R.I. Top Court Finds Insurable Interest Not Necessary in Annuities

In a legal decision that breaks new ground, the Rhode Island Supreme Court has found no requirement of insurable interest when it comes to the purchase of an annuity with a death benefit.

Insurable interest is required in the purchase of life insurance policies to prevent wagering on people’s lives, but the court found that since annuities are different from life insurance, insurable interest doesn’t apply.

Howard M. Zaritsky, a Virginia-based legal and tax expert with no connection to the case, said he thinks the Rhode Island decision in Western Reserve Life Assurance Co. of Ohio v. ADM Associates LLC sets a precedent.

“I think this is the first case on this issue,” Zaritsky said in an interview Tuesday with InsuranceNewsNet. “What it means is that anybody trying to do this transaction is going to buy this policy in Rhode Island.”

The Rhode Island high court ruled on the insurable interest after it was petitioned to do so by the U.S. 1st Circuit Court of Appeals.

Lacking a Rhode Island Supreme Court precedent on insurable interest for annuities, the circuit court asked the Rhode Island Supreme Court to issue an advisory opinion.

The Rhode Island Supreme Court, by a 3-2 majority, found that “common law has not yet been extended to cover annuity policies on the grounds of public policy, and, in our opinion, is unambiguous in its sole application to life insurance policies.”

Plaintiffs argued that the clause “any insurance contract” covered the variable annuity with a death benefit — in this case the Freedom Premier III annuity with a “Double Enhanced Death Benefit” — sold to Charles Buckman.

When Western Reserve Life discovered that there was no relationship between ADM Associates and Buckman, the carrier sought to rescind the Buckman annuity a year after it was issued.

Western Reserve Life filed five separate suits in federal court against annuity brokerage companies, agents and individual annuitants and corporate policy-investors and owners, according to court documents.

“Ultimately, the absence of an insurable interest in an annuity policy with a death benefit does not transform this kind of policy into the classic wagering contract that is prohibited by our public policy,” the court ruled.

But in a dissenting opinion, Justice William Robinson said that while it’s true that life insurance policies and annuity contracts are “separate and distinct,” the issue was whether the death benefit rider makes the annuity a wagering contract.

“My careful review of the record has led me to the definite conviction that the annuity at issue in this case is indeed and illicit (and void) wagering contract,” Robinson wrote.

While the Rhode Island high court in this case found there was no requirement of an insurable interest in the context of an annuity, it unanimously upheld the incontestability rule, which makes the policy incontestable from the date of its issuance.

Whether such a clause is included in an insurance policy or in an annuity contract, it is “enforceable against all attempts to escape the ‘deliberately assumed obligations[s]’ contained within these contracts,” the court found.

“We find it ironic that the plaintiff, the party who drafted the immediately effective incontestability clause, is now seeking to invalidate the clause so that it can escape its obligations under the annuity policy,” the court also held.

The insurance carrier argued that because the policy was void for the lack of an insurable interest, the incontestability clause in the policy never existed.

Zaritsky said that incontestability clauses, which are designed to prevent raising claims of fraud or misrepresentations years after the policy was issued, vary from state to state.

“The Rhode Island court said that even if it were insurance — which it isn’t — they would have to raise that issue within the incontestability period,” Zaritsky said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].