Locke Lord QuickStudy: United States District Court N.D. Illinois, Western Division

Sun Life Assurance Company of Canada, Plaintiff, vs. Wells Fargo Bank, N.A., et al., Defendants. Case No. 17 C 06588

Locke Lord LLP
April 13, 2020
Plaintiff, Sun Life Assurance Company of Canada, (“Plaintiff”) filed a declaratory judgement action against Wells Fargo Bank, N.A., as securities intermediary and nominal, record owner for its secondary and tertiary life insurance market investor customers (“Bank”), and Frank Nelsen and asked the court to declare that a certain life insurance policy ‎(“Policy”) issued by Plaintiff on the life of Robert Corwell, an Illinois resident when he applied as the proposed ‎‎(the “Insured”) was void ab initio as an illegal wager on human ‎life for lack of an insurable interest.  Plaintiff also sought ‎to recover from Nelsen, an Illinois insurance ‎producer appointed by Plaintiff to sell its ‎insurance policies, damages for fraudulent inducement, ‎fraud, negligent misrepresentation, ‎and breach of contract.‎ The Bank, on behalf of the beneficial owner of the Policy at the time of the Insured’s death, Vida Capital (“Vida”), sought a return of premiums from the Plaintiff paid by Vida and all prior beneficial owners of the Policy if the Court determined that the Policy was void ab initio.

This article discusses the issues surrounding the enforceability of the Policy under Illinois law and the potential return of all premiums to the current beneficial owner of the Policy.

Holdings:  A.   Under Illinois law, while a nonrecourse premium finance loan made to the original purchaser of a life insurance policy to pay its premiums does not, per se in and of itself render a life insurance policy void ab initio, in the circumstances presented by the case, the court found that the ‎nonrecourse premium finance loan program (the “Program”) was structured, designed and administered by a non-bank life settlement industry participant as a key ‎part of its overall plan to use the Insured’s ‎insurability, an asset of the Insured, to create a policy eligible for sale to a third party investor without insurable interest in the life of the Insured pursuant to the terms of an origination agreement in place before the issuance of the Policy to the Insured.  The nonrecourse loan was the inducement to ‎the Insured to contribute his insurability to the Program, and that insurability funded ‎the wager on the Insured’s life.  Looking beyond the very complicated form and structure of the nonrecourse premium finance Program, the court concluded, under the particular facts and circumstances of the case, that the transaction was ‎intended to circumvent Illinois’ law against wagering on the life of a stranger, and, therefore, the Policy was void ab initio because the purchaser of the Policy was not the Insured but was, instead, a third party without insurable interest in the life of the Insured.‎

              B.   There was no evidence that the beneficial owner of the Policy at the time of the Insured’s death was complicit in ‎procuring the issuance of the Policy nor did Plaintiff argue ‎any such complicity.  Plaintiff’s argument was that the beneficial owner‎ knew or should have known, because of its due ‎diligence review conducted when it purchased the beneficial interest in the Policy, that the Policy was void for lack of an ‎insurable interest.  The evidence showed ‎only that, after its due diligence review, ‎it believed the Policy to be valid, but it just turned out to have been ‎wrong.  Because it was not complicit in the ‎issuance of the Policy, Plaintiff was not entitled to summary ‎judgment on the Bank’s counterclaim for restitution of premiums to ‎the extent the premiums were paid by the Bank on behalf of non-complicit ‎beneficial owner of the Policy at the time of the Insured’s death.‎

The Bank, as securities intermediary for a series of intermediate beneficial owners of the Policy, also sought restitution of premiums it paid ‎on behalf of those intermediate beneficial owners from the time it first acquired the Policy as securities ‎intermediary for the first of them.However, the Bank did not show ‎why premiums paid on behalf of prior beneficial owners ‎should be recoverable for the beneficial owner at the time of the Insured’s death.  Plaintiff was, therefore, entitled ‎to summary judgment as to restitution of any premiums not ‎paid on behalf of the last beneficial owner of the Policy.‎

The court concluded broadly that buying a life insurance policy to insure one’s own life with the intention ‎of trying to sell it later at a profit does not appear to violate ‎Illinois law.  (contrast a recent Georgia federal district court case, Jackson National vs. Crum, which is now on appeal to the Eleventh Circuit and the subject of a Locke Lord LLP QuickStudy dated March 24, 2020)  Illinois law allows a sale to a third party without an ‎insurable interest at some point after a life insurance policy has been ‎procured by the insured.The court said that there did not seem to be any ‎reason to allow such a sale only where the insured ‎originally intended to maintain the policy indefinitely and ‎later decided to try to sell it because of some change in ‎circumstances.

Because investment in a life insurance policy with the expectation of selling the policy at a later time for a profit is a lawful purpose for ‎an insured to procure a policy on his own life, under normal ‎circumstances, any misrepresentation in the insurance application ‎about this purpose would be subject to a life insurance policy’s two-year contestability ‎provision required by 215 ILCS 5/224(1)(c).  Likewise, ‎because use of nonrecourse financing is lawful in Illinois, ‎under normal circumstances, the court stated that misrepresentations in the application about the policy’s use (i.e., for estate planning purposes) or relating to financing or the source of funds for the payment of the premiums due with respect to such policy would also be subject to this provision.‎‎

The court specifically noted that had the Insured purchased the Policy and paid the premiums ‎for two years with the proceeds of a nonrecourse loan from ‎his local bank and then sold the Policy to a secondary life insurance policy acquirer/investor ‎and paid off the local bank loan with the sales proceeds, the Policy ‎would have been validly issued and validly sold to the secondary acquirer,‎ and challenges to the misrepresentations in the insurance Policy application as to the Policy’s purpose and financing ‎incontestable would be outside the contestability period.‎

Brief Statement of the Facts.

Coventry Capital, along with LaSalle National Bank, created the Program1 to source life insurance policies, primarily for a secondary life insurance policy market investor.  The Program provided nonrecourse premium finance loans to individuals and life insurance trusts created to purchase life insurance policies.  ‎When a nonrecourse premium finance loan came due, the ‎borrower had three available options: (1) pay off the loan, ‎retain the policy, and thereafter pay the premiums to keep it in force; ‎‎(2) relinquish the policy to the lender in satisfaction of the ‎debt; or (3) sell the policy to a purchaser willing to pay ‎more than the outstanding loan balance and, thus, provide a ‎gain to the borrower, the selling policy owner.‎

The court found it was evident that the Program was designed to foster the issuance of ‎life insurance policies which would qualify, after the expiration ‎of a policy’s contestability period, for origination/sale to the third party investor under the origination ‎agreement noted above.  Insurance producers were enlisted under the Program to solicit individuals who could qualify for ‎high death-benefit life insurance policies and direct them to ‎the Program where they could obtain nonrecourse financing ‎to acquire and maintain the life insurance policies for a couple years before ‎selling the policies, relinquishing them to the nonrecourse premium finance lender for ‎eventual sale under the origination agreement, or using other means to repay the ‎premium finance loans and maintain the policies in-force.‎  The Program may have had the effect of obscuring the existence of nonrecourse premium financing ‎from the issuing life insurance companies.

In 2006, Nelson pitched the Insured, 78 at the time, to participate in the Program.Under the Program, the insured procured two $5,000,000 death benefit amount policies, one from Plaintiff and one from another life insurance company.  The Insured misrepresented in the Policy’s application the purpose for his purchase of the Policy and denied there was any premium financing for it.  The Insured relinquished the Policy in 2009 after the expiration of its contestability period.The Insured died in 2017.The chain of beneficial title of the Policy passed through a number of owners and finally to Vida, and the Bank served as the securities intermediary throughout.

The court relied on relatively old Illinois state court cases, principally Hawley v. Aetna Life Ins. Co., 125 N.E. 707, 708 (Ill. 1919), and distinguished one more recent 7th Circuit case, Ohio Nat’l Life Assur. Corp. v. Davis, 803 F.3d 904 ‎(7 th Cir. 2015).

What are the results of this case?  Nonrecourse premium finance lending in connection with the origination of life insurance policies in Illinois is not automatically disqualifying, but such nonrecourse premium financing presents a significant risk factor as to a policy’s validity as an illegal wagering contract and under applicable insurable interest law, particularly if the policies are originated under a program similar to the one presented to the court; the intent of the original insured, when purchasing a policy, to sell the policy at a future date is not in and of itself disqualifying; and the expiration of the contestability period in Illinois does not allow the insurance company to resurrect misrepresentations in the application as indicative of illicit behavior.2


1. The Program was highly complicated with partnerships, trusts, subtrusts, program administrators, tiers of Coventry Entities, loan documents, collateral assignments (followed by a Coventry decision not to use collateral assignments because that would be a red flag to the Plaintiff, powers of attorney, etc., far too convoluted for the purposes of the description of the Program for this Article.
2. The court noted in its footnote #1 that since the issuance of the Policy, Illinois has enacted the Viatical Settlements Act of 2009 (215 ILCS 159/1 ‎et seq.) but this statute does not apply to this case. See Ohio Nat’l Life Assur. Corp. v. Davis, 803 F.3d 904, ‎(7 th Cir. 2015).‎