Litigation Checkup: Recent Developments in Life Insurance Litigation

Courts around the country continue to conduct regular checkups on the law regarding stranger-originated life insurance (STOLI) policies, slayer statutes, and privacy legislation.

Stranger-Originated Life Insurance

In GWG DLP Master Trust Dated 03/01/06 v. Estate of Frank, the Supreme Court of Delaware held that a three-year limitations period applied to a claim brought under a Delaware statute, 18 Del. C. § 2704(b), that allows an insured, or the insured’s executor or administrator, to bring an action to recover benefits received by a beneficiary, assignee, or payee under a contract made in violation of the statute prohibiting life insurance policies lacking an insurable interest. The court declined to accept the plaintiff’s argument that limitations periods were inconsistent with prior determinations by the court that STOLI policies are unenforceable, concluding that the three-year limitations period was consistent with public policy. Statutes of limitations, the court explained, promote justice by ensuring timely litigation, and the court balanced that interest with the interest of preventing human-life wagering.

In Wilmington Trust, National Association v. Ameritas Life Insurance Corp., the Supreme Court of Georgia examined a series of certified questions to help resolve a dispute arising from an insurer’s refusal to pay death benefits under life insurance policies that it claimed were illegal STOLI policies.

Under Georgia law, an insurance policy is void if the one taking out the policy does not have an “insurable interest” in the life of the insured. Accordingly, a life insurance policy is void if it is “procured or caused to be procured” by a third party unless the policy is payable to one with an insurable interest in the life of the insured. The certified questions sought clarification on the circumstances under which a life insurance policy could be said to have been “procured or caused to be procured” by a third party.

The court rejected Ameritas’ argument that a policy is procured by a third party whenever someone other than the insured paid the premium. The court, however, also rejected Wilmington Trust’s argument that a policy could not be procured, or caused to be procured, by a third party if the insured took part in the application process.

The court concluded that a policy is procured, or caused to be procured, by a third party when the third party has effectively obtained or acquired a life insurance contract on the life of another or has “served as the cause” for obtaining such a contract. When assessing this issue, a court must consider the totality of the circumstances to determine who effectively obtained or acquired the policy. Relevant circumstances for courts to consider include: who paid the premiums on the policy; who located the potential insured; who participated in the formation of the policy; who prepared and controlled the content of the relevant documents; whether the policy was created for the benefit of the insured or investors; who had the power to name the trustee of a life insurance trust and who had control over the trust; the sophistication of the insured on financial matters; and the extent of the insured's participation in the insurance application process.

Slayer Statute

In Popanda v. Roth, the U.S. District Court for the Eastern District of Wisconsin held that Wisconsin’s slayer statute applied to an individual whose plea of not guilty by reason of mental disease or defect had been accepted by the Wisconsin state court.

Popanda was an interpleader action initiated to resolve competing claims to the death benefit of a life insurance policy. The resolution of the claims turned on whether the insured’s husband, who pleaded not guilty by reason of mental disease or defect to her killing, could recover under the policy.

Nearly all states, including Wisconsin, have adopted “slayer statutes,” which prohibit a killer from profiting from their wrongdoing. For the statute to apply, the killing must be unlawful and intentional. Under Wisconsin’s slayer statute, a killing is unlawful and intentional if: (1) a final judgment establishes criminal accountability for the killing; (2) a final adjudication of delinquency establishes accountability for the killing; or (3) a court determines by a preponderance of the evidence that the killing was unlawful and intentional.

The court held that there was no final judgment establishing criminal accountability. Although the husband had admitted to killing his wife, the insured, the court in his criminal trial had accepted his plea of not guilty by reason of mental disease or defect. The court further held that the husband was an adult at the time he killed his wife, and thus there was no adjudication of delinquency.

The court, however, held that the preponderance of the evidence showed that the killing was unlawful and intentional. The court reasoned that the killing was unlawful because there was no evidence that it was authorized by law. While the husband’s plea of not guilty by reason of mental disease or defect meant he did not form the criminal intent to kill the insured, “intentionally” in the context of the slayer statute referred to civil intent. Civil intent requires only that a person intended their actions, regardless of whether they knew that those actions were wrongful. The uncontroverted evidence, including the husband’s guilty plea during the first phase of his criminal proceeding, established that he acted with the purpose to kill. The husband was therefore barred from recovering under the policy.

Privacy

The Illinois case Reynolds v. State Farm Life Insurance Co. involved a class action brought by an applicant for a life insurance policy, alleging a violation of the state’s Genetic Information Privacy Act (GIPA) for using genetic and personal health information to assess eligibility for coverage.

The complaint alleged that the insurer violated section 20(b) of GIPA by requiring the applicant to undergo a physical exam and provide genetic health information to assess coverage eligibility. Section 20(b) prohibits insurers from disclosing “protected health information (PHI) that is genetic information” for “underwriting purposes.”

The trial court concluded that section 20(b), taken as a whole, did not apply to life insurers and granted the insurer’s motion to dismiss with prejudice. The Illinois appellate court affirmed. Focusing on statutory interpretation, the court reasoned that the “genetic information” collected by the insurer for underwriting did not meet GIPA’s definition of “protected health information.” GIPA adopted HIPAA’s definition of “personal health information,” which must be “individually identifiable health information” and be “created or received by a health care provider, health plan, employer, or health care clearinghouse.” Since the plaintiff did not allege that the life insurer is any of these, the life insurer’s use of genetic information fell outside GIPA’s scope.

Moreover, the court concluded that section 20(b) applies only to health insurance underwriting because section 20(b) (4) provides a “catch-all provision” for other health insurance activities “besides” those already listed in the statute. The court stated that this language showed that the statute describes health insurance underwriting, not life insurance underwriting. Further, every clause that follows the term “underwriting purposes” mentions health insurance or some activity related to health insurance. No clause mentions life insurance or anything exclusively related to life insurance.