Minnesota appeals court issues landmark insurable interest ruling for life settlement investments

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by Eric Pearson

In a landmark ruling for companies involved in the life settlement industry, the United States Court of Appeals for the Eighth Circuit has ruled that the insurable interest requirement for life settlement investments under Minnesota law is satisfied as soon as an individual takes out an insurance policy on their own life, regardless of any later intent to sell the policy in the form of life settlements. The court also ruled in PHL Variable Insurance Company v. Bank of Utah, No. 14-1210  that insurance companies may not challenge the validity of life insurance policies that are sold through life settlement transactions outside of the two year contestability period established under Minnesota state law.

Life settlement policies—in which the owner of a life insurance policy sells the interest in their policy in exchange for a cash payment—have become an increasingly common and lucrative form of investment in recent years. However, some life insurance companies have sought to avoid making payments on the death benefit for life insurance policies sold in the form of life settlements by incorrectly claiming that these transactions are “stranger originated life insurance,” or STOLI policies, which are prohibited under the insurable interest requirements established by some state laws.

The Eight Circuit court’s ruling in Bank of Utah involved a declaratory judgment action filed by PHL Variable Insurance Company in an attempt to challenge the death benefit claim for a $5 million insurance policy held by the Bank of Utah. PHL sought to challenge the validity of the policy under Minnesota state law even though the two year contestability period for the policy has expired.

The Bank of Utah filed an appeal with the Eighth Circuit court after the policy was declared invalid by the United States District Court for the District of Minnesota. The district court’s decision to invalidate the life insurance policy at issue in Bank of Utah relied upon a pair of related U.S. District Court decisions in Sun Life Assurance Co. of Canada v. Paulson. In those rulings, the court found that in order for a life insurance policy to be declared void under Minnesota’s laws regarding insurable interest, the insurance company must prove that there was an agreement in existence when the policy was issued for the insured to sell the policy to a third party.

The Eight Circuit overturned the district court’s decision in Bank of Utah, ruling that Paulson’s “agreement” standard would be rejected by the Minnesota Supreme Court because it overrode the principle that the court’s power to declare contracts invalid “should be exercised only in cases free from doubt.” Instead, the Eight Circuit court established a new bright-line rule stating that “when a person purchases insurance on his own life and later assigns it to a stranger, the contract between the insured and insurer is valid unless voidable for fraud or other defenses that are subject to the incontestability bar.” In cases where an insured individual has taken out an insurance policy on their own life, the validity of that policy cannot be challenged under the insurable interest doctrine.

The Eighth Circuit court’s ruling in Bank of Utah also declared that insurance companies cannot challenge the validity of an insurance policy under the insurable interest doctrine after the two-year contestability period for the policy has elapsed. In doing so, the Eight Circuit rejected the district court’s holding that this contestability period does not apply to insurance policy challenges that are filed regarding the insurable interest doctrine under Minnesota state law.

Effect of Bank of Utah Ruling on Life Settlement Investments

Although the Eighth Circuit court’s ruling in Bank of Utah addressed insurance questions under Minnesota state law, the decision may have broad implications for purchasers of life settlement investments across the country. Currently, there is relatively little legal precedent for cases involving questions of insurable interest involving life insurance policies and life settlement investments. As a result, the courts often look to other decisions in cases such as Bank of Utah in order to resolve questions regarding the insurable interest doctrine in other states.

This decision may also make it easier for life settlement companies and investors in Minnesota to seek a declaratory judgment action establishing the validity of a life insurance policy under the Minnesota Insurable Interest Act. Under the law, an insurance policy owner “who believes in good faith that the insurer may challenge the policy for lack of insurable interest” may bring a declaratory judgment action seeking a court order to declare the policy in question valid [Minn. Stat. § 60A.0789 subd. 3(b)].

These actions enable policy holders to determine whether life insurance policies on which they are making premium payments will not be declared invalid by an insurable interest challenge filed after the death of the insured. However, because the right to seek a declaratory action under Minnesota law will end on December 31, 2016, insurance policy holders seeking to establish the validity of an insurance policy must file these actions soon.

Heygood, Orr & Pearson and Life Settlement Lawsuits

Despite the District Court’s ruling in Bank of Utah, companies involved in the sale of life settlement investments may still face opposition from insurance companies in their efforts to collect the death benefits for valid insurance policies that were sold in the form of life settlement transactions.  If you or your company were the victim of wrongful actions involving the sale or purchase of life settlement investments, you may be able to take legal action in order to recover some or all of your losses. The first step to filing a lawsuit is to speak with a firm that possesses the experience and knowledge with life settlement litigation to achieve the best possible result in your case.

Heygood, Orr & Pearson has filed litigation on behalf of life settlement companies in cases where an insurance company refused to pay the death benefits on a policy because it claimed that it was a STOLI policy. Our firm has also filed lawsuits on behalf of investors who were charged excessive amounts to cover premium payments on their life settlement investments or who were misled by a life settlement provider about the value of these investments. We have also filed lawsuits on behalf of life settlement brokers involved in the sale of these life insurance investments.

For a free legal consultation to find out if you may qualify to file a lawsuit, contact the lawyers at Heygood, Orr & Pearson by calling our toll-free hotline at 1-877-446-9001. You can also reach us by following the link to our firm’s free case evaluation form and one of our representatives will be in touch with you as soon as possible.