PHL Variable Ins. Co. v. Bank of Utah, No. 14-1210 (8th Cir. 2015)
Annotate this CaseA “viatical” or “life settlement” permits an insured to sell his life insurance policy. Federal tax and some state laws have been amended to accommodate the practice. In 2006, an agent persuaded Close, age 74, to apply for a $5 million life insurance policy. As submitted to PHL, his application falsely stated Close’s net worth and income, and failed to disclose his conviction for receiving illegal kickbacks. Under the agent’s guidance, Close falsely stated his net worth to obtain a two-year, $300,225 premium financing loan from CFC, a PHL-approved funding source. The policy was pledged as collateral; Close personally guaranteed 25 percent of the loan, believing that the policy would be worth $1.3 million in two-years, when it became “incontestable” under Minn. Stat. 61A.03.1(c) and that he would be able to sell it for $500,000. PHL conducted minimal investigation and received premiums of $272,025; CFC received $14,200 in fees; and the agent and a CFC employee split substantial commissions. In 2009, BNC explained Close’s options for repayment: refinancing, selling, or relinquishing the policy to the lender. The secondary market had crashed. Close surrendered the policy. When Close died in 2011, investigation revealed the fraudulent misrepresentations, but rescission was foreclosed by the incontestability statute. PHL sought a declaratory judgment that the policy was void as contrary to public policy for lack of an insurable interest. The district court agreed. The Eighth Circuit reversed, stating that permitting insurers to resist paying based on evidence that an insured used premium financing and planned to sell, is “not a result the Supreme Court of Minnesota would find acceptable in exercising its ‘delicate and undefined power’ to declare a contract void.
Court Description: Civil case - Insurance. In action seeking a declaration that a stranger-owned-life-insurance police (STOLI) was void ab initio as contrary to public policy for lack of an insurable interest, the district court erred in determining that a policy may be challenged for lack of an insurable interest beyond the contestability period; first, it is unlikely that the Minnesota courts would permit an insure to obtain a windfall of collected premiums and renege on its contractual obligations because a third party "schemed" with the insured before the policy was issued to help him buy a policy on his own life for resale, an intent which, if unilateral, was consistent with the public policy recognizing that insurance policies are legitimate investments, as well as insurance; second, the court erred in finding the insurer's position was not foreclosed by Minnesota's incontestability statute as whether the insured has an agreement with an insurance agent, broker or premium financing company at the time the policy is issued that it will be sold, either to an identified person who lacks an insurable interest or, more typically, into a secondary market of insurance policy investors, is a risk the insurer can promptly investigate. Judge Colloton, concurring in the judgment.
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