A policy holder’s insurable interest in a life insurance policy is valid even if he intended to sell it when he bought it, a Federal court says.

The U.S. 4th Circuit Court of Appeals in Richmond, Va., made that ruling in upholding a lower court decision in a case brought by First Penn-Pacific Life Insurance Co., Schaumburg, Ill. That court ruled that First Penn could not cancel a policy it had issued to Stanley Moore, an Arizona resident, even though Moore had made false statements when applying for the policy.

The court acknowledged that Moore had attempted to defraud 7 life insurance companies in 1997 when he purchased life insurance policies with a total value of $8.5 million. Shortly afterwards, he met with a viatical settlement broker to sell the policies, fraudulently claiming he was terminally ill, according to the 4th Circuit.

Then, on Jan. 5, 1998, Moore bought a $2 million, 10-year policy from First Penn, which he later converted to a 20-year policy. By failing to disclose his other policies to First Penn, he made “material misrepresentations” to the company, the court acknowledged.

Upholding the 2007 decision by the U.S. District Court in Maryland, the appeals court ruled First Penn could not cancel the policy it had issued to Moore, holding that the insurer had failed to contest the policy within Arizona’s required 2-year period.

On appeal, First Penn asserted that Moore did not have an insurable interest in the policy because he had intended to sell it. “Clearly, an individual has an insurable interest in his own life,” the circuit court ruled. Even if Moore planned to sell the policies when he bought them, there was no evidence that any other party participated in Moore’s plan to sell his policies, it added.

“Evaluating insurable interest on the basis of the subjective intent of the insured at the time the policy issues, as First Penn would have us do, would be unworkable and would inject uncertainty in the secondary market for insurance,” the court stated.

A top executive of the Life Insurance Settlement Association, Orlando, which had filed a friend-of-the-court brief in the case, praised the decision.

“This is a clear and concise statement of established law, and it carries great weight coming from the U.S. 4th Circuit Court of Appeals,” said Doug Head, executive director of LISA. “The decision acknowledges the value of the growing life settlement market and the importance and value of protecting that market as it has emerged for the benefit of consumers.”

The case is First Penn-Pacific v. Evans, no. 07-2020.