U.S. District Court Grants Summary Judgment in a Ruling That Reinforces California Law in Favor of Life Settlements

February.09.2012

On February 6, 2012, in Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust, et al., the United States District Court for the Central District of California granted summary judgment on behalf of the Doris Barnes Family 2008 Irrevocable Trust and against Hartford Life and Annuity Insurance Company on all of Hartford’s claims, including a claim that the policy at issue was void for lack of insurable interest and claims for fraud, fraudulent inducement, negligent misrepresentation, and conspiracy.

The case involved the sale, shortly after the policy was issued, of the beneficial interest in the Trust, which was formed to purchase the policy. Hartford sought a declaration that the policy was void for lack of insurable interest because the insured, Doris Barnes, obtained the policy with the specific intent to sell it right away. Hartford also sought damages against the Trust for fraud and conspiracy based on misrepresentations that were allegedly made in connection with the application for the policy.

In holding that the policy was not void for lack of insurable interest, the court rejected Hartford's claim that an insured’s intent to sell a policy is relevant to insurable interest. Relying on the California insurable interest statutes and judicial opinions in Lincoln Life and Annuity Co. v. Berck (commonly referred to as Teren) and Lincoln Nat’l Life Ins. Co. v. Gordon R. A. Fishman Irrevocable Life Trust, the Court concluded: "The Insurance Code does not state or imply that the intent to sell a Policy in the future is relevant to whether one has an insurable interest. Rather, the Code plainly states that a policy may be transferred to one without an insurable interest after the policy goes into effect." The court also held that the recent amendments to Insurance Code sections 10110.1(d) and 10110.1(e) do not apply retroactively to policies that were issued before January 1, 2010.

In addition, the court held that a life insurance policy's incontestability clause bars an insurer from asserting a claim for damages more than two years after a policy is issued based on fraudulent or negligent misrepresentations in the application. The court observed that to allow an insurance company to bring an affirmative claim for fraud rather than contesting the policy itself "would strip incontestability clauses of almost all meaning." The court’s holding thus protects policyholders from damages claims after a policy has become incontestable.

The Trust was represented by Orrick.