Opinion ID: 2325732
Heading Depth: 2
Heading Rank: 3

Heading: certified question three: the trust's interest

Text: The third certified question concerns whether the relevant statutory provisions confer upon a trustee an insurable interest in the life of the individual insured who established the trust if the insured intends to transfer the beneficial interest in the trust to a third-party investor with no insurable interest. As certified by the district court: Does 18 Del. C. § 2704(a) and (c)(5) confer upon the trustee of a Delaware trust established by an individual insured an insurable interest in the life of that individual when, at the time of the application for life insurance, the insured intends that the beneficial interest in the Delaware trust would be transferred to a third-party investor with no insurable interest in that individual's life following the issuance of the life insurance policy? Our answer to question number three is YES, as long as the individual insured actually established the trust. If, however, the insured does not create and fund the trust then the relationship contemplated under section 2704(c)(5) is not satisfied. Phoenix argues section 2704(c)(5) must be interpreted in the context of section 2704(a) and Delaware common law, which prohibit wagering contracts channeled through trusts. Dawe argues that section 2704(c)(5) recognizes a trust's right to own life insurance policies by conferring on a trustee a broad insurable interest in the life of the insured. Delaware statutory trusts did not exist at common law. The policy of the Delaware Statutory Trust Act is to give maximum effect to freedom of contract and the enforceability of governing instruments, and its provisions are to be construed broadly even if in derogation of the common law.
Section 2704(c) describes categories of persons and entities having an insurable interest in the life of the insured. Section 2704(c)(5) confers on the trustee of a trust an insurable interest in the life of the person who established the trust. On July 13, 2011, after the parties completed briefing, [80] the Governor signed Senate Bill No. 83, an Act to amend Titles 10, 12, 18, and 25 of the Delaware Code relating to judicial procedure, fiduciary relations, insurance and property. Section 17 of that Act addresses 18 Del. C. § 2704(c)(5). At the time that the parties briefed the certified questions, section 2704(c)(5) provided in relevant part that: The trustee of a trust established by an individual has an insurable interest in the life of that individual and the same insurable interest in the life of any other individual as does any person who is treated as the owner of such trust for federal income tax purposes. Section 2704(c)(5) now provides, in pertinent part, that: The trustee of a trust created and initially funded by an individual has an insurable interest in the life of that individual and the same insurable interest in the life of any other individual as does any person who is treated as the owner of such trust for federal income tax purposes without regard to: a. The identity of the trust beneficiaries b. Whether the identity of the trust beneficiaries changes from time to time; and c. The means by which any trust beneficiary acquires a beneficial interest in the trust. [81] Importantly, the prior statutory language did not limit who may be a trust beneficiary or require the beneficiary to have an independent insurable interest. The revised language expressly states that a trustee has an insurable interest without regard to the identity of the trust beneficiaries, whether the [trust beneficiaries] change ..., and the means by which any trust beneficiary acquires a beneficial interest in the trust. [82] The Synopsis of Senate Bill 83 states the revisions were intended to clarify the provisions of current law concerning when a trust has an insurable interest, meaning the recent changes did not alter the earlier statute. Thus, a trust has an insurable interest in the life of the person who established created and initially funded the trust without regard to whether the beneficial interest in the trust is subsequently sold or transferred.
As noted in Section IIC above, we must interpret section 2704(c) in light of section 2704(a) to create harmony within the statute. Section 2704(c)(5) requires more than just technical compliance with section 2704(a), otherwise section 2704(c)(5) would expressly authorize wagering contracts, so long as it was conducted through a trust for whom the insured was the settlor or grantor. And as explained in Question two, a life insurance policy procured or effected without an insurable interest is a wager on the life of the insured and is prohibited by the Delaware Constitution. Section 2704(c)(5) only grants the trustee of a Delaware trust an insurable interest in the life of the individual insured if the trust is established by the individual insured. The insured, as settlor or grantor, must both create and initially fund the trust corpus. This requirement is not satisfied if the trust is created through nominal funding as a mere formality. If the funding is provided by a third party as part of a pre-negotiated agreementthen the substantive requirements of sections 2704(a) and 2704(c)(5) are not met. Parties cannot use section 2704(c)(5) to do indirectly what 2704(a) clearly prohibits parties from doing directly. The general rule, as explained in Question two, is that all persons have an insurable interest in their own life ... and may ... insure their life in good faith for the benefit of any person whom they see fit to name as the beneficiary, regardless of whether such person has an insurable interest in their life, provided it not be done by way of cover for a wagering policy. [83] Thus, an individual insured can procure a policy and name his own trust as the owner and beneficiary of that validly procured life insurance policy, and the policy complies with the first clause of section 2704(a). Additionally, the individual insured can establishcreate and initially funda trust for the purpose of procuring life insurance on the individual's own life and the trustee of that trust has an insurable interest under the second clause of section 2704(a) and section 2704(c)(5). In both scenarios, however, either the individual insured or the trustee must intend to purchase the policy for lawful insurance purposes, and not as a cover for a waging contract. Where the individual insured creates a trust to hold a life insurance policy on his life and funds the trust with that policy or with money to pay its premiums then the trustee has the same insurable interest that the settlor has in his own life. Thus, we only inquire whether the owner (either the insured or the trust) has an insurable interest in the insured's life at the policy's inception and not whether the beneficiaries of the policy have an insurable interest. If the individual insured creates and initially funds the trust, then the trustee has an insurable interest without regard to how the trust beneficiaries obtained their interest. Therefore, we answer Certified question three in the affirmative if the life insurance is procured for a legal purpose and not as a cover for an illegal wager contract. In cases where a third party either directly or indirectly funds the premium payments as part of a pre-negotiated arrangement with the insured to immediately transfer ownership, the policy fails at its inception for lack of an insurable interest.