Locke Lord QuickStudy: Jackson National Life Insurance Company vs. Sterling Crum

Locke Lord LLP
March 24, 2020

A Georgia federal district court recently rendered a declaratory judgment in action filed on October 3, 2017, by Jackson National Life Insurance Company (“Jackson”) against Sterling Crum (“Crum”), the transferee and secondary market (investor) owner of a term life insurance policy.  Jackson sought the Court’s determination that an insurance policy it had issued (the “Jackson Policy”) insuring the life of Kelly Couch (“Couch”), the initial owner of the Jackson Policy, an assignment of which defendant Crum later obtained, was void ab initio under Georgia law as an illegal human life wager based on its issuance without a validly, supporting insurable interest in Couch’s life.

Holding:  A life insurance policy procured by an individual insuring his or her own life with the intent at the time of issuance later to sell or assign the policy to any person that has no insurable interest in the life of the insured is a void wagering contract under Georgia law.

This unilateral intent standard adopted by the Court, which focused solely on the insured’s intent to sell his policy at some time in the future, for determining whether a life insurance policy fails for lack of insurance interest at its issuance may be the first such decision of its kind in the country.  The standard would apply in the absence of a prearranged sale or assignment with an identified transferee when the policy is issued.

The insured’s intent is a fact question.  “[T]he focus of this Court’s inquiry is [the insured’s] intent at the time of his procurement of the [Jackson] Policy.”  The Court conducted a bench trial and determined, as the fact finder, the deceased insured’s intent from a very ‘bad’ set of facts described below.

At the time of his application for the Jackson Policy, the 32 year-old unmarried male insured, Couch, was HIV positive and had twice filed for bankruptcy protection, but had misrepresented those facts in his August, 1998, application to Jackson for a $500,000, ten-year term life insurance policy.  Couch had no dependents relying on him for support, and he named his estate as the beneficiary of the Jackson Policy.  The writing insurance agent, Kevin Palombo, represented in connection with the application that he had seen Couch when the application was taken and that, to the best of his knowledge and belief, there was nothing adversely affecting the insurability of Couch other than as indicated on the application.  Couch may have also provided a false blood sample in connection with Jackson’s underwriting.  Couch had also purchased another $500,000 term life insurance policy from First-Penn Pacific Life Insurance Company in August/September, 1998 (the “FP Policy”).

Jackson issued the Jackson Policy to Couch in January, 1999.  Nine months later, Sterling Crum, an investor who did not know Couch, acquired ownership of the Jackson Policy through Crum’s broker, John Frick doing business as Iowanes Holdings, LLC.  Frick had connected Crum with multiple entities engaged in the business of procuring and selling life insurance policies on the lives of HIV-positive insureds, one of whom was Keith Thomas doing business as Associates Trust, Inc.  Both broker Frick and investor Crum were experienced in investing in life insurance policies owned by HIV positive males.  Crum, however, was a stranger to Couch and was not involved in any respect with the origination, application or issuance of the Jackson Policy and only learned that the Jackson Policy might be available for investment several months after its issuance.  Crum also acquired the FP Policy.

Couch died in 2005, six years after issuance of the Jackson Policy.  The Jackson Policy purportedly lapsed in 2010 (while Crum owned the Jackson Policy) for non-payment of premiums, but Crum filed a claim for its death benefit with Jackson in 2017.1  Subsequently Crum failed to respond to a question on Jackson’s death benefit claim form which had asked if the beneficiary claimant was an individual or entity which invested in the Jackson Policy as a viatical or life settlement.

The Court recited Georgia’s general prohibition against wagering contracts2, the Georgia insurable interest statute3 and then traced relevant Georgia cases back to 1898.  The Court relied most heavily on Clements v. Terrell, 167 Ga. 237, 145 S.E. 78 (1928).  That case involved the designation by the insured (and owner of a life insurance policy) of an initial beneficiary without insurable interest and not the subsequent sale of a policy to someone lacking insurable interest in the insured’s life.

The Court acknowledged an insured’s right to designate a beneficiary who lacks insurable interest in the life of the insured, so long as the insured acted ‘in good faith and without fraud, collusion or an intent to enter into a wagering contract’, but then wrote, “But, [Georgia] law is less clear as to what constitutes [an unlawful] wagering contract when a life insurance policy is lawfully taken out on an insured’s own life, but later assigned to a third party without an insurable interest.”

The life insurance company bears the burden of proof on the factual inquiry to demonstrate that it was the insured’s intent at the time of policy procurement to enter into a wagering contract, i.e., to assign the policy at some future date to a person that lacks insurable interest in the life of the insured.  However, the intent of the ultimate assignee of the policy is only marginally relevant to the question.

Relevant due diligence questions for life settlement industry providers and investors might include inquiries concerning misrepresentations on a policy’s application, the life insurance agent that assisted the insured in the procurement of the policy, the life expectancy of the insured at policy inception, when [how quickly] after policy issuance the policy was first transferred to an investor, what brokers or others might have assisted the investor in the acquisition of the policy, whether the initial beneficiary of a policy had an insurable interest in the life of the insured, the source of funds for payments of the premiums (whether premium financing or other third party sources were used), and any role the assignee might have played in connection with the procurement or issuance of the policy.

An issue not discussed in the decision is whether the assignee can recover premiums paid to the life insurance company.  Under the Georgia Insurance Code, a life insurance policy procured or caused to be procured on the life of another person is void unless the person that procured the policy or caused its issuance has an insurable interest in the life of the insured.  That statute also states that, in the case of a void life insurance policy, the issuing life insurance company is required to refund all premiums paid on such void life insurance policy.  A life insurer’s obligation to return premiums it has received for a life insurance policy rescinded or voided for lack of insurable interest has been a vigorously litigation issue in many stranger originated life insurance cases across the country, but Georgia is one of the few, if not the only, state that has codified this obligation.  The Order expressly states that, “[T]his [statutory] subsection…does not appear on its face to address situations where an individual takes out a life insurance policy on his or her own life and assigns that policy to some third party without an insurable interest.” (emphasis in the Order).

The court did not discuss the expiration of the two-year contestability period provided under O.C.G.A. §33-25-3(a)(2) or the Georgia Life Settlements Act, O.C.G.A. §33-59-1, et seq., which did not exist in 1999.

We are investigating whether Crum intends to appeal the decision or ask for a rehearing.  Often, when applicable state law is unsettled, a federal district court or court of appeals might seek an advisory opinion from that state’s highest court of authority (see, e.g., Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A., United States Court of Appeals for the Third Circuit, Case No. A-49-17 (080669) June 4, 2019).



Because Couch died during while the Jackson Policy was in-force and all premiums were paid and up to date, a purported lapse of the Jackson Policy after the date of his death did not terminate the right of the beneficiary to receive the death benefit payable under the Jackson Policy.  And because Jackson was apparently unaware of its potential obligation to pay the death benefit and it had continued to receive premium payments well after Couch’s death, Jackson might have assumed that Couch was alive in 2010.  There is no discussion in the decision about the possible application of the Georgia escheat law in this unusual situation, and that subject is beyond the scope of this short note.
2 O.C.G.A. § 13-8-2(a)(4).
3 O.C.G.A. § 33-24-3(b).
4 O.C.G.A. § 33-24-3(i).