Columbus Life’s New Attack on the Secondary Market

Life Settlements Alert | July.15.2020

In the past eight months, Columbus Life Insurance Company (“Columbus Life”) has filed at least eleven lawsuits against investors seeking to void their policies and keep their premiums.  This recent wave of lawsuits opens a new front in the longstanding battle insurance companies have waged against companies that have provided a secondary market outlet for elderly insureds seeking to cash out on their life insurance.  In this latest wave of litigation, Columbus Life and a handful of other insurance companies continue to seek a massive windfall by claiming policies are void for lack of insurable interest years after the policies were issued and seeking to keep millions of dollars in premiums they have received over that time.  The stages for this latest offensive are states with vague or indefinite insurable interest laws, where the insurers hope to establish unfavorable precedent that would discourage secondary market investors from continuing to provide options for insureds looking to monetize their life insurance.   

Background

All of Columbus Life’s complaints filed so far are essentially the same.  Columbus Life alleges that a life insurance policy, often issued over a decade ago and owned by a securities intermediary on behalf of an investor, is an illegal human wagering contract and lacked insurable interest at inception.  In all the cases, Columbus Life asks the court to declare the policy void ab initio so it need not pay any death benefit to the policyholder.  And in some instances, Columbus Life filed the lawsuit after the policyholder submitted a claim for the death benefit.  However, in none of the lawsuits does Columbus Life explain why it waited over a decade to challenge a policy while collecting millions of dollars in premiums over that time.

The new lawsuits are, in fact, a reprise of the insurers’ initial counter to the secondary market from the early to mid-2000s, when companies like Phoenix Life Insurance Company began seeking to void policies for lack of insurable interest.  When this strategy met with only limited success—in part due to a landmark Eighth Circuit ruling on insurable interest won by Orrick—insurers like AXA, Lincoln, Transamerica, and John Hancock began raising the cost of insurance for certain policies.  These rate increases led to their own flurry of class action and investor lawsuits, many of which are still pending. 

A few years later, Sun Life Assurance Company of Canada (“Sun Life”) implemented its own strategy to avoid paying death benefits on policies, despite having collected millions of dollars in premiums on the policies for years.  It filed a slew of lawsuits against investor policyholders across the country seeking to void their policies, and these lawsuits have only continued to increase over the last five years.  Since Sun Life began its campaign, policyholders have questioned whether other insurers would follow suit.  We now apparently have the answer.

The Strategy

Columbus Life’s opening salvo in this litigation has been significant: It has filed at least eleven lawsuits since late 2019, targeting two groups of states.  The first are jurisdictions with established caselaw that tends to favor insurers seeking to invalidate policies because they permit courts to make subjective post-hoc decisions about the intent of a transaction years later.  These states include Delaware, where Columbus Life has filed a number of its suits and which has a robust body of insurable interest decisions that, for the most part, are unfavorable for life settlement investors.  Delaware courts, for example, have found policies originated through nonrecourse premium finance loans to be void for lack of insurable interest where they have concluded the insured was used as a straw man for a STOLI scheme.  See Sun Life Assurance Co. of Can. v. U.S. Bank Nat’l Ass’n, 369 F. Supp. 3d 601, 611 (D. Del. 2019).  However, Delaware courts generally have required insurers to return the premiums when an insurance policy is found to be void ab initioSee Sun Life Assurance Co. of Can. v. Berck, 719 F. Supp. 2d 410, 418 (D. Del. 2010); Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Tr., 774 F. Supp. 2d 674, 681-82 (D. Del. 2011); Lincoln Nat’l Life Ins. Co. v. Snyder, 722 F. Supp. 2d 546, 564-65 (D. Del. 2010); Sun Life Assurance Co. of Can. v. U.S. Bank Nat’l Ass’n, C.A. No. 17-75-LPS, 2019 WL 8353393, at *4 (D. Del. Dec. 30, 2019).  But while policyholders have some recourse against Columbus Life with respect to these lawsuits, a return of premiums, even with interest, may not always make an investor whole, particularly if it is not allowed to recover what it paid for the policy.  Delaware courts have acknowledged this but have avoided rulings that would make an investor whole—they recognize that most policyowners are highly sophisticated secondary market investors who know there is a risk that their policy is a STOLI policy and do not want to encourage additional STOLI transactions.  See U.S. Bank, 2019 WL 8533393, at *3-4.

The second group of states Columbus Life has targeted are jurisdictions with vague or unsettled insurable interest laws where it is likely Columbus Life hopes to develop the law in its favor.  It seems other carriers have followed a similar strategy—for example, Jackson National Life Insurance Company in the United States District Court for the Northern District of Georgia in Jackson Nat’l Life Ins. Co. v. Crum, No. 17-cv-3857 (N.D. Ga. Mar. 2, 2020), which resulted in one of the more favorable decisions on insurable interest for insurers under previously unsettled Georgia law.  That decision is currently on appeal to the Eleventh Circuit. 

For Columbus Life, North Carolina seems to be its new chosen forum.  North Carolina law surrounding insurable interest is essentially a blank slate, in large part because North Carolina lacks a general insurable interest statute, making it an outlier among states.  Columbus Life filed two lawsuits in spring 2020 in the United States District Court for the Eastern District of North Carolina seeking to void policies under North Carolina law.  Judging from the complaints in those actions, it is apparent Columbus Life will try to swing North Carolina law in its favor, opening the door for future suits seeking to avoid its obligations under policies issued in North Carolina. 

But Columbus Life also seems willing to test the waters in jurisdictions that historically have been favorable to policyholders.  On May 29, 2020, it filed a lawsuit in the United States District Court for the Central District of California seeking to void a policy under California law.  Either Columbus Life will be making a run at changing the law in California or it now intends to challenge any or virtually any policy it believes is owned by an investor.

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Overall, we view these cases as representing a new wave of attacks on investors by a small groups of insurers.  It seems likely Columbus Life will file more suits in the near future, and any investor-owned policies issued by Columbus Life are at risk of being challenged.

However, policyowners and investors in life settlements need not back down and accept these attacks.  There are several affirmative defenses and counterclaims that can be explored in response to Columbus Life’s complaints.  This can include, at a minimum, seeking to recoup the premiums paid to Columbus Life, which courts in many jurisdictions have awarded to a policyholder whose policy was found to be void ab initio.  Depending on the jurisdiction and circumstances of the case, policyholders may also be able to assert state statutory or common law claims against Columbus Life for, among other things, engaging in a practice of collecting premiums on policies the company had no intent of honoring.