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Locke Lord QuickStudy: Georgia Supreme Court to Weigh-in on Key Insurable Interest Question for Life Insurance

February 10, 2022

Appeal from the United States District Court for the Northern District of Georgia, D.C. Docket No. 1:17-‎cv-03857-WMR.‎

On February 4, 2022, the United States Court of Appeals for the Eleventh Circuit certified two ‎questions to the Georgia Supreme Court, which should be of interest to life insurance companies, ‎life insurance agents and the secondary life insurance industry, asking whether a life insurance ‎policy is void ab initio when an insured procures a life insurance policy on his own life with the ‎intention to sell that policy to a then unidentified person with no insurable interest in the life of the ‎insured.‎

‎“As to the controlling legal standard, we seek guidance on ‎the question whether a third party ‎with no insurable interest ‎must be involved in the procurement of the policy before it can ‎be ‎deemed an unlawful wagering contract.‎

‎1.‎ When an insured has purchased a life insurance policy ‎with the intent to sell the policy ‎to a third party with no ‎insurable interest, must either the subsequent purchaser or an ‎intermediary ‎be complicit in the procurement of the policy before the [policy] can ‎be deemed to ‎be an illegal wagering contract and thus void ab initio?‎

‎2.‎ If the answer to the above question is neither an absolute “Yes” or “No,” but instead is a ‎response that a life insurance ‎policy can sometimes be deemed to constitute an unlawful ‎wagering ‎contract even without the complicity of the described third party, ‎then we respectively ‎seek further guidance as to the circumstances ‎that determine when the policy is void ab initio ‎and when it is not.‎

In 2021, a Georgia federal district court 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 issued in 1999 ‎when the insured was 32 years of age and well before the modern STOLI ‎practices emerged in about ‎‎2005. This early species of STOLI policies involved a practice known ‎as “clean-sheeting” in the early ‎viatical settlements days of the 1980s and 1990s where an insured ‎diagnosed with HIV would ‎misrepresent his or her health condition, as did the insured here, Kelly ‎Couch (“Couch”), to buy a life ‎insurance policy in order to sell it to raise funds needed for ‎payment of medical or other living ‎expenses. Jackson sought the Court’s determination that the insurance policy it ‎had issued (the ‎‎“Jackson Policy”) insuring the life of Couch, the initial owner of the Jackson ‎Policy, an assignment of ‎which defendant Crum obtained eight months after the policy’s ‎issuance without ever having any ‎prior contact with Couch, 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. Before the policy was ‎issued, Couch had been in contact with a broker concerning the eventual sale of the Policy post ‎issuance, but no buyer was identified prior to the issuance of the policy, and Crum was apparently ‎unaware of those pre-issuance contacts. Couch paid the initial premiums for the policy from his own ‎checking account. The district court found that 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. The court thereby rejected the argument that mutual intent at the time of ‎issuance of the ‎policy by the applicant/insured and a subsequent assignee must be shown to ‎establish an illegal ‎and unenforceable wagering contract. The district 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, “[b]ut, [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.” This unilateral intent ‎standard adopted by the district court ‎may be the first such decision of its kind in the country and ‎represents a significant win for life ‎insurers in voiding STOLI policies if the decision is ultimately upheld. The lower court decision ‎stands in contrast to decisions of some other states’ courts rejecting a unilateral ‎intent test and ‎requiring that an identified secondary market purchaser be identified to the ‎original policyholder and ‎have engaged in some pre-policy issuance discussions about the policy’s ‎resale. Accordingly, ‎Georgia law would fall in a high-risk category of STOLI policies being ‎invalidated on the basis that ‎the policy applicant purchased the policy with an intention later to ‎sell it in a life settlement ‎transaction. That might result in a chill in the life settlement market for Georgia originated policies and ‎a devaluation of Georgia-based policies ‎within portfolios held by hedge funds and other investor ‎groups, particularly the many ‎policies that were issued during the period from 2005 to 2008 using ‎non-recourse premium finance loan structures ‎anchored in Georgia that from inception contemplated ‎the possible resale of a policy following a ‎‎2-year loan that was coterminous with the policy’s ‎contestability period. ‎

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