In most states, carriers may void life insurance policies for lack of insurable interest at any point, even after the two-year contestability period prescribed by statute. This loophole allows insurers to continue collecting premiums on policies for which they may never pay claims, and, for life settlement investors, creates a risk of a zero return on an otherwise sound investment. 

Thanks to a new law that took effect today, however, investors may now file declaratory actions on Minnesota policies of $1 million or more in face, seeking judgments conclusively validating those policies, even though no death benefit claim has been submitted. This law is the first piece of settlement investor-friendly legislation ever passed. Orrick’s Public Policy Group, in conjunction with Fortress Investment Group, led a two-year long effort to provide investors with this novel recourse.

The law specifically provides that a policy’s “owner of record,” or the trustee that owns the policy on behalf of an investor, has two years to seek a declaratory judgment that the policy had a valid insurable interest at inception. Additionally, the law does not require an investor to wait to seek validation until the insurer attempts to rescind the policy. Instead, the policy owner simply must have a good faith belief that the insurer will challenge the policy’s validity. The law applies only to the owners of policies at the time of their enactment. However, as investors generally hold policies through intermediaries, the transfer of an interest does not extinguish the rights granted under the legislation.

This Minnesota law is a milestone for investors against insurers’ efforts to invalidate policies on insurable interest grounds. Notably, it follows on the heels of case law with similar implications in Delaware (Wilmington Savings Fund Society, FSH, et al. v. PHL Variable Insurance Company and Phoenix Life Insurance Company) and New York (CSSEL Bare Trust v. Phoenix Life Insurance Company), which 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.