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Where a party lacking an insurable interest procures a policy directly or by assignment on the life of another, the transaction is a mere speculation, contrary to public policy, and therefore void.
The Schlanger Trust is a Delaware statutory trust with its principal place of business in Delaware. On December 14, 2006, Lincoln National Life Insurance Company issued a $6 million life insurance policy on Joseph Schlanger's life to the Schlanger Trust. The policy contains an incontestability clause stating that "We [Lincoln] will not contest this policy after it has been in force during the Insured's lifetime for 2 years from the Issue Date." Schlanger died on January 21, 2009, more than two years after the policy's issue date. On February 13, 2009, the Schlanger Trust submitted a claim for the death benefit under the policy. Lincoln first contested the policy when it filed this action on July 10, 2009. In its original complaint, Lincoln contends that the policy was never intended for legitimate insurance needs, but in reality was the product of a stranger originated life insurance ("STOLI") scheme promoted by GIII, a private investing entity. Lincoln alleges a multi-layered trust scheme that is identical in form to the arrangement described above in Dawe. The insurance company claims that the beneficiary of the Schlanger Trust was actually another trust, the Joseph Schlanger 2006 Family Trust. Although Schlanger himself was the beneficiary of the Family Trust, Lincoln contends that under the scheme, immediately upon issuance of the policy Schlanger sold his beneficial interest in the Family Trust to GIII, which paid all of the premiums. Lincoln asserts that the entire trust structure was intended to generate, and then conceal, a life insurance policy that would allow GIII, an investor with no insurable interest, to speculate on Schlanger's life. After filing a challenge to the policy in the United States District Court for the District of Delaware, the defendant Trust moved to dismiss the complaint, asserting that the policy's two-year contestability period barred Lincoln's claim. On July 20, 2010, the district court denied the Trust's motion.
Can a life insurer contest the validity of a life insurance policy based on a lack of insurable interest after expiration of the two-year contestability period set out in the policy as required by 18 Del. C. § 2908?
The state supreme court found, inter alia, that the investing entity lacked an insurable interest under § 2704. The incontestability period in the policy was directly contingent, and predicated, upon the formation of a valid contract. Therefore, as the policy was void as against public policy, it never came into force. Consequently, the incontestability provision in § 2908 was inapplicable.