A federal appeals court on March 7 rejected an effort by the trustee of an estate to collect on a $1 million insurance policy in which the trustee argued that she held an “insurable interest,” but the court did so not on the basis of the issue that so concerns the life insurance industry.

The ruling in Chawla v. Transamerica Occidental Life Insurance Company (05-1160) by a panel of the 4th U.S. Circuit Court of Appeals, based in Richmond, Va., voided the policy based on misrepresentations on 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,” an Association for Advanced Life Underwriting bulletin says.

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–passed both the House and Senate of 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 in the estate because courts by policy are supposed to make their rulings as narrow as possible.

According to lawyers at the AALU, this means the critical issue of “insurable interest” has not been resolved in the federal courts.

The case dealt with a policy issued to a Maryland trust that was owned by the wife of a doctor who cared for an elderly man.