Recent Developments in the Life Settlement Industry - June 2012

The Delaware General Assembly is considering new legislation to address a contentious issue in the life settlement industry. A new law proposed in May 2012, Delaware Senate Bill No. 220 (the Senate Bill), would require a life insurance company that rescinds an insurance policy on the grounds that the policy holder lacked an insurable interest to refund the premiums that the insurer has collected from the owner of the rescinded life insurance policy.1 If enacted, the Senate Bill would codify the Delaware common law with the stated goal of protecting investors in the secondary market for life insurance in Delaware.2 This DechertOn-Point discusses the Senate Bill's content and intended effect.

The Senate Bill has its origins in an issue that, in the last decade, has faced the life settlement industry not only in Delaware, but in a number of U.S. jurisdictions. Courts across the United States have been confronted with a significant amount of litigation between life insurance companies and policy owners in which the point in dispute is whether an insurance policy should be deemed void on the grounds that the insurance policy lacked an "insurable inter-est."3 Related to this question is whether, in the event the life insurance company obtains a favorable decision in the dispute over the insurable interest, the life insurance company should be permitted to keep the premiums paid by the policy owner. According to the sponsors of the Senate Bill, insurance companies continue to file pleadings in Delaware courts seeking to withhold the premiums paid by the policy owners, despite the "well-settled" common law rule that "an insurer must return the premiums it has collected on the policy."4

While the sponsors of the Senate Bill have cited a number of cases demonstrating that this controversy may be well-settled in Delaware,5 other states have reached the conclusion that the insurance companies may withhold premiums paid by policy owners who held insurance policies fundamentally flawed by the lack of an insurable interest. Florida and Arkansas appellate courts, for example, have reasoned that to compel insurance companies to refund premium payments after an adverse determination of insurable interest would not appropriately disincentivize what such courts view as "wagering contracts" on the life of an insured individual, which the these courts consider void as against public policy.6 Thus, in Florida and Arkansas, insurance companies may retain premiums...