WASHINGTON — The life settlement industry is welcoming a pair of recent Delaware Supreme Court decisions, despite reports suggesting that the decisions were a blow.

In PHL Variable vs. Price Dawe 2006 Insurance Trust Insurance Company, the courthas affirmed the common law ability of a legally insured person or insurable trust to sell a policy on that person’s life for market value — provided that procurement of the policy is not part of a straw purchase pursuant to a prior agreement to resell to an investor, and that the procurement is not part of an illegal wager in which a third party directly or indirectly pays the premiums.

The court holds that an arrangement involving an agreement with a straw man is illegal. An illegal arrangement occurs when an investor has a pre-negotiated arrangement for an immediate transfer of ownership of the policy, and there is no insurable interest on the part of the original owner, according to the court.

The court has ruled that the “intent” of the insured to sell a policy is irrelevant. The transaction itself is legal if, at inception, the individual procuring the policy has insurable interests and does not have a pre-negotiated agreement to immediately transfer ownership.

“The secondary market for life insurance is perfectly legal,” Delaware Chief Justice Myron Steele writes in a decision for the court. “Indeed, today it is highly regulated. In fact, most states have enacted statutes governing secondary market transactions, and all jurisdictions permit the transfer or sale of legitimately procured life insurance policies. Virtually all jurisdictions, nevertheless, still prohibit third parties from creating life insurance policies for the benefit of those who have no relationship to the insured. These policies, commonly known as ‘stranger originated life insurance [STOLI],” … lack an insurable interest and are thus an illegal wager on human life.”

The court then immediately applied the same reasoning to another “stranger-originated life insurance” (STOLI) case, The Lincoln National Life Insurance Company, vs. Schlanger et al.

The court ruled “en banc,” meaning that all judges on the court participated in the decision.

Insurance interest claims by insurers can still be brought at any time, according to the court.

In PHL Variable Insurance Company, a unit of the Phoenix Companies Inc., Hartford (NYSE:PNX), issued a $9 million Delaware life insurance policy on Dawe’s life with an issue date of March 8, 2007. Dawe died March 3, 2010. On June 9, 2010, the Dawe Trust made a claim to Phoenix for the death benefit. Phoenix first contested the policy by filing a lawsuit Nov. 10, 2010.

Phoenix had contended that Dawe did not qualify, and had no legitimate need, for a $9 million life insurance policy. Phoenix, the court states, claims Dawe misrepresented his income and assets in his application and that he was financially induced –as a straw man–into participating in the transaction as part of a STOLI scheme.

REACTIONS

Representatives from Phoenix were not immediately available for comment.

Life settlement industry experts said they like the ruling.

“The court very clearly distinguished between STOLI — a prearranged agreement to transfer a policy involving a straw man — that’s illegal– and life settlements [involving] a legitimately procured life insurance policy in a life settlement market described as highly regulated, says Michael Freedman, a senior vice president at Coventry First L.L.C., Fort Washington, Pa.

“Rejecting the pleadings of the American Council of Life Insurers, the court held that an insured taking out a policy on his or her own life cannot violate insurable interest laws merely because he or she intends to someday sell his or her policy, stating that ‘The insured’s subjective intent for procuring a life insurance policy is not the relevant inquiry,’” according to Darwin Bayston, executive director of the Life Insurance Settlement Association (LISA), Orlando, Fla.

The American Council of Life Insurers (ACLI), Washington, says it is pleased with the ruling, in part because the Delaware court talks about good faith.

“The court said it is not necessary to infer intent; you can look to the facts of the transactions to determine whether the policy was taken out in good faith,” says Michael Lovendusky, a vice president at the ACLI. “If a stranger is paying for the policy, if the insured has no ‘skin in the game,’ that is a clear indication that the policy was not acquired in good faith.”

However, the court did not seem to focus on defining good faith.

An insured’s right to take out a policy with the intent to immediately transfer the policy is not unqualified, the court states. “That right is limited to bona fide sales of that policy taken out in good faith,” as opposed to cover for a wagering contract, the court says.

The court goes on on to say that intent is not relevant to the inquiry here.

“The relevant inquiry is who procured the policy and whether or not that person meets the insurable interest requirements,” the court concludes.

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