insurable interest

Seventh Circuit Holds that Insurers Cannot Challenge Policies for Lack of Insurable Interest Under Wisconsin Law

On October 12, 2016, the United States Court of Appeals for the Seventh Circuit, in an opinion authored by Judge Richard Posner, affirmed a district court decision finding that securities intermediary U.S. Bank, N.A. is entitled to $6 million in life insurance policy proceeds, plus statutory interest and bad faith damages, from insurer Sun Life Assurance Company of Canada. In its decision in the case, Sun Life Assurance Co. of Canada v. U.S. Bank National Association, as Securities Intermediary, the Seventh Circuit made clear that, pursuant to applicable Wisconsin statutory law, an insurance company cannot avoid its obligation to pay the death benefit on a life insurance policy, even if the policy was issued to a stranger lacking an insurable interest in the insured life. And if it fails to timely pay a claim on such a policy, a carrier may be held liable for statutory interest and additional damages for acting in bad faith. The ruling applies to policies governed by Wisconsin law that were issued prior to November 1, 2010, when the Wisconsin legislature amended the applicable law.

The insurance policy in this case was issued in 2007 by Sun Life on the life of wealthy octogenarian Charles Margolin. In 2011, U.S. Bank purchased the policy on behalf of an investor (i.e., as securities intermediary), and in 2014, Mr. Margolin died. Even though Sun Life had collected $2.5 million in premiums and knew about all of the transactions concerning the policy that occurred between 2007 and 2014, it refused to pay the policy proceeds without first investigating the policy’s validity. U.S. Bank, as the owner and beneficiary of the policy, invoked a Wisconsin statute requiring the insurer to pay claims within 30 days and brought a lawsuit against Sun Life to force a payment.

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Life Insurance is No Longer a Box of Chocolates: Life Settlement Investors Will Know Exactly What They Get

shutterstock_71485084Earlier this month, the U.S. Court of Appeals for the Eighth Circuit handed down a groundbreaking decision in one of the cases on our 2015 watch list. Overruling a Minnesota District Court decision, the Court of Appeals held that when a person purchases insurance on his own life, the policy is valid regardless of an intent to later transfer the policy. The Eighth Circuit also held that any challenges to a policy based on insurable interest must be made within the state’s two-year contestability period. Orrick represented the appellants in the successful appeal of a lower court decision. The reversal of the lower court ruling is a major win for life settlement policy investors, as it significantly limits insurers’ ability to challenge the validity of life insurance policies sold on the secondary market. See our client alert for a more detailed discussion of the decision.