A federal appeals court this week rejected an effort by the trustee of an estate to collect on a $1 million insurance policy in which she argued that she held an “insurable interest.”

The ruling in the so-called Chawla case by a panel of the 4th U.S. Circuit Court of Appeals, based in Richmond, Va., voided the policy based on misrepresentations about the health of the insured–and not on the critical “insurable interest” issue raised by the lower court.

“Furthermore, it is not at all clear how this Appeals Court opinion will affect current efforts in the Maryland legislature to settle this issue,” the Association for Advanced Life Underwriting bulletin said.

An AALU official said bills clarifying that a normal life insurance trust has an insurable interest in the life of the insured–the position the life insurance industry is taking on the issue–appear to be moving toward enactment in the Maryland legislature.

Indeed, the appeals court panel’s ruling vacated the part of the lower court decision that said the trust lacked an insurable interest because it was unnecessary to consider that issue.

According to lawyers at AALU, the case dealt with a policy issued to a Maryland trust the trustee of which was the wife of a doctor who cared for an elderly man. AALU officials said that the appeals court decision is a positive development because it eliminates a troublesome holding that life insurance trusts, which are used commonly in estate planning and other contexts for the benefit of family members or others who have a clear insurable interest in an insured, could lack an insurable interest. The issue is not fully resolved, because it is still possible for other courts in the future to consider it.

Laurie Lewis, ACLI senior vice president, taxes and retirement security, said as a result of the decision, there exists no valid court decision interpreting whether or not a trust in Maryland has an insurable interest.

“The effect of the appeal court’s decision is that there is no ruling adverse to a trust’s insurable interest under Maryland law,” Lewis said.

The case is Chawla v. Transamerica Occidental Life Insurance Company, 05-1160.