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Life settlements Alert

october 04, 2011

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For more information about Orrick's Life Settlements practice, please contact:

Stephen G. Foresta Partner, Litigation
New York
(212) 506-3744

Khai LeQuang
Of Counsel, Litigation
Los Angeles
(213) 612-2407

In Answering Certified Questions on Insurable Interest, Delaware Supreme Court Raises Many More


On September 20, 2011, the Delaware Supreme Court answered three certified questions directly impacting life settlement investments.  The questions were presented to the Supreme Court in two companion cases pending in the federal district court of Delaware, PHL Variable Ins. Co. v. Price Dawe 2006 Insurance Trust and Lincoln Nat'l Life Ins. Co. v. Joseph Schlanger 2006 Insurance Trust

First, the Delaware Supreme Court held that an insurer can contest a life insurance policy for lack of insurable interest even after the contestability period expires.  This ruling aligns Delaware with the majority of states that have considered the issue (New York being the major exception).

Second, the Court held that the Delaware insurable interest statute, 18 Del. Code § 2704, does not prohibit an insured from obtaining a policy on his or her own life and immediately transferring the policy (or a beneficial interest in a trust that owns the policy) to a person without an insurable interest, even if the insured never intended to keep the policy.  However, the Court held that "if a third party financially induces the insured to procure a life insurance contract with the intent to immediately transfer the policy to a third party, the contract lacks an insurable interest."  The Court explained that the decisive issue is not whether the insured intended to transfer the policy, but whether the insured actually procured the policy or was merely an "instrumentality" used by a third-party investor to procure the policy. 

Third, the Court held that a Delaware trust established by the insured has an insurable interest in the insured as long as the insured actually established the trust, which requires that the insured both "create and initially fund the trust corpus."  The Court held that the insurable interest requirement is not met "if the trust is created through nominal funding as a mere formality" or if the trust is funded by a third party "as part of a pre-negotiated agreement."

The answers to the second and third certified questions raise a number of significant questions.  For instance, the Court explained that an insured does not "procure" a policy (i.e., is merely an "instrumentality") if a third party provides "the insured the financial means to purchase the policy" by funding the premium payments.  This holding calls into question whether a policy originated through premium financing is procured by the insured or a third party.  In such cases, it would seem that the insured (not the third party lender) funds the premium payments; the insured simply does so with funds borrowed from the lender.  The Court appeared more concerned about premium payments made by a third party as an advance on a pre-arranged purchase than with premium financing, which is expressly authorized by Delaware statute. 

Although the full implications of Dawes and Schlanger are impossible to predict, what is clear is that a court applying Delaware law in an insurable interest dispute will need to "scrutinize the circumstances under which the policy was issued and determine who procured or effected the policy."  This inherently fact-specific inquiry, coupled with the right of insurers to contest a policy for lack of insurable interest after the contestability period, adds uncertainty to policies governed by Delaware law and will undoubtedly lead to more litigation involving life settlement transactions.

For more information on this case and its potential impact, please contact Steve Foresta or Khai LeQuang.