Case Title: Alice Kramer v. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2010-11-17T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 176  
Alice Kramer,
            Respondent,
        v.
Phoenix Life Insurance Co., 
Lincoln Life & Annuity Co. of New 
York,
            Defendants,
Lifemark S.A.,
            Intervenor-Appellant.
(And Third-Party Actions.)
John J. Tharp, for intervenor-appellant.
Patrick J. Feeley, for respondent Phoenix Life
Insurance Co.
Michael J. Miller, for respondent Lincoln Life &
Annuity Co. of New York.
Andrew A. Wittenstein, for respondent Kramer.
Tab K. Rosenfeld, for intervenor-respondent Lockwood
Pension Services, Inc. et al.
Andrea B. Bierstein, for respondents Berck and Life
Products Clearing, LLC.
Edward S. Bloomberg, for respondent T.D. Bank, N.A.
The Institutional Life Markets Association; American
Council of Life Insurers et al.; Life Insurance Settlement
Association, amici curiae.
CIPARICK, J.:
The United States Court of Appeals for the Second
Circuit has certified the following question for our
consideration: 
"Does New York Insurance Law §§ 3205 (b) (1) and (b)
(2) prohibit an insured from procuring a policy on his
own life and immediately transferring the policy to a
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No. 176
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person without an insurable interest in the insured's
life, if the insured did not ever intend to provide
insurance protection for a person with an insurable
interest in the insured's life?"
We now answer in the negative and hold that New York law permits
a person to procure an insurance policy on his or her own life
and immediately transfer it to one without an insurable interest
in that life, even where the policy was obtained for just such a
purpose. 
This litigation involves several insurance policies
obtained by decedent Arthur Kramer, a prominent New York
attorney, on his own life, allegedly with the intent of
immediately assigning the beneficial interests to investors who
lacked an insurable interest in his life.  In May 2008, Arthur's
widow, plaintiff Alice Kramer, as personal representative of her
husband's estate, filed an amended complaint in the United States
District Court for the Southern District of New York seeking to
have the death benefits from these insurance policies paid to
her.  She alleges that these policies, which collectively provide
some $56,200,000 in coverage, violate New York's insurable
interest rule because her husband obtained them without the
intent of providing insurance for himself or anyone with an
insurable interest in his life. 
As alleged in the plaintiff's complaint, defendant
Steven Lockwood, the principal of Lockwood Pension Services, Inc.
("Lockwood Pension"), approached Arthur, presumably a
sophisticated investor, about participating in a "stranger-owned
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No. 176
1  All facts here are drawn from allegations in the parties'
complaints, and are discussed in greater detail in the District
Court opinion (see Kramer v Lockwood Pension Servs., Inc., et
al., 653 F Supp 2d 354 [SDNY 2009]).
2  Lincoln alleges that, in January 2006, Hudson was
acquired by and merged with TD Bank, N.A.
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life insurance" ("SOLI" or "STOLI") scheme as early as 2003.1 
They commenced such a scheme in June 2005, when Arthur
established the first of two insurance trusts ("the June trust")
and named two of his adult children, Andrew and Rebecca Kramer,
as beneficiaries.  A present Lockwood Pension employee was named
as trustee, succeeded by defendant Jonathan Berck.  In June and
July 2005, defendant Transamerica Occidental Life Insurance Co.
funded the trust with one or more insurance policies with a total
death benefit of approximately $18,200,000.  Andrew and Rebecca
then assigned their beneficial interests in the trust to a
stranger investor, defendant Tall Tree Advisors, Inc. ("Tall
Tree").  In 2007, Berck, as trustee, sold the ownership interests
in the policies to a non-party purchaser.  
Arthur established a second trust in August 2005 ("the
August trust") and named a third adult child, Liza Kramer, as
beneficiary.  Hudson United Bank ("Hudson") was named trustee,2
also succeeded by Berck.  In July 2005, defendant Phoenix Life
Insurance Co. ("Phoenix") issued three insurance policies to fund
the August trust, with a total death benefit of $28,000,000, and
Liza likewise assigned her interest to Tall Tree.  In November
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2005, defendant Lincoln Life & Annuity Co. of New York
("Lincoln") also issued a policy to the August trust with a death
benefit of $10,000,000, and Liza assigned her interest to another
stranger investor, defendant Life Products Clearing, LLC ("Life
Products").  Intervenor Lifemark alleges that it purchased the
Phoenix policy from the August trust in August 2007, just over
two years after its issuance.  Allegedly both trust agreements
were prepared by counsel for Lockwood Pension, neither Arthur
Kramer nor his children ever paid premiums on the policies, and
the Kramer children were never "true beneficiaries" of the trusts
after the policies were issued.  Phoenix and Lincoln allege that
Lockwood served as broker pursuant to an "Independent Producer
Contract" he had with Phoenix and a "Broker Agreement" he had
with Lincoln.
Following Arthur's death in January 2008, Alice refused
to turn over copies of the death certificate to investors holding
beneficial interests in the policies.  She filed this action
alleging that these policies violated New York's insurable
interest rule and so should be paid to her, as the representative
of the decedent's estate.  Defendants are the insurance companies
that issued the policies, trustees, and various insurance
brokers/investors.  They filed counterclaims, cross-claims, and
third-party complaints.  As relevant here, Berck, as trustee, and
Life Products filed nearly identical answers seeking to have the
proceeds of the Lincoln policy awarded to them.  Intervenor
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No. 176
3  Other claims that survived the District Court order
include Life Products and Berck's counterclaims against Alice, in
the alternative, for misrepresentation/breach of warranty; Life
Products' third-party claims against Liza for breach of express
warranty and breach of contract; and Life Products and Berck's
cross-claims against Lincoln for breach of contract.  
Notably, District Court determined that the insurers
could not attempt to void the policies, as they had been issued
over two years earlier and so are incontestible (see Insurance
Law § 3203 [a] [3]; New England Mut. Life Ins. Co. v. Caruso, 73
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Lifemark, claiming to be a good faith purchaser for value, seeks
to have the Phoenix policy proceeds paid to it.  Phoenix and
Lincoln brought claims against Lockwood for breach of contract
and also seek a declaratory judgment declaring that the policies
are void and that they are not required to pay policy proceeds to
anyone. 
District Court granted motions to dismiss many of the
parties' claims, but denied Lockwood's motion to dismiss the
insurers' claims against him.  Relying primarily on District
Court precedent, the court stated that, according to the alleged
facts: 
"Lockwood breached provisions of the New York
Insurance Law in that he caused to be
procured directly or through assignment or
other means, a contract of insurance upon the
life of the decedent [Kramer] for the benefit
of strangers who did not have an insurable
interest in his life at the time the policy
was obtained" (Kramer, 653 F Supp 2d at 388
[internal quotation marks omitted]).  
The court also permitted Alice, Life Products, and Berck's
declaratory judgment claims, counterclaims, and cross-claims to
go forward.3 
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No. 176
NY2d 74 [1989]).  As a result, it dismissed the insurers'
counterclaims and cross-claims for, among other things, fraud,
fraudulent concealment, aiding and/or abetting fraud, and for a 
declaratory judgment. 
4  The Second Circuit denied Phoenix and Lincoln's petitions
seeking to appeal District Court's order "because an immediate
appeal concerning the issues presented therein is unwarranted." 
Nonetheless, the insurers urge us to expand the scope of the
certified question and consider whether District Court properly
dismissed their claims.  
We have considered Phoenix and Lincoln's arguments
relating to the incontestability issue, but decline their request
to expand the scope of the certified question.  Thus, we are
denying Alice and Lifemark's motions in this Court to strike the
portions of the insurer's briefs addressing whether the
incontestability rule should apply here ( __ NY3d __ [decided
today]).
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District Court certified its order to allow for an
interlocutory appeal to the Second Circuit pursuant to 28 USC §
1292 (b), noting that "there is indeed substantial ground for
difference of opinion on the application of New York Insurance
Law to SOLI arrangements of this type" (653 F Supp 2d at 398),
and that "[n]umerous claims in this suit, including but not
limited to the initial Declaratory Judgment action by Plaintiff,
turn on the interpretation of" New York Insurance Law § 3205
(id.).  The Second Circuit granted Lifemark's petition for leave
to appeal District Court's interlocutory order, and certified the
question at issue to us.4
New York's insurable interest requirement is codified
in Insurance Law § 3205 (b).  Section 3205 (b) (1) addresses
individuals obtaining life insurance on their own lives: 
"Any person of lawful age may on his own
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No. 176
5  In 2009, the Legislature added several new provisions to
the Insurance Law regulating permissible "life settlement
contracts," i.e. agreements by which compensation is paid for
"the assignment, transfer, sale, release, devise or bequest of
any portion of: (A) the death benefit; (B) the ownership of the
policy; or (C) any beneficial interest in the policy, or in a
trust . . . that owns the policy" (see Insurance Law § 7802 [k]). 
In addition to regulating the life settlement industry (see
Insurance Law art 78), this new law prohibits
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initiative procure or effect a contract of
insurance upon his own person for the benefit
of any person, firm, association or
corporation. Nothing herein shall be deemed
to prohibit the immediate transfer or
assignment of a contract so procured or
effectuated" (Insurance Law § 3205 [b] [1]).
Section 3205 (b) (2) addresses a person's ability to obtain
insurance on another's life and requires, in that circumstance,
that the policy beneficiary be either the insured himself or
someone with an insurable interest in his life:
"No person shall procure or cause to be
procured, directly or by assignment or
otherwise any contract of insurance upon the
person of another unless the benefits under
such contract are payable to the person
insured or his personal representatives, or
to a person having, at the time when such
contract is made, an insurable interest in
the person insured" (Insurance Law § 3205 [b]
[2]).
An insurable interest is defined as, "in the case of persons
closely related by blood or by law, a substantial interest
engendered by love and affection" or, for others, a "lawful and
substantial economic interest in the continued life, health or
bodily safety of the person insured" (Insurance Law § 3205 [a]
[1]).5 
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No. 176
"stranger-originated life insurance," defined as "any act,
practice or arrangement, at or prior to policy issuance, to
initiate or facilitate the issuance of a policy for the intended
benefit of a person who, at the time of policy origination, has
no insurable interest in the life of the insured under the laws
of this state" (Insurance Law § 7815).  It also prohibits anyone
from entering a valid life settlement contract for two years
following the issuance of a policy, with some exceptions (see
Insurance Law § 7813 [j] [1]).  Because these provisions did not
go into effect until May 18, 2010, they do not govern this
appeal.  
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The insurable interest requirement at common law was
designed to distinguish an insurance contract from a wager on
someone's life (see Ruse v Mutual Benefit Life Ins. Co., 23 NY
516, 523 [1861] ["A policy, obtained by a party who has no
interest in the subject of insurance, is a mere wager policy"]). 
From the first, an insurable interest was required only where a
policy was "obtained by one person for his own benefit upon the
life of another" (id.).  This basic distinction between policies
obtained on the life of another and those obtained on one's own
life is reflected in the twin provisions of § 3205 (b) (1) and
(b)(2).  As we have explained:
"When one insures his or her own life, the
wagering aspect is overridden by the
recognized social utility of the contract as
an investment to benefit others. When a third
party insures another's life, however, the
contract does not have the same manifest
utility and assumes more speculative
characteristics which may subject it to the
same general condemnation as wagers (New
England Mut. Life Ins. Co., 73 NY2d at 77-
78)."
Plaintiff and the insurers urge us to find that an
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individual who procures insurance on his own life with the intent
of immediately assigning the policy to one without an insurable
interest is subject to the insurable interest requirement
articulated in § 3205 (b) (2), despite the fact that § 3205 (b)
(1) contains no such requirement.  They make three basic
arguments: (1) that a policy obtained with the intent to assign
it to a party lacking an insurable interest violates § 3205 (b)
(2); (2) that this scenario is precluded by a common law rule
that an insured could only assign a policy to one without an
insurable interest if the policy was obtained "in good faith"
compliance with the insurable interest rule, not as a means of
circumventing it; and (3) that one who obtains insurance on one's
own life in accordance with a prior arrangement with a third
party, as alleged here, does not act "on his own initiative"
within the meaning of the statute.  In response, Lifemark, Life
Products, Berck, Lockwood, and Lockwood Pension argue that the
language of § 3205 (b) (1) confers great freedom on an insured in
assigning life insurance benefits, including the freedom to
obtain insurance for any reason and to immediately assign a
policy to an investor with no insurable interest, and that this
freedom cannot be reconciled with any older common law "good
faith" limitation. 
The "starting point" for discerning statutory meaning
is, of course, the language of the statute itself (see Roberts v
Tishman Speyer Props., L.P., 13 NY3d 270, 286 [2009]). "[W]here
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the language of a statute is clear and unambiguous, courts must
give effect to its plain meaning" (Matter of Crucible Materials
Corp. v New York Power Auth., 13 NY3d 223, 229 [2009] [internal
quotation marks omitted]).  
Here, § 3205 (b) (1) clearly provides that, so long as
the insured is "of lawful age" and acts "on his own initiative,"
he can "procure or effect a contract of insurance upon his own
person for the benefit of any person, firm, association or
corporation" (Insurance Law § 3205 [b] [1]).  This language is
unambiguous and not limited by the statutory text.  It thus
codifies the common law rule that an insured has total discretion
in naming a policy beneficiary (see Olmsted v Keyes, 85 NY 593
[1881]).  Our lower courts have long held that, under § 3205 (b),
"[w]here the deceased effects the insurance upon her own life, it
is well-established law that she can designate any beneficiary
she desires without regard to relationship or consanguinity"
(Corder v Prudential Ins. Co., 42 Misc 2d 423, 424 [Sup Ct, Erie
County 1964]; see also Gibson v Travelers Ins. Co., 183 Misc. 678
[Sup Ct, New York County 1944]).
It is equally plain that a contract "so procured or
effectuated" may be "immediate[ly] transfer[ed] or assign[ed]"
(Insurance Law § 3205 [b] [1]).  The provision does not require
the assignee to have an insurable interest and, given the
insured's power to name any beneficiary, such restriction on
assignment would serve no purpose.  This freedom of assignment is
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not limited by § 3205 (b) (2), which addresses procurement of an
insurance policy on another's life, "either directly or by
assignment," because § 3205 (b)(2) requires an insurable interest
only "at the time when such contract is made" (Insurance Law §
3205 [b] [2]), that is, when such insurance is initially
procured.  The statute therefore incorporates the common law rule
that a policy valid at the time of procurement may be assigned to
one without an insurable interest in the insured's life and,
relatedly, no insurable interest is required when one holds a
policy on another's life, so long as the policy was "valid in its
inception" (Olmsted, 85 NY 598).  As one appellate court has
summarized, "Insurance Law § 3205 (b) permits any person of
lawful age who has procured a contract of insurance upon his or
her own life to immediately transfer or assign the contract, and
does not require the assignee to have an insurable interest"
(Hota v Camaj, 299 AD2d 453 [2d Dept 2002]).
There is simply no support in the statute for plaintiff
and the insurers' argument that a policy obtained by the insured
with the intent of immediate assignment to a stranger is invalid. 
The statutory text contains no intent requirement; it does not
attempt to prescribe the insured's motivations.  To the contrary,
it explicitly allows for "immediate transfer or assignment"
(Insurance Law § 3205 [b] [1]).  This phrase evidently
anticipates that an insured might obtain a policy with the intent
of assigning it, since one who "immediately" assigns a policy
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likely intends to assign it at the time of procurement.    
The statutory mandate that a policy must be obtained on
an insured's "own initiative" requires that the decision to
obtain life insurance be knowing, voluntary, and actually
initiated by the insured.  In common parlance, to act on "one's
own initiative" means to act "at one's own discretion:
independently of outside influence or control" (Merriam-Webster's
Collegiate Dictionary, 10th ed., 602 [1996]).  The key point is
that the policy must be obtained at the insured's discretion.  As
the dissent acknowledges, common sense dictates that some outside
influence is acceptable -- advice from a broker or pension
planner, for example.  The notion of obtaining insurance and the
details of the insurance contract need not spring exclusively
from the mind of the insured.  Rather, the insured's decision
must be free from nefarious influence or coercion. 
Contrary to the dissent's view, the initiative
requirement, without more, does not prohibit an insured from
obtaining a policy pursuant to a non-coercive arrangement with an
investor (see dissenting op at 8).  Under the dissent's
interpretation, a sophisticated party who approaches an investor
about such an arrangement, drafts necessary documents, procures
insurance on his own life, and assigns it for compensation is not
acting "on his own initiative."  The language of the statute
simply does not support such a reading. 
Further, the insurable interest requirement of § 3205
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6  The 1939 statute read: 
"Any person of lawful age may on his own initiative
procure or effect a contract of insurance upon his own
person for the benefit of any person, firm, association
or corporation, but no person shall procure or cause to
be procured, directly or by assignment or otherwise any
contract of insurance upon the person of another unless
the benefits under such contract are payable to the
person insured or . . . to a person having, at the time
such contract is made, an insurable interest in the
person insured" (L 1939, ch 882, § 146).
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(b) (2) does not alter our reading of § 3205 (b) (1) because it
does not apply when an insured freely obtains insurance on his
own life.  Rather, it requires that when a person "procure[s] or
cause[s] to be procured, directly or by assignment or otherwise"
an insurance policy on another's life, the policy benefits must
run, "at the time when such contract is made," to the insured or
one with an insurable interest in the insured's life (Insurance
Law § 3205 [b] [2]).  Where an insured, "on his own initiative,"
obtains insurance on his or her own life, the validity of the
policy at its inception is instead governed by § 3205 (b) (1).
Our reading of the statutory language is buttressed by
the legislative history of § 3205 (b).  A forerunner to the
current provision appeared in the 1939 recodification of the
Insurance Law as a single paragraph (1939 NY Laws ch. 882, art.
7, § 146),6 and a 1984 recodification broke that single paragraph
into the two provisions we have today.  The sentence "[n]othing
herein shall be deemed to prohibit the immediate transfer or
assignment of a contract so procured or effectuated," however,
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was not added until 1991. It was prompted by a United States
Internal Revenue Service private letter ruling suggesting that if
a person obtained an insurance policy with the intent of
transferring it to a charitable organization lacking an insurable
interest in his life, the transaction would violate § 3205 (b)
(2) (see Mem of Assemblyman Lasher, Bill Jacket, L 1991, ch 334,
at 6; IRS Private Letter Ruling, March 1991, PLR 9110016).  The
Legislative aim was to "correct [this] erroneous interpretation"
(Mem of Assemblyman Lasher, Bill Jacket, L 1991, ch 334, at 6). 
Thus, it not only added, in terms not limited to charitable
organizations, that a policy may be "immediate[ly] transfer[red]
or assign[ed]" (Insurance Law § 3205 [b] [1]), but it did so to
clarify the legislative understanding that a policy might be
assigned regardless of the insured's intent in procuring it.
In light of the overwhelming textual and historical
evidence that the Legislature intended to allow the immediate
assignment of a policy by an insured to one lacking an insurable
interest, we are not persuaded by plaintiff and the insurers'
argument that § 3205 (b) is limited by the common law requirement
that an insured cannot obtain a life insurance policy with the
intent of circumventing the insurable interest rule by
immediately assigning it to a third party (see Steinback v
Diepenbrock, 158 NY 24, 30-31 [1899]).  To the extent that there
is any conflict, the common law has been modified by unambiguous
statutory language.  We note further that if our Legislature had
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intended to impose such a limitation, it could easily have done
so.  The Legislature has been very active in this area, most
recently in its redrafting of Article 78 of the Insurance Law.
Finally, we recognize the importance of the insurable
interest doctrine in differentiating between insurance policies
and mere wagers (see Caruso, 73 NY2d at 77-78), and that there is
some tension between the law's distaste for wager policies and
its sanctioning an insured's procurement of a policy on his or
her own life for the purpose of selling it.  It is not our role,
however, to engraft an intent or good faith requirement onto a
statute that so manifestly permits an insured to immediately and
freely assign such a policy. 
Accordingly, the certified question should be answered
in the negative.
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Alice Kramer v Phoenix Life Insurance Co., et al.
No. 176 
SMITH, J.(dissenting):
I would answer the certified question with a qualified
yes: My view of New York law is that where, as in this case, an
insured purchases a policy on his own life for no other purpose
than to facilitate a wager by someone with no insurable interest,
the transaction is unlawful.
I
"Stranger-originated life insurance" is a new name for
an old idea.  Transactions not basically different from the one
before us have been known, and condemned, by courts for more than
a hundred years.  
In 1872, a young man named Henry Crosser took out a
policy on his own life.  On the same day, Crosser entered a
contract with something called the Scioto Trust Association, in
which Crosser agreed to assign the policy to Scioto, and Scioto
agreed to pay the premiums on it.  It was agreed that at
Crosser's death, Scioto would get 90 percent of the insurance
proceeds.  When Crosser died the following year, his
administrator sued Scioto, claiming all the proceeds, and the
United States Supreme Court, applying pre-Erie federal common law
(see Erie R.R. Co. v Tompkins, 304 US 64 [1938]), held the
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Crosser-Scioto contract invalid.  The Court said that what it
called "wager policies" were "independently of any statute on the
subject, condemned, as being against public policy" (Warnock v
Davis, 104 US 775, 779 [1882]). 
Warnock also stated a broader rule: "The assignment of
a policy to a party not having an insurable interest is as
objectionable as the taking out of a policy in his name" (104 US
at 779).  That rule was too broad.  New York, as the Warnock
court recognized, had already rejected it (see id. at 781-82,
citing Saint John v American Mut. Life Ins. Co., 13 NY 31
[1855]), and a few decades later the United States Supreme Court
rejected it also (Grigsby v Russell, 222 US 149 [1911]).  In
Grigsby, Justice Holmes explained that a contract taken out by a
third party with no insurable interest in the insured's life is
generally more problematic than an assignment by the insured to
such a person: 
"A contract of insurance upon a life in which
the insured has no interest is a pure wager
that gives the insured a sinister counter
interest in having the life come to an end. .
. .
"But when the question arises upon an
assignment it is assumed that the objection
to the insurance as a wager is out of the
case. . . .  The danger that might arise from
a general license to all to insure whom they
like does not exist.  Obviously it is a very
different thing from granting such a general
license, to allow the holder of a valid
insurance upon his own life to transfer it to
one whom he, the party most concerned, is not
afraid to trust" 
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(222 US at 155).
Grigsby thus established the general rule, consistent
with the New York common law of that day and with our current
statutory law (Insurance Law § 3205 [b]), that while a third
party without an insurable interest may not purchase a life
insurance policy, an insured may do so and assign it to the third
party, whether the third party has an insurable interest or not. 
That is the rule the majority applies here.
But this rule of free assignability has always had an
exception -- an exception for cases like Warnock, and like this
case, where the insured, at the moment he acquires the policy, is
in substance acting for a third party who wants to bet on the
insured's death.  Justice Holmes explained the exception in
Grigsby, and thus distinguished Warnock, but did not overrule its
narrow holding:
"[C]ases in which a person having an interest
lends himself to one without any as a cloak
to what is in its inception a wager have no
similarity to those where an honest contract
is sold in good faith . . .
"[Warnock v Davis] was one of the type just
referred to, the policy having been taken out
for the purpose of allowing a stranger
association to pay the premiums and receive
the greater part of the benefit, and having
been assigned to it at once." 
(222 US at 156).  
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There are good reasons why the common law, as reflected
in both Warnock and Grigsby, invalidated stranger-originated life
insurance.  Even if we ignore the possibility that the owner of
the policy will be tempted to murder the insured, this kind of
"insurance" has nothing to be said for it.  It exists only to
enable a bettor with superior knowledge of the insured's health
to pick an insurance company's pocket.
In a sense, of course, all insurance is a bet, but for
most of us who buy life insurance it is a bet we are happy to
lose.  We recognize that the insurance company is more likely
than not to make a profit on the policy, receiving more in
premiums than it will ever pay out in proceeds, and that is the
result we hope for; we pay the premiums in order to protect
against the risk that we will die sooner than expected.  But
stranger-originated life insurance does not protect against a
risk; it does not make sense for the purchaser if it is expected
to be profitable for the insurance company.  The only reason to
buy such a policy is a belief that the insured's life expectancy
is less than what the insurance company thinks it is.  Thus, we
may be confident that the Scioto Trust Association, which
acquired a policy on the life of 27-year-old Henry Crosser, was
not surprised when Crosser died before he was 30.  And we may be
equally confident that the purchasers in this case thought,
probably with good reason, that they knew something about Arthur
Kramer's health that the insurance companies did not know.
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No. 176
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When Grigsby was decided, New York common law had
anticipated the federal common law, adopting not only the rule of
Grigsby -- that life insurance policies are, in general, freely
assignable -- but also the exception recognized in Grigsby --
that the assignment cannot be used as a "cloak to what is in its
inception a wager."  In Steinback v Diepenbrock (158 NY 24, 31
[1899]), answering an objection to the rule of free
assignability, we observed:
"[I]t is said that if the payee of a policy
be allowed to assign it, a safe and
convenient method is provided by which a
wagering contract can be safely made.  The
insured, instead of taking out a policy
payable to a  person having no insurable
interest in his life, can take it out to
himself and at once assign it to such person. 
But such an attempt would not prove
successful, for a policy issued and assigned,
under such circumstances, would be none the
less a wagering policy because of the form of
it.  The intention of the parties procuring
the policy would determine its character,
which the courts would unhesitatingly declare
in accordance with the facts, reading the
policy and the assignment together, as
forming part of one transaction."
Under New York common law, therefore, the purchasers of
stranger-originated life insurance could not prevail in a case
like this: the law would look through the form of the
transaction, and "[t]he intention of the parties procuring the
policy would determine its character."  It hardly seems open to
doubt, on the facts before us, that the intention of the
purchasers here was to bet on Arthur Kramer's death, and that
Kramer's intention was to be compensated for helping them do so.
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II
The majority holds, in effect, that Insurance Law §
3205 (b) has displaced the common law, and eliminated the
exception recognized in Grigsby and Steinback to the rule of free
assignability.  I think this is an incorrect reading of the
statute.  I see no reason to believe the Legislature ever
intended to abolish the anti-wagering rule.
While statutes relating to the insurable interest
requirement in New York date at least to 1892 (L. 1892, ch. 690 §
55), it is enough for present purposes to go back to 1984, when
Insurance Law § 3205 (very similar to a predecessor statute,
Insurance Law § 146) was enacted, containing the following
language:
"(b)(1) Any person of lawful age may on his
own initiative procure or effect a contract
of insurance upon his own person for the
benefit of any person, firm, association or
corporation.
"(2) No person shall procure or cause to be
procured, directly or by assignment or
otherwise any contract of insurance upon the
person of another unless the benefits under
such contract are payable to the person
insured or his personal representatives, or
to a person having, at the time when such
contract is made, an insurable interest in
the person insured."
Thus the 1984 version of the statute protected the
insured's right to buy a policy and name any beneficiary he or
she liked, but otherwise prohibited life insurance where the
beneficiary had no insurable interest.  It did not specifically
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address the question of an assignment by the insured to a person
lacking an insurable interest; it did not restate the long-
standing common-law rule that, in general, life insurance
contracts were freely assignable, even to such assignees.
This omission became a problem in 1991, when the United
States Internal Revenue Service ruled that a plan to procure a
policy on one's life with the intent to transfer the policy
immediately to a charity would violate section 3205(b)(2), so
that any such assignment could not be treated as a charitable
gift for tax purposes (see IRS Ruling 9110016 [March 8, 1991]). 
The Legislature acted promptly to correct this "erroneous
interpretation" of the New York Insurance Law (memorandum of
Assemblyman Lasher on A 8586, Bill Jacket for L. 1991, ch. 334,
at 6).  It added a second sentence to Insurance Law § 3205 (b)
(1), so that that subdivision now reads:
"Any person of lawful age may on his own
initiative procure or effect a contract of
insurance upon his own person for the benefit
of any person, firm, association or
corporation. Nothing herein shall be deemed
to prohibit the immediate transfer or
assignment of a contract so procured or
effectuated."
The 1991 amendment gave statutory form to the long-
established New York rule that life insurance contracts may be
freely assigned, even to someone without an insurable interest. 
But there was also, as I have explained, a long-established
exception to the rule: Assignability could not be used to cloak a
third-party wagering transaction.  I see no reason to think that
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the Legislature, in codifying the general rule, meant to abolish
the exception.  The majority opinion offers neither any reason
for the Legislature to consider abolishing it, nor any evidence
that the Legislature thought it was doing so.  Indeed, nothing in
the history of the statute suggests that the Legislature intended
to alter the common law of insurable interest in any way: the
sponsor's memorandum says its purpose was to "restate and
clarify" it (id.).  
As I read the 1991 amendment, it codified not only the
free assignability rule, but also the anti-wagering exception to
it -- although I admit it could have expressed the exception much
more clearly.  The new second sentence of Insurance Law § 3205
(b) (1) refers, in the words "so procured or effectuated," to the
words of the first sentence, which says that a person "may on his
own initiative procure or effect a contract of insurance."  "On
his own initiative" is a rather mysterious phrase, which can
hardly be taken literally.  Life insurance does not become
invalid because its purchase was initiated (in the sense of being
proposed or suggested) by the insured's spouse or an insurance
agent.  Rather, I see in the words "on his own initiative" an
echo of the rule recognized in Steinback and Grigsby -- that an
insured may not, in procuring a policy, act as an agent for a
third-party gambler without an insurable interest.  So read,
Insurance Law § 3205 (b) (1) is completely consistent with the
pre-existing common law of New York, and with the wise public
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policy underlying the common law.
The majority today rejects this analysis, and holds in
substance that Insurance Law § 3205 (b) enacts the general rule
of free assignability, while abolishing the "cloak for a wager"
exception.  For the reasons I have explained, I think this
holding is unnecessary and unfortunate.  I agree with the
majority that there may be cases where a policy can be valid,
even though the insured bought the policy intending to assign it
to someone (perhaps a charity, or the insured's domestic partner)
without an insurable interest in the insured's life.  Thus, I
would not answer with an unqualified yes the Second Circuit's
question whether an insured must have intended to "provide
insurance protection for a person with an insurable interest." 
But I think the answer should be yes when the question is limited
to a case, like this one, in which the parties attempted the kind
of wagering transaction forbidden by the common law.
The majority's negative answer to the Second Circuit's
question, though I think it is wrong, may be of limited
importance.  Any harm done may have already been repaired by the
2009 enactment of a statutory prohibition on stranger-originated
life insurance (see majority op at 7 n 5).  The new statute may
create its own problems; insurable interest rules, as our
opinions in this case surely demonstrate, are tricky to handle. 
But I view the new statute as an attempt to implement what I
think has always been the public policy of New York to condemn
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wagers on the early death of an insured.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Following certification of a question by the United States Court
of Appeals for the Second Circuit and acceptance of the question
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified question answered in
the negative.  Opinion by Judge Ciparick.  Chief Judge Lippman
and Judges Graffeo, Read and Jones concur.  Judge Smith dissents
in an opinion in which Judge Pigott concurs.
Decided November 17, 2010