted the physical examination.
In September 2000, Chawla applied to increase the face value of the policy from $1 million to $2.45 million, the opinion states.
Geisinger died on Sept. 23, 2001.
Judge Hiltons opinion states that the trust must prove an insurable interest in the life of the insured and Chawla failed to demonstrate such an existence as defined by Maryland statute.
“We believe that because this particular decision was based on facts unique to this case, it does not call into question the insurable interest in policies owned by trusts,” says Bill Tate, senior vice president and chief marketing officer, Transamerica Occidental Life Insurance Company, Los Angeles.
“This case involved a situation where an individual applied for a life insurance policy and was found by Transamerica not to have an insurable interest in the proposed insured,” Tate continues. “When the application was turned down on this basis, a trust was then utilized in an apparent attempt to provide for an insurable interest.
“Under this trust, this individual was the sole beneficiary of the life insurance benefits. In the context of this case, this individual had no insurable interest and the use of a trust in this way did not provide one.
“Transamerica does not view this ruling as having any application to trusts generally, including those set up for estate planning purposes,” Tate says.