On April 9, 2014, the United States District Court for the District of Delaware issued a decision allowing an investor to proceed with a claim seeking, among other things, a declaratory judgment concerning the validity of dozens of life insurance policies, even though no death benefit claim had been submitted on any of the policies.  The ruling, in Wilmington Savings Fund Society, FSB, et al. v. PHL Variable Insurance Company and Phoenix Life Insurance Company, Civil Action No. 13-499-RGA, held that, prior to submitting any claims under the policies, the trustee of 60 life insurance trusts could seek declaratory relief determining whether the trusts’ policies had an insurable interest when issued by the carrier, or were instead void ab initio for lack of insurable interest.  The Court declined to permit, however, the trustee’s other declaratory judgment claims concerning increases in the cost of insurance on the policies and the trustee’s ability to transfer the policies.  Although the Court also dismissed a number of the trustee’s other claims alleging racketeering activity and fraud by the insurer, the court allowed the plaintiff to proceed with its claims under a section of the Connecticut Unfair Trade Practices Act (“CUTPA”) prohibiting misrepresentations and false advertising of insurance policies. 

At issue in this case are life insurance policies issued by PHL Variable Insurance Company and Phoenix Life Insurance Company (together, “Phoenix”), to sixty trusts, the owners, and beneficiaries in the period from 2006 to 2008.  Wilmington Savings Fund Society FSB, as trustee of the trusts, brought the suit alleging that, as a strategy to mitigate losses sustained during the economic crisis that began in 2008, Phoenix decided to systematically refuse to honor certain classes of policies.  These policies included those in which investors held the beneficial interest, policies held by trusts with Wilmington as trustee, and policies written by certain agents.  Wilmington alleged that this practice destroyed the secondary market exchange for these policies, and diminished their value.  Wilmington further alleged that, while Phoenix had no intention of paying claims on Wilmington’s policies, it raised the cost of insurance on the policies to the point that many policyholders were left with no alternative but to allow their policies to lapse.  In the event that policyholders decided not to allow their policies to lapse, Wilmington alleged, Phoenix made a business decision to deny coverage on the grounds that the policies lacked insurable interest and to keep all premiums paid.  In certain cases, the Phoenix preemptively challenged policies, rather than waiting until the insured has died, and sought to retain the premiums paid. 

Among other claims, Wilmington sought declaratory relief, asking the court to determine whether the policies comply with Delaware insurable interest laws and are thus valid.  In denying Phoenix’s motion to dismiss this claim, the court noted that Phoenix sought to invalidate “virtually identical policies that were issued only after the collection of large premiums, [that] there are similar lawsuits scattered across the United States, [and that] it is undisputed that the Defendants will have the right to challenge the policies as void ab initio.”  As a result, allowing the court to declare the validity of these policies would “define and clarify the rights” of the parties, therefore providing the investors with “an immediate impact” to help them decide whether to continue or cease paying premiums on the policies.    

Although the court dismissed most of Wilmington’s other claims, the decision is still an important victory for investors because it allows for a determination of the validity of investor-owned policies under certain circumstances.  This decision follows on the heels of a similar ruling by a Delaware federal court judge in December 2013 in PHL Variable Ins. Co. v. ESF QIF Trust, as well as a ruling from a 2011 New York state court judge in CSSEL Bare Trust v. Phoenix Life Insurance Company.  Rulings like these provide investors with the certainty of knowing whether death benefits will be paid before potentially paying substantial sums in premiums to keep their policies in effect.