New York Court of Appeals hears arguments on stranger-owned life insurance and New York’s insurable interest rule

New York Court of Appeals hears arguments on stranger-owned life insurance and New York’s insurable interest rule

On October 12th, the parties in Kramer v. Phoenix Life Ins. Co. presented oral arguments to the New York Court of Appeals regarding New York's insurable interest law and its effect on stranger-owned life insurance (SOLI or STOLI) arrangements.

In Kramer v. Lockwood Pension Servs., 653 F. Supp. 2d 354 (S.D.N.Y. 2009) [enhanced version available to lexis.com subscribers], Arthur Kramer created two life insurance trusts, naming his children as beneficiaries. For consideration, Mr. Kramer then directed his children to execute assignments of their beneficial trust interests to "stranger investors." Allegedly, the investors, not the children, paid all premiums on the policies.

After Mr. Kramer's death, plaintiff, Alice Kramer, sought a declaratory judgment that the insurance proceeds should be paid to her. Specifically, plaintiff alleged that the arrangement was an arrangement to procure life insurance policies with the purpose of immediately transferring the beneficial interests to stranger investors in contravention of NY CLS Ins § 3205's insurable interest rule.

Defendants, including the stranger investors, counterclaimed to recover the insurance proceeds, arguing that the benefits were properly paid to those who currently held the beneficial interest, which they had acquired from the children for cash consideration. Conversely, the insurance companies, as third-party complainants, sought to have the policies voided and not paid to anyone, arguing that defendants had developed a formulaic method for circumventing New York's insurable interest rule, using trusts and elderly persons as strawmen to acquire life insurance policies for the benefit of strangers who had no insurable interest in the insureds' lives.

Finding substantial ground for difference of opinion on the application of New York Insurance Law (§ 3205) to SOLI arrangements, the district court certified its order for an interlocutory appeal to the Second Circuit. The Second Circuit then certified the following question to the New York Court of Appeals.

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 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?

Lexis.com subscribers can view the pleadings from Kramer v. Lockwood Pension Servs., 653 F. Supp. 2d 354 (S.D.N.Y. 2009)

Lexis.com subscribers can view the motions from Kramer v. Lockwood Pension Servs., 653 F. Supp. 2d 354 (S.D.N.Y. 2009)

 

Related documents and postings:

STOLI on the Rocks - a Series of Case Commentaries from LISI

Download New Hampshire Life Settlements Act, Restricting STOLI Insurance Policies

District Court Rules on Stranger-Initiated Annuity Transactions

The Law of Life and Health Insurance - § 2.07[9] Investor Initiated Life Insurance ("IILI")

Lovendusky on Illicit Life Insurance Settlements

Understanding Life Insurance Settlements and Stranger Originated Life Insurance

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