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September 26, 2011 at 08:00 PM
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.
