In the carrier rescission case of Columbus Life Insurance Company versus Wilmington Trust, N.A., filed in 2021, the Arizona Supreme Court is being asked if a life insurance company can contest the validity of a policy based on a lack of insurable interest after the two-year contestability period expires, as required by Arizona law.
Oral arguments are set for mid-March and a decision in this case is expected in 60 days.
The dispute involves a $2.5 million Columbus Life Insurance Co. second-to-die life insurance policy taken out by a husband and wife, Howard and Eunice Peterson, in 2003 who were then 81 and 79 years old, respectively. The Petersons applied for the policy following a retirement seminar and Howard Peterson passed away in 2016. Mrs. Peterson passed away in 2018 and the policy’s owner, Wilmington Trust, filed a claim to recover the death benefit, 18 years after the policy had been issued.
Columbus Life Insurance Co. refused to pay Wilmington Trust’s claim, and instead filed suit claiming that the policy lacked insurable interest from its inception and is void ab initio, or that it had no legal effect from inception. According to court filings, during that 18-year period Columbus Life Insurance Co. collected at least $1.5 million in premiums on the policy.
“This is a case about stranger-originated life insurance or STOLI: A pernicious phenomena where investors use senior citizens as tools to create life insurance policies—not for the benefit of the seniors or their families—but as human life wagers to benefit the investors,” according to a Supplemental Brief submitted by Columbus on January 24, 2023. “More than a hundred years ago, this Court recognized that human-life wagering violates public policy and that policies created for this purpose are void. That common law rule has never been abrogated, and instead has been codified and bolstered.”
Among the issues the case could decide: whether a carrier can wait as long as possible to sue on STOLI grounds, collect more in premiums due to that delay, and then keep all the premiums. “Remarkably, Columbus also asserts that it should be allowed to keep the premiums that it received on this policy that it now says never existed,” according to the filing by attorneys for Wilmington Trust.
As the case proceeded in U.S. District Court in Arizona, there was a pause to see if the policy can be enforced, and on August 10, 2022 Judge Diane Humetewa of the United States District Court for the District of Arizona in Phoenix issued an order requesting a response from the Arizona Supreme Court. The question posed: “Does Arizona law permit an insurer to challenge the validity of a life insurance policy based on a lack of insurable interest after the expiration of the two-year contestability period required by A.R.S. § 20-1204?”
In the brief filed to support the question, Columbus Life Insurance Co. said the answer is “yes,” arguing the policy was “void ab initio” because it was an “illegal wagering contract” in violation of Arizona law.
“The court should decline Wilmington’s efforts to allow its STOLI investor clients to profit from illegal human life wagering and prevent Arizona from becoming a favored jurisdiction for the next wave of STOLI,” the Columbus Life Insurance Co. attorneys asserted.
Attorneys for Columbus Life Insurance Co. did not respond to a request from Life Risk News for additional comments on the case.
Attorneys for Wilmington Trust say the proper answer is “no,” in part summarizing the argument this way: “This Court addressed substantially the same question sixty years ago, in another case in which a life insurer sought to escape liability by rewriting the clear language of the statute. Ancient principles of statutory construction, as well as relevant public policy considerations, illustrate why the answer should be no, as do the facts that led to this question being presented.”
“If Columbus legitimately felt that the Policy lacked insurable interest, then it could and should have made that contention during the contestability period (or, even better, when it underwrote the Policy),” according to the filing. “Columbus has gone to the courts instead, asking them to do now, after the insureds are no longer alive, what the insurer failed to do many years ago: underwrite the Policy. The statute exists to preclude the exact type of belated challenge to the policy’s validity that Columbus brings here and to relieve Arizona courts from the burden of performing this function. Columbus treated the Policy as valid for more than 16 years, and this Court should reject its attempt to rewrite Arizona law to further its pursuit of a windfall.”
Most of the states have decided this question by either statute or court decision and have gone different ways on the issue, said Jule Rousseau, an attorney with ArentFox Schiff LLP in New York who is representing Wilmington Trust. For example, New York placed the burden on the insurance company and Wisconsin decided via statute. Delaware’s 2011 Price Dawe decision held that policies that lack insurable interest are void. In 2016, Florida’s supreme court held that STOLI challenges are barred by the two-year contestability clause.
Commentators cited in the court documents say the more enlightened view is New York’s position, where the Court of Appeals placed the burden on the insurance company to act within two years. This is the first time Arizona will address the question and the answer will determine the status of many cases.
“But there is something inherently wrong with a carrier having an unlimited amount of time to challenge, and if successful, getting to keep the premiums,” Rousseau said.