California Supreme Court Denies Review of Teren Decision, Enhancing Investor Position in Life Settlements


On August 31, 2011, the California Supreme Court declined to review the Court of Appeal's decision in Lincoln Life and Annuity Co. v. Berck, commonly referred to as the Teren case.  In Teren, the insured, Jack Teren, formed an insurance trust and designated his son, Elliot, as the original beneficiary.  Teren then obtained $20 million in life insurance policies that were issued to the trust, and approximately one month later, sold the beneficial interest in the trust to an investor.  The trial court allowed Lincoln to rescind the policy for lack of insurable interest, and the Court of Appeal reversed the trial court in an unpublished decision.  

Relying on Lincoln Nat'l Life Ins. Co. v. Gordon R. A. Fishman Irrevocable Life Trust, the Court of Appeal identified two important principles of California insurable interest law.  First, insurable interest is determined at the time a policy takes effect.  Second, a life insurance policy may be transferred by assignment to a person without an insurable interest.  The Court of Appeal also found that the Teren policies were supported by an insurable interest when they took effect because "Elliot, who is Jack's son and was the beneficiary of the trust when it was formed and when the policies were issued, undisputedly had an insurable interest in Jack's life." 

The court then held that a policy having an insurable interest at inception is not void for lack of insurable interest merely because the insured intended to sell the policy to someone without an insurable interest.  According to the Court of Appeal, "Although the evidence shows the trust intended that [the investor] ultimately would acquire the beneficial interest in Jack's policies, that intent does not negate the fact that when the trust acquired the policies, they were supported by an insurable interest."  In the opinion, the Court of Appeal also held that California's 2009 amendments to the Insurance Code do not apply retroactively to policies that were issued before the amendments came into effect.

After the ruling by the Court of Appeal, Lincoln filed a petition for review by the California Supreme Court, which was denied.  Although the Court of Appeal opinion remains unpublished and cannot be cited in California state courts, the denial of review provides additional credibility to the decision, and federal courts and state courts in other jurisdictions may be less hesitant to follow it, especially when taken with the New York Court of Appeals similar holding in Kramer v. Phoenix Life Ins. Co.  In addition, insurance companies had been routinely citing the trial court's insurable interest ruling in Teren, and the denial of review now completely undermines their reliance.