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

Heading: certified question two: intent to transfer

Text: The second certified question concerns whether the statutory insurable interest requirement is violated where the insured procures a life insurance policy with the intent to immediately transfer the benefit to an individual or entity lacking an insurable interest: Does 18 Del. C. § 2704(a) and (c)(5) prohibit an insured from procuring or effecting a policy on his or her own life and immediately transferring the policy, or a beneficial interest in a trust that owns and is the beneficiary of the policy, to a 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 his or her life? Our answer to question number two is NO, so long as the insured procured or effected the policy and the policy is not a mere cover for a wager. PHL and ACLI argue that the Dawe policy violates Delaware's insurable interest statute because Dawe procured the policy with the intent to transfer it immediately to an investor without an insurable interest. They argue that the insurable interest requirement is a substantive regulation that would be completely undermined by ignoring intent. The insurers assert that the opposite result is illogical because it would give a procedural loophole to STOLI scheme promoters. The Dawe Trust counters that reading an intent requirement into the insurable interest statute is at odds with its plain language. The Trust accordingly urges this Court not to engraft an intent element onto the law because it would be at odds with our principles of statutory construction. More specifically, the Dawe Trust argues that insurable interest is determined only at the moment the life insurance contract becomes effective. According to the Dawe Trust, the Delaware Insurance Code abrogates older Delaware cases decided at common law, which looked beyond the initial beneficiary to the intent of the parties when determining insurable interest. The Trust also emphasizes that life insurance policies are freely assignable under Delaware law.
Since the initial creation of life insurance during the sixteenth century, speculators have sought to use insurance to wager on the lives of strangers. [27] In England, dead pools and the use of insurance to wager on strangers' lives actually became a popular pastime. [28] In response, Parliament enacted the Life Assurance Act of 1774 which prohibited the use of insurance as a wagering contract unlinked to a demonstrated economic risk. [29] Although the Act did not use the words insurable interest, the concept was embedded in the Act. This principle eventually crossed the herring pond and became firmly rooted in the common law of every state in the Union. [30] More than a century ago, the United States Supreme Court concisely articulated the public policy behind the insurable interest requirement: [T]here must be a reasonable ground, founded upon the relations of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the continuance of the life of the assured. Otherwise the contract is a mere wage, by which the party taking the policy is directly interested in the early death of the assured. Such policies have a tendency to create a desire for the event. They are, therefore, independently of any statute on the subject, condemned, as being against public policy. [31] Over the last two decades, however, an active secondary market for life insurance, sometimes referred to as the life settlement industry, has emerged. [32] This secondary market allows policy holders who no longer need life insurance to receive necessary cash during their lifetimes. The market provides a favorable alternative to allowing a policy to lapse, or receiving only the cash surrender value. The secondary market for life insurance is perfectly legal. Indeed, today it is highly regulated. In fact, most states have enacted statutes governing secondary market transactions, and all jurisdictions permit the transfer or sale of legitimately procured life insurance policies. Virtually all jurisdictions, nevertheless, still prohibit third parties from creating life insurance policies for the benefit of those who have no relationship to the insured. These policies, commonly known as stranger originated life insurance, or STOLI, lack an insurable interest and are thus an illegal wager on human life. In approximately 2004, securitization emerged in the life settlement industry. Under this investment method, policies are pooled into an entity whose shares are then securitized and sold to investors. [33] Securitization substantially increased the demand for life settlements, but did not affect the supply side, which remained constrained by a limited number of seniors who had unwanted policies of sufficiently high value. As a result, STOLI promoters sought to solve the supply problem by generating new, high value policies.
The plain language of 18 Del. C. § 2704(a) is ambiguous because a literal reading of the statute would permit wagering contracts, which are prohibited by the Delaware Constitution. [34] The rules of statutory construction are well settled. [35] First, we must decide if the statute is ambiguous. [36] A statute is ambiguous if it is susceptible of two reasonable interpretations [37] or if a literal reading of its terms would lead to an unreasonable or absurd result not contemplated by the legislature. [38] If it is unambiguous, then there is no room for judicial interpretation and the plain meaning of the statutory language controls. [39] If, on the other hand, the statute is ambiguous, then we consider it as a whole and we read each section in light of all the others to produce a harmonious whole. [40] Only when a statute is ambiguous do we look for guidance to its apparent purpose and place it as part of a broader statutory scheme. [41] We also ascribe a purpose to the General Assembly's use of particular statutory language and construe it against surplusage if reasonably possible. [42] Courts should, however, interpret statutory law consistently with pre-existing common law unless the legislature expresses a contrary intent. [43] We accordingly must approach section 2704(a) with these principles of statutory construction in mind. The Delaware Constitution prohibits all forms of gambling unless it falls within one of the enumerated exceptions. [44] Nearly one hundred years ago, the United States Supreme Court explained, [a] contract of insurance upon a life in which the insured has no interest is a pure wager.... [45] Accordingly, a life insurance policy procured or effected without an insurable interest is a wager on the life of the insured the Delaware Constitution prohibits. Because a literal reading of the statute creates an absurd result not contemplated by the General Assembly, we must interpret the statute in conformity with both Delaware law and the General Assembly's intent.
Phoenix and ACLI argue that the statutory language prohibits entering into a life insurance contract with the intent immediately to transfer the policy to someone without an insurable interest. The United States District Court for the District of Delaware has reached the same conclusion. [46] ACLI correctly points out that under Delaware common law, an assignment may not be used as a formalistic cover for what in substance amounts to a wager. [47] Phoenix and ACLI also argue that ignoring intent would result in an illogical triumph of form over substance that would completely undermine the policy goals behind the insurable interest requirement. [48] We agree. For nearly one hundred years, Delaware law has required an insurable interest as a way to distinguish between insurance and wagering contracts. In Baltimore Life Ins. Co. v. Floyd , the court explained: [T]he legitimate scheme of life insurance is inclined to be distorted and to some it affords an invitation for a mischievous kind of gambling. To avoid this misuse of a most useful character of undertaking, in which a beneficiary may become interested in the early death of the insured, it is held that the insurance upon a life shall be effected and resorted to only for some benefit incident to or contemplated by the insured, and that insurance procured upon a life by one or in favor of one under circumstances of speculation or hazard amounts to a wager contract and is therefore void, upon the theory that it contravenes public policy. The presence of an insurable interest on the part of the beneficiary is urged as a request to avoid the appearance of a wager contract, holding that without such an interest, the interest in the beneficiary is speculative. An insurable interest of the beneficiary may be shown by proof of the fact of relationship between the beneficiary and the insured within certain degrees, and by proof of pecuniary interest, such as arise between partners and between debtors and creditors. Evidence of such an insurable interest is evidence that the contract is not a wager and is evidence of the contracts validity. If the beneficiary has an insurable interest and the transaction is otherwise legal, the policy is valid; if he has not such an interest the policy may be valid, if the transaction is bona fide and free from speculation. [49] In Floyd, the court analyzed the intricacies of the insurable interest requirement in detail, including the general rule that, where the transaction is bona fide, a person may take insurance upon his own life for the benefit of one having no insurable interest in his life. [50] This general rule is based upon the theory that it is not reasonable to suppose that a person will insure his own life for the purpose of speculation. [51] However, the identity of the contracting party is not dispositive to the determination of whether an insurance policy is bona fide. One of the tests as to the validity of the contract is to determine by whom the premiums are to be paid. If the one taking the insurance pays the premiums, the transaction is generally upheld. But there is a strong, though not universal, tendency to condemn contracts in which the premiums are paid by the beneficiary [who holds no insurable interest]. [52] In 1968, the General Assembly codified the insurable interest requirement, [53] in a statute which essentially restated the substantive considerations of Floyd. [54] When the General Assembly enacted section 2704 in 1968, it specified categories of persons who have an insurable interest in the life of the insured and who may procure or cause to be procured life insurance on the insured. These categories include anyone having a lawful and substantial economic interest in the insured's life, parties to a contract for the purchase or sale of a business interest, and any relatives having a substantial interest engendered by love and affection. [55]
The tenets of statutory construction require us to interpret statutes consistent with the common law [56] unless the statutory language clearly and explicitly expresses an intent to abrogate the common law. [57] Although the insurable interest requirement is originally a creature of both state and pre- Erie [58] federal common law, [59] it is now codified in the Delaware Insurance Code. In relevant part, the Insurance Code provides: Any individual of competent legal capacity may procure or effect an insurance contract upon his/her own life or body for the benefit of any person, but no person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under such contract are payable to the individual insured or his/her personal representatives or to a person having, at the time when such contract was made, an insurable interest in the individual insured. [60] Section 2704(a) has two parts. The first clause provides that a person may procure or effect insurance on his own life for the benefit of anyone. This clause has no limiting language concerning intent, or even requires the beneficiary to have an insurable interest in the life of the insured. Section 2704(a) provides that [a]ny individual of competent legal capacity may procure or effect an insurance contract upon his/her own life or body for the benefit of any person ... [61] In contrast to the first clause, the remainder of the section concerns procuring insurance on the life of another. Under this language, policies procure[d] or cause[d] to be procured on the life of someone other than the person seeking the insurance must be payable to the insured or his/her personal representatives or to a person having, at the time when such contract was made, an insurable interest in the individual insured. [62] Although the statute has been periodically updated, [63] the substance of Delaware law on insurable interest has remained the same. An insured is permitted to take out an insurance policy on his own life, but the law prohibits persons other than the insured from procuring or causing to be procured insurance, unless the benefits are payable to one holding an insurable interest in the insured's life. [64] The insurable interest requirement serves the substantive goal of preventing speculation on human life. For this reason, section 2704(a) requires more than just technical compliance at the time of issuance. Indeed, the STOLI schemes are created to feign technical compliance with insurable interest statutes. If a third party procures life insurance on another person or causes the procurement of life insurance on another personthe beneficiary of that contract must have an insurable interest in the life of the insured. At issue is whether a third party having no insurable interest can use the insured as a means to procure a life insurance policy that the statute would otherwise prohibit. Our answer is no, because if that third party uses the insured as an instrumentality to procure the policy, then the third party is actually causing the policy to be procured, which the second clause of section 2704(a) proscribes. The statute defines the moment in time the insurable interest requirement appliesthe time when such contract was made, i.e., the moment the life insurance contract becomes effective. [65] Thus, the insurable interest requirement does not place any restrictions on the subsequent sale or transfer of a bona fide life insurance policy. Indeed, section 2720 of the Delaware Insurance Code makes life insurance policies assignable to anyone, even a stranger, subject to any contractual restrictions in the policy. [66] Section 2720 comports with the United States Supreme Court decision Grigsby v. Russell [67] and does not abrogate the common law as established in Baltimore Life Ins. Co. v. Floyd . Read this way, a life insurance policy that is validly issued is assignable to anyone, with or without an insurable interest, at any time. The key distinction is that a third party cannot use the insured as a means or instrumentality to procure a policy that, when issued, would otherwise lack an insurable interest. Recently, the New York Court of Appeals answered a similar certified question, holding that an insured may procure insurance on his own life with the intent to immediately assign it to another. We find Kramer v. Phoenix Life Ins. Co. [68] distinguishable because the insured purchased policies on his own life and a provision of the New York insurance law [69] that did not contain an insurable interest requirement governed those policies. Moreover, Kramer was decided on a narrow set of issues applying unique New York insurance statutes, which are not applicable here. [70] Notably, after Kramer the New York legislature revised the state's insurance laws to prohibit STOLI transactions, limiting the precedential value of Kramer, even in New York. [71]
The General Assembly did provide one specific exception to the insurable interest requirement, which allows issuance of a policy where the person paying the premiums does not have an insurable interest in the insured's life. Under that exception, the beneficiary must be a benevolent, educational or religious institution and the payor be designated as the owner. [72] The logical implication of this exception is that in cases not covered, it would be impermissible if the person paying the premium had no insurable interest in the life of the insured or if the person paying the premiums were not the policy owner. For this reason, we must interpret section 2704 and section 2705 in harmony and not render the language of section 2705 superfluous. If the insured procures the policy at the behest of another, the policy may nevertheless lack a legally insurable interest. [73] To determine who procured the policy, we look at who pays the premiums. [74] Indeed, section 2704(a) and section 2705 read together require the insured to fund the premiums on the policy unless the payor is a charitable, benevolent, educational, or religious institution. Therefore, if a third party financially induces the insured to procure a life insurance contract with the intent to immediately transfer the policy to a third party, the contract lacks an insurable interest. Stated differently, if an insured procures a policy as a mere cover for a wager, then the insurable interest requirement is not satisfied. [75] An insured's right to take out a policy with the intent to immediately transfer the policy is not unqualified. That right is limited to bona fide sales of that policy taken out in good faith. [76] A bona fide insurance policy sale or assignment requires that the insured take out the policy in good faithnot as a cover for a wagering contract. [77] Certainly, if A cannot procure a life insurance policy on the life of B without having an insurable interest in B's life then A cannot induce B's procurement of a life insurance policy with the intent to allow A to immediately purchase the policy for a nominal sum. If the first is a speculating and wagering policy so is the last. [78] Thus, section 2704 requires courts to scrutinize the circumstances under which the policy was issued and determine who in fact procured or effected the policy. Payment of the premiums by the insured, as opposed to someone with no insurable interest in the insured's life, provides strong evidence that the transaction is bona fide. [79] Under section 2704(a), the insured is free to procure or effect a policy on his own life for the benefit of anyone. Life insurance policies, however, do not come into effect without premiums, so an insured cannot procure or effect a policy without actually paying the premiums. Notably, section 2708, which prohibits policies issued without the consent of the insured except in narrow situations not present here, utilizes the phrase applies therefore or has consented thereto in writing. By implication, procuring or effecting a policy has to be something more than simply applying for a policy or providing written consent to the policy's issuance. Therefore, if a third party funds the premium payments by providing the insured the financial means to purchase the policy then the insured does not procure or affect the policy. Accordingly, third parties are prohibited from procuring or causing to be procured insurance contracts on the life of the insured unless the policy benefits are payable to someone with an insurable interest. In summary, the insured's subjective intent for procuring a life insurance policy is not the relevant inquiry. The relevant inquiry is who procured the policy and whether or not that person meets the insurable interest requirements.