TAG | investor-initiated life insurance
Comments off · Posted by Securities Lawyer in FINRA
It was announced that a federal court decision in Pennsylvania has given a win for life settlement investors, deflating carriers’ argument that it is permissible for an insured person to apply for a life settlement with the express intent to sell it to a third party, writes Darla Mercado in an InvestmenNews.com article from October 12, 2011.
This suit filed by Principal Life Insurance Co. against brothers Matthew and Mark DeRose, trustees of their mother’s family trust, Judge Christopher C. Conner of the U.S. District Court for the Middle District of Pennsylvania in Harrisburg ruled that under state statute, insurable interest is determined solely based on the relationship between the insured person and the policy beneficiary.
Finding on “intent” is similar to recent rulings made in Delaware State Supreme Court (PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust) and in the New York Court of Appeals (Alice Kramer vs. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York). State laws don’t refer to the “intent of the parties” at the time coverage begins, nor does it require that the transfer of a policy must be in “good faith,” the judge wrote in his Oct. 5 ruling.
Mercado goes on to say that the fact that several courts have already rejected the “intent” argument could shape the outcome of other stranger-originated-life-insurance lawsuits filed by carriers which claim that an insured person applied for a policy with a plan to sell it to an investor in the secondary market, lawyers say.
The article points out that the Principal-DeRose case concerns JoAnn DeRose, who in 2006 applied for three policies with a total of $35 million in death benefits. The JoAnn DeRose Family Trust was the intended owner and beneficiary of the policy, and Ms. DeRose’s sons Matthew and Mark were beneficiaries of the trust, according to court documents. The policies were funded through non-recourse premium financing provided by First Priority Bank, and the $1.51 million loan to cover the premiums was secured by the policies.
The credit approval memorandum from First Priority stated that the principal source of repayment for the loan is “the sale of the three assigned life insurance policies in the secondary market, via a life settlement transaction,” according to court documents.
The InvestmentNews.com article points out that Principal subsequently filed an instant declaratory judgment action against the DeRose brothers, claiming they bought the policies as part of a Stoli scheme and hid their use of non-recourse financing on the application for the policies. The insurer sought to have the policies voided because they lacked insurable interest at inception and the application documents had material misrepresentations. Principal also sought to retain the premiums to offset its expenses.
Then Judge Conner set aside the DeRoses’ alleged intent to sell the policies in the secondary market, and instead based insurable interest on the fact that Ms. DeRose’s sons were the beneficiaries of the trust, which in turn was the beneficiary of the insurance policies. Indeed, a parent-child relationship forms the basis for insurable interest, he wrote.
Judge Conner is allowing Principal to move forward with claims aiming to void the policies based on misrepresentations on the application. He is also permitting the carrier to seek retention of the premiums to offset the costs related to issuing the policies.
“While we can’t comment on pending litigation, The Principal does not support any form of investor-initiated life insurance where individuals or investors purchase insurance solely to bet on the early demise of an insured,” spokeswoman Joelle Kirchoff wrote in an e-mail. “We closely monitor our business for these types of policies. In policies where investor-initiated life insurance is suspected, lawsuits have been filed.”
If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com.
We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).
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