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.
