Attorneys squared off in New York's top court Tuesday, arguing whether the state law prohibits people from buying life insurance policies and immediately selling them to investors who make money when the insured person dies.
The law was recently amended by the Legislature to regulate so-called "stranger originated life insurance," or STOLIs. The change prohibits intermediaries, without any personal interest in an insured individual, from arranging or planning in advance for someone to obtain and transfer to them a policy.
The question before the Court of Appeals is whether someone can buy a policy with no intention of protecting their usual beneficiaries, loved ones with a personal or economic stake in their welfare, and then simply sell it to someone else.
"How could this be anything but a wagering transaction?" Judge Robert Smith asked during the hearing. "No one would ever do this unless you had a better idea than the insurance company of how long this person was going to live."
While seniors can get money selling policies they don't need, lawmakers have noted "the moral hazards" posed by investors speculating on death.
Alice Kramer brought the suit on behalf of her late husband's estate. Arthur Kramer, an attorney, had bought several policies late in his life, assigned them to two trusts, named his children as beneficiaries and then directed them to exchange their interest in the trusts to investors in exchange for some cash. She claims the death benefits should go to the estate.
The investor Lifemark paid $1.9 million in 2007 to buy a $10 million policy on Kramer, who died the next year. With total disputed death benefits estimated at $56 million, investors also filed claims with the insurers, who argued the policies are void.
New York insurance law generally requires that a beneficiary have an "insurable interest" in the insured person, meaning a close relative by blood or law, a substantial interest by love and affection, or a lawful and substantial economic interest in their health and safety. The law also says any adult can buy insurance on themselves for the benefit of any person, firm, association or corporation.
"If an individual procures a policy on his or her own life, there's no insurable interest required," Lifemark attorney John Tharp Jr. argued before the seven judges. "That individual, the law recognizes, can exercise the judgment and make the decisions."
Tharp said Lifemark was not involved in originally procuring the policies and later bought the one policy while it was in effect.
Several judges questioned whether an individual was doing it on their own initiative if an investor or adviser came to them with the idea.
Insurance company lawyers told the court that they didn't know the Kramer trust had sold its insurance interest to investors until Kramer's estate filed a complaint.
"We pay on life insurance policies all the time," said Michael Miller, attorney for Lincoln Life & Annuity Co. "If there was a legitimate insurable interest we would have paid here."
"There's been a market wave of these transactions," Miller said. He estimated it was in the billions of dollars.
Bruce Ferguson, senior vice president of the American Council of Life Insurers, told the Associated Press that about 30 states have enacted laws in the last few years to curb the practice, and that there are currently some investment products that contain bundled life settlements sold in secondary markets.
One regulatory approach is to require a five-year waiting period before life insurance policies can be sold, Ferguson said.