A recent New York Supreme Court ruling has the potential to benefit the life settlement industry doing business in the state in a big way, says an insurance industry attorney who has been following the case.
New York State Supreme Court Justice Paul Wooten denied Phoenix Life Insurance Co.'s motion to dismiss a lawsuit brought by a Credit Suisse subsidiary over the payout of an "incontestable" life insurance policy before the insured had died.
CSSEL Bare Trust, which is owned by Credit Suisse, had asked Wooten to grant a declaratory judgment that determined the life insurance policy written by Phoenix must be paid, citing several cases in which Phoenix contested whether it was required to pay policies that had been immediately transferred to a third party. Insurance broker Steven Lockwood and Lockwood Pension Services Inc. served as intermediaries in most of those cases.
Phoenix argued CSSEL Bare lacked standing because the insured had not yet died, therefore making it impossible to determine whether Phoenix would contest the policy's payment in the future.
Wooten disagreed, finding Phoenix had demonstrated throughout its history of litigating similar life settlement cases that such a challenge was "likely to occur." Wooten also determined that Phoenix's history of challenging life insurance policies that had been transferred decreased the value of those policies in the life settlement marketplace.
"The marketability of the plaintiff's property, the subject life insurance policy, has been destroyed by [Phoenix's] refusal to honor similar policies," Wooten wrote. "As interest in a life insurance policy is a recognized property right, Phoenix's prior actions and express statements regarding trust schemes involving the Lockwood entities create a cloud over the marketability of the subject policy."
Julius Rousseau III, an insurance and reinsurance attorney with Arent Fox, said Wooten's ruling was "highly unusual and significant" because it will allow anyone who owns a policy to request a declaration that the company is going to honor the policy some years down the road. That could put an end to the what Rousseau called the "insurable interest two-step," in which life insurance carriers try to get out of making payments on policies that have been transferred.
Rousseau, who has handled lawsuits against Phoenix, said one passage in Wooten's decision is likely to be quoted in similar suits against life insurance carriers who "try to play the same game to get out of making good on their payments."
Wooten wrote, "[Phoenix] has a potentially multimillion-dollar interest incentive in trying to litigate issues pertaining to contestability prior to the insured's death, and it appears [Phoenix] may be ignoring this incentive in order to maximize the premiums collected on the policy. . . . The incontestability clause is statutorily required to prevent precisely this scenario."
Rousseau said the decision is the latest example that the litigation landscape is shifting in favor of the life settlement industry. "Many recent court cases show that courts are coming to agree with the decision that the knee-jerk reaction of the carriers was wrong -- that it is perfectly legal for investors to buy these policies."
Last year, the American Council of Life Insurers denounced a decision by the New York Court of Appeals that provided the precedent for Wooten's determination that it is legal for someone to buy an insurance policy on their own life and immediately transfer it to others without an insurable interest in that person's life. At the time, ACLI said that decision "runs counter to three centuries of English and U.S. court rulings that purchasing life insurance solely as a vehicle for wagering on human life violates public policy and should be prohibited" (BestWire, Nov. 19, 2010).
Despite those complaints, courts in other states are also coming down in favor of the life settlement industry.
In May, a California appeals court rejected Lincoln Life & Annuity Company of New York's attempt to void $20 million in coverage, ruling that two life insurance policies it issued were supported by an insurable interest in the insured's life (BestWire, May 24, 2011).
Phoenix Life Insurance Co. currently has a Best's Financial Strength Rating of B+ (Good).
Lincoln Life & Annuity Company of New York currently has a Best's Financial Strength Rating of A+ (Superior).
(By Jeff Jeffrey, Washington Correspondent: [email protected])