It is OK to buy life insurance on yourself with the intent to sell to a third party, according to a Georgia Supreme Court ruling in a case emanating from the HIV viatical era.
Even though the $500,000 term policy was purchased fraudulently in the 1990s by someone who did not disclose his HIV-positive status for the apparent purpose of reselling the policy, Jackson National is still obligated to pay the death benefit, according to the court’s ruling.
The state’s top court last week reversed a federal district court’s ruling that a person could not under common case law buy a life policy with the intent to sell to a third party with no insurable interest because that would constitute human-life wagering.
The case comes out of the era when an HIV diagnosis was a virtual death sentence, with a life expectancy of only a few years. A market grew to buy HIV patients’ life policies for a fraction of the face value but more than cash value in what are called viatical settlements.
Some people abused the system by colluding with HIV patients to buy the policy for resale, in stranger-originated life insurance sales, or STOLI. But in this case, it appears Kelly Couch applied for the policy in August 1998 on his own, although he did cover up his HIV diagnosis from 1996.
Georgia’s top court ruled that Jackson National was relying on case law that would have considered the deal illegal wagering, but that was superseded by a 1960 state law.
“Under Georgia law, a life insurance policy taken out by the insured on his own life with the intent to sell the policy to a third party with no insurable interest, but without a third party’s involvement when the policy was procured, is not void as an illegal wagering contract,” according to the opinion.
Couch apparently did not coordinate the initial purchase with a third party, but he appeared to have fraudulently applied for the coverage. Along with failing to disclose that he had an HIV-positive diagnosis, he used an incorrect Social Security number, did not disclose that he had filed for bankruptcy twice in the previous seven years and had falsified medical tests. Couch “clean-sheeted” his medical tests by providing blood from an uninfected person.
Jackson National issued the policy even though Couch had no dependents in need of the $500,000 and that Couch had little money to spare for the premium. The policy was not contested within the two-year contestability window.
Policy sale requested
Couch had contacted a broker to sell his policy a few months after it was issued in January 1999. The broker ended up transferring it to a client, Sterling Crum, apparently to make good on another policy it had sold Crum although that policy was later determined to be invalid, according to court records.
Before deciding to accept this transfer, Crum received a one-page summary from the broker, Associates Trust, showing that Couch had tested positive for HIV in 1996 and that a recent doctor’s review confirmed a life expectancy of only 24-30 months. Couch then asked for a beneficiary/ownership change to his “friend” Sterling Crum, a person he never met or spoke with.
Payments on the premiums ($250 annually) were issued from a “premium reserve account” that Associates Trust set up under Couch’s name until the contestability period closed. As of January 2001, Crum paid the premium until 2009, when he let it lapse. But the policy did not actually lapse then, because Couch had died in 2005, a fact that Crum did not learn until 2017, after which he filed a claim.
Jackson National denied the claim and filed a declaratory judgment action in federal court to void the contract as illegal human-life wagering. The federal court agreed with Jackson.
State law supersedes common law
In its reversal of the federal court opinion, the state court provided a bit of historical background on human-life wagering:
“In the eighteenth century, it became popular in England to buy insurance on the lives of strangers — for example, elderly celebrities, or defendants being tried for capital crimes — as a form of gambling,” according to the ruling.
“These policies were considered gambling bets, not insurance against any risk of loss, because those who bought this ‘insurance’ had no interest in the underlying ‘asset,’ i.e., the life at stake. … Disapproval of these human-life wagers goes back almost as far. Describing the practice of selling insurance on lives in which the insured had no interest as having ‘introduced a mischievous Kind of Gaming,’ the British Parliament passed a law in 1774 to ‘[r]emedy’ the problem. That remedy was straightforward: the law forbade anyone from taking out insurance on a life if the person ‘for whose Use, Benefit, or on whose Account such Policy or Policies shall be made’ had no ‘[i]nterest’ in the life, and it declared ‘null and void’ any policy that violated that rule. Put simply, if someone wanted to take out insurance on another person’s life, she had to have an interest of some sort in that life beyond the payout she would get at its end.”
That became the insurable interest rule in the United States, becoming central to modern insurance. The idea is that a valid life policy needs some reasonable grounds “to expect some benefit or advantage from the continuance of the life of the assured,” or else the contract is “a mere wager, by which the party taking the policy is directly interested in the early death of the assured.”
An 'unlimited insurable interest'
Georgia has had insurable interest laws dating back to the 19th century, but the latest statute is clear that “a person may lawfully take out a policy of insurance on his own life” because a person has an “unlimited insurable interest in his or her own life,” according to the ruling.
“Nothing in this language excludes from that broad approval a person who secretly ‘intends’ to turn around and sell the policy to someone without an insurable interest,” according to the ruling. “To the contrary, the statute allows a person taking out a policy on his own life to designate as a beneficiary ‘whomsoever such individual pleases, regardless of whether the beneficiary designated has an insurable interest.’”
Because a third-party was not involved during the application process, there was no infraction of the insurable interest rule, despite the applicant’s intention.
Jackson National’s case rested on longstanding common law that prohibited human-life wagering, but that was displaced by Georgia’s constitutional and statutory law, specifically legislation in 1960 that repealed all previous life insurance statutes, the court ruled.
Essentially, the court ruled that “insurable interest” is what the insured says it is: “We have already explained (and again, no one disputes) that the statute’s language on its face does not contain the intent-based limitation that Jackson asks us to recognize — that is, that a policy taken out by someone on her own life with the intent to sell it to a third party who has no insurable interest in the life is void as an illegal wagering contract.”
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]