A New York and New Jersey Lawyer Who Represents Policyholders and Beneficiaries in Life Insurance Denial Cases

In a long-awaited decision, the New York Court of Appeals in Kramer v. Phoenix Life Ins. Co. has given the green-light to stranger-oriented life insurance policies–that is, those where an individual purchases a life insurance policy and then transfers it to investors in exchange for payment.

The life insurance settlement industry is one that has been the center of quite a lot of controversy in recent years, as the practice of investing in life insurance policies has heated up. In fact, some predict it will become the newest version of the mortgage and homebuying craze of this past decade.

According to the Court of Appeals, the statutory language of the New York Insurance Law along with its textual history clearly resolved the matter. Section 3205(b)(1) permits any person to obtain a life insurance policy and “nothing herein shall be deemed to prohibit the immediate tranfer or assignment of a contract so procured or effectuated.”

The various life insurance companies involved in the suit contended that Insurance Law 3205(b)(2) invalidated the policies at stake. That section states that a person shall not pocure life insurance unless the death benefit is payable to a person with an insurable interest.”

The court, however, recognized the clear dichotomy between the sections, observing that (b)(1) allows a person to purchase a New York life insurance policy and afterwards transfer it to another, while (b)(2) simply prohibits life insurance wagers wherein an individual directly purchases life insurance on another person as an investment or gamble.

The court was unwilling to read  an intent or bad faith component into the statutory framework. In fact, it observed that it is a common practice for persons to purchase life insurance and then later designate a charity, which has no insurable interest in the insured, as a beneficiary. In short, if a New York life insurance policy is valid at its inception, the insured can sell it off.

As a New York life insurance attorney, I have mixed feelings about the decision. I agree with opponents to the life insurance settlement business that it is not healthy in a society to have investors who are wagering on the death of a person. It cheapens the value of life, and at its worst, it can provide a financial incentive for some to wish for the death of the insured, a dynamic that contains a dangerous criminal component. On the other hand, to a certain degree the court was constrained by the statutory language and its history. Moreover, if a law is enacted to prohibit the transfer of policies, it could provide additional grounds for life insurance companies to try to disclaim coverage.

We will see if the New York legislature enacts a law to put a stop to the life settlement business. Given its current dysfunctional state, I’m not holding my breath.

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