SOURCE: Life Insurance Settlement Association

Life Insurance Settlement Association

November 17, 2010 17:21 ET

LISA Applauds New York Court of Appeals Decision on Insurable Interest

ORLANDO, FL--(Marketwire - November 17, 2010) - The Life Insurance Settlement Association (LISA) praised today's decision regarding insurable interest by New York's highest court. "Consumers won a resounding victory today," said Doug Head, LISA Executive Director. "This decision emphatically affirms property rights and the vitality of the secondary market." LISA was pleased to submit an amicus brief to the court. 

In Kramer v. Phoenix, the New York Court of Appeals was asked by the U.S. Second Circuit Court of Appeals to determine whether New York insurable interest law prohibits an insured from procuring a policy and "immediately transferring" it "if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured's life." 

Although most states, including New York, now prohibit an immediate transfer under LISA-initiated life settlement legislation that requires a two year waiting period before resale, this opinion has far-reaching impact going forward, Head explained. "The Court grounded its decision in insurable interest law going back to the 1800s, and definitively concluded that an insured can take out a policy for any beneficiary, and any purpose. Thus the 'intent' question is relevant under today's life settlement laws even if the 'immediate transfer' question is not."

Head noted that the Court expressly followed "the common law rule that an insured has total discretion in naming a policy beneficiary" and that "When one insures his or her own life, the wagering aspect is overridden by the recognized social utility of the contract as an investment to benefit others." The Court made a "basic distinction between policies obtained on the life of another and those obtained on one's own life."

"The Court recited and rejected insurer arguments 'that a policy obtained with the intent to assign it to a party lacking an insurable interest violates' insurable interest," said Head. "This nails it down: Insurers' attempts to construct an intent standard through endless litigation is a failure."

Head noted that the New York court's decision in Kramer follows the U.S. Fourth Circuit Court of Appeals decision in First Penn v. Evans in 2009, which concluded that "evaluating insurable interest on the basis of the subjective intent of the insured at the time the policy issues... would be unworkable and would inject uncertainty into the secondary market for insurance." Head said, "we believe that the insurance marketplace, as a whole, will benefit from this assurance." 

"In both First Penn and Kramer, U.S. Courts of Appeals have directly addressed the question of whether an insured violates insurable interest by procuring a policy on his own life with intent to resell. The Fourth Circuit rejected that argument last year and the New York Court of Appeals has now told the Second Circuit the same thing," said Head.

"This case is very important. Insurance is property. Carriers simply cannot second-guess why a consumer buys a policy on his own life. The insured's reasons for buying a policy -- including as an investment -- are his own. The confidence of all in the insurance market is enhanced with this decision," Head concluded.

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