Kramer v. Phoenix Life Ins. Co.
(Ct. Apps., decided 11/17/2010)
New York insurance law, alike the law in many other jurisdictions, has long prohibited the procurement of life insurance payable to one who lacks an insurable interest in the person insured at the time the life insurance contract was made.
New York's insurable interest requirement is codified in Insurance Law § 3205(b). Section 3205(b)(1) addresses individuals obtaining life insurance on their own lives:
Section 3205(b)(2) addresses a person's ability to obtain insurance on another's life and requires, in that circumstance, that the policy beneficiary be either the insured himself or someone with an insurable interest in his life:"Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated."
New York Insurance Law § 3205(a)(1) defines insurable interest as, "in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection" or, for others, a "lawful and substantial economic interest in the continued life, health or bodily safety of the person insured.""No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured."
On this appeal, the New York Court of Appeals addressed this certified question from the United States Court of Appeals for the Second Circuit:
In a 5-2 decision, the Court answered that question in the negative, holding that at the time the policies at issued in this case were procured and assigned, New York law permitted a person to procure an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose."Does New York Insurance Law §§ 3205(b)(1) and (b)(2) prohibit an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured's life, if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured's life?"
At issue in this case was $56,200,000 in coverage under several stranger-owned or stranger-originated life insurance policies (SOLI or STOLI policies) issued on the life of Arthur Kramer, a prominent attorney. Although the policies originally named one or more of Kramer's adult children as beneficiaries at inception, they were immediately assigned to stranger investors and eventually sold. Neither Arthur Kramer nor his children ever paid premiums on the policies, and the Kramer children were never "true beneficiaries" of the trusts the policies had funded after the policies were issued.
Kramer died in 2008 and his widow refused to turn over copies of the death certificate to investors holding beneficial interests in the policies. She filed this action in federal court, alleging that the SOLI policies violated New York's insurable interest rule and so should be paid to her as the representative of her deceased husband's estate.
In ruling on various motions to dismiss, the federal district court held that defendant Steven Lockwood, the principal of Lockwood Pension Services and the person who had originally approached Kramer in 2003 about participating in the SOLI scheme, "breached provisions of the New York Insurance Law in that he caused to be procured directly or through assignment or other means, a contract of insurance upon the life of the decedent [Kramer] for the benefit of strangers who did not have an insurable interest in his life at the time the policy was obtained." The district court granted an interlocutory appeal of the interpretation of New York Insurance Law § 3205 to the Second Circuit, Court of Appeals, and that court certified the dispositive question to the New York Court of Appeals, leading to this decision.
In strictly interpreting and applying the language of 3205(b)(1) and (b)(2), the five-justice majority, in a opinion by Justice Ciparick, found that those sections and others of the New York Insurance Law did not prohibit SOLI or STOLI policies at the time the policies at issue in this case were issued, assigned and sold:
In footnote #5, the majority noted that in 2009, the New York State Legislature added several new provisions to the Insurance Law regulating permissible "life settlement contracts," i.e. agreements by which compensation is paid for "the assignment, transfer, sale, release, devise or bequest of any portion of: (A) the death benefit; (B) the ownership of the policy; or (C) any beneficial interest in the policy, or in a trust . . . that owns the policy" (see Insurance Law § 7802 [k]). In addition to regulating the life settlement industry (see Insurance Law art 78), this new law prohibits "stranger-originated life insurance," defined as "any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state" (Insurance Law § 7815). It also prohibits anyone from entering a valid life settlement contract for two years following the issuance of a policy, with some exceptions (see Insurance Law § 7813 [j] [1]). Because these provisions did not go into effect until May 18, 2010, however, they did not govern the Court's decision on this appeal.In light of the overwhelming textual and historical evidence that the Legislature intended to allow the immediate assignment of a policy by an insured to one lacking an insurable interest, we are not persuaded by plaintiff and the insurers' argument that § 3205 (b) is limited by the common law requirement that an insured cannot obtain a life insurance policy with the intent of circumventing the insurable interest rule by immediately assigning it to a third party (see Steinback v Diepenbrock, 158 NY 24, 30-31 [1899]). To the extent that there is any conflict, the common law has been modified by unambiguous statutory language. We note further that if our Legislature had intended to impose such a limitation, it could easily have done so. The Legislature has been very active in this area, most recently in its redrafting of Article 78 of the Insurance Law.
Finally, we recognize the importance of the insurable interest doctrine in differentiating between insurance policies and mere wagers (see Caruso, 73 NY2d at 77-78), and that there is some tension between the law's distaste for wager policies and its sanctioning an insured's procurement of a policy on his or her own life for the purpose of selling it. It is not our role, however, to engraft an intent or good faith requirement onto a statute that so manifestly permits an insured to immediately and freely assign such a policy.
In his dissenting opinion, Justice Smith disagreed with the majority's holding that, in effect, Insurance Law § 3205(b) displaced the common law, and eliminated the exception recognized in late 19th and early 20th century United States Supreme Court cases to the rule of free assignability. Justice Smith opined that this was an incorrect reading of the statute and saw no reason to believe the Legislature ever intended to abolish the common law anti-wagering rule:
The majority today . . . holds in substance that Insurance Law § 3205 (b) enacts the general rule of free assignability, while abolishing the "cloak for a wager" exception. For the reasons I have explained, I think this holding is unnecessary and unfortunate. I agree with the majority that there may be cases where a policy can be valid, even though the insured bought the policy intending to assign it to someone (perhaps a charity, or the insured's domestic partner) without an insurable interest in the insured's life. Thus, I would not answer with an unqualified yes the Second Circuit's question whether an insured must have intended to "provide insurance protection for a person with an insurable interest." But I think the answer should be yes when the question is limited to a case, like this one, in which the parties attempted the kind of wagering transaction forbidden by the common law.
The majority's negative answer to the Second Circuit's question, though I think it is wrong, may be of limited importance. Any harm done may have already been repaired by the 2009 enactment of a statutory prohibition on stranger-originated life insurance (see majority op at 7 n 5). The new statute may create its own problems; insurable interest rules, as our opinions in this case surely demonstrate, are tricky to handle. But I view the new statute as an attempt to implement what I think has always been the public policy of New York to condemn wagers on the early death of an insured.
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