Geronta Funding v. Brighthouse Life Insurance Company
On August 25, 2022, the Delaware Supreme Court adopted a fault-based analysis framed under the Restatement (Second) of Contracts (“Restatement”) to determine if life insurance policy premiums should be returned in a case where the policy is found to be void ab initio for lack of insurable interest. Geronta Funding v. Brighthouse Life Insurance Company, No. 380, 2021 (D. Del. 2022) (“Seck”). In doing so, the Court effectively overruled a number of federal Delaware court decisions that have held that a life insurer is required to return premium to an investor if the policy is void for lack of insurable interests. The Court remanded the case to the Superior Court to determine if the life insurer had inquiry notice that the policy may have lacked insurable interest, and how such a finding may affect the return of premium issue under the new framework provided by the Court. While the Seck decision has provided a general framework for courts applying Delaware to utilize on the return of premium issue, it has left a number of questions unanswered, such as whether a tertiary market owner is entitled to recover premiums paid by prior policy owners, and what specific inquiries should be made as to the carrier’s actual and constructive knowledge of red flags, and what inquiries an investor should make before purchasing a policy (and whether industry standards will provide a benchmark).
In July of 2007, Brighthouse Life Insurance Co.’s predecessor received an application in New Jersey to insure the life of one Mansour Seck, identified as a 74-year-old French citizen residing in New Jersey. The Seck Policy amount was $5M; the owner and beneficiary were identified as the “Mansour Seck Irrevocable Life Insurance Trust;” and the applicant’s agent was a broker named Pape Seck. The life insurer followed its usual underwriting protocols and issued the policy.
In 2009, after expiration of the 2-year contestability period, the Seck Policy was sold on the secondary market to EEA Life Settlements, Inc. In 2015, the Seck Policy was sold again, this time to Geronta, a hedge fund, as part of a portfolio purchase in a tertiary market transaction.
Shortly after acquiring the Seck Policy, Geronta suspected that the Seck Policy’s insured, Mansour Seck, was fictitious. After performing an investigation and determining that the pedigree information for Mansour Seck was incorrect, in April of 2017, Geronta notified Brighthouse of its concerns. Geronta wanted to rescind the policy with the carrier and recover all of the premiums that it and the prior owner had paid for the policy. Brighthouse agreed to rescind the policy but refused to return the premiums. In 2018, Brighthouse commenced a lawsuit in the Delaware Superior Court against Geronta, seeking a declaration that the Seck Policy was void ab initio for lack of insurable interest, and an order that it was allowed to retain all of the premiums that it and its predecessor had paid for the policy. Geronta counterclaimed, seeking to recover the premiums on a theory of restitution. The parties stipulated that the policy was void ab initio for lack of insurable interest. The only issue to be determined was who would get the premiums paid for the policy by the secondary and tertiary market investors.
The Delaware Superior Court held a bench trial and ruled that Brighthouse could keep all premiums paid to keep the policy in force after April 21, 2017, the date that Geronta had told Brighthouse that it suspected that Mansour Seck was not a real insured. But the Superior Court found that Geronta was not entitled to recover any premiums that it or its predecessor had paid prior to the date that it notified Brighthouse of its suspicions. The Superior Court purported to follow the Restatement in its determination. Generally, under Restatement § 197, a party to an agreement that is unenforceable on public policy grounds cannot seek restitution (here, the recovery of premiums) unless that party is able to prove an applicable exception. The Superior Court focused on certain exceptions set forth in Restatement § 198, which may apply if the party seeking restitution proves either (a) it was excusably ignorant of the facts that caused the agreement to be unenforceable, or (b) it was not equally at fault (in pari delicto) with the other party to the contract. The Superior Court concluded that Brighthouse was not at fault because it had followed its underwriting guidelines in issuing the policy and did not have actual knowledge that the policy lacked insurable interest. The Superior Court determined that Geronta was not excusably ignorant of the problems with the policy, or equally at fault with the insurer, primarily because it had made a strategic decision not to review information that it had received regarding the policy before purchasing it, which information would, according to the Superior Court, have indicated red flags.
Because this was a matter of first impression for the Delaware Supreme Court, it surveyed what other courts across the nation have done in similar situations and found that the courts generally have adopted one of the following approaches: (1) rescission and automatic disgorgement of premiums; (2) restitution under a fault-based analysis grounded in considerations specific to insurance policies declared void ab initio for lack of insurable interest; and (3) restitution under the Restatement. The Court specifically noted that the majority of the courts that it surveyed determined that the premiums should be returned to the investor after undertaking a fault-based analysis.
The Court adopted restitution under a fault-based analysis as framed by the Restatement as the test to determine whether premiums should be returned when a party presents a viable legal theory, such as unjust enrichment, and seeks the return of paid premiums as remedy. It instructed Delaware courts to analyze the exceptions outlined in Sections 197, 198, and 199 of the Restatement, including whether: (1) there would be a disproportionate forfeiture if the premiums are not returned; (2) the claimant is excusably ignorant; (3) the parties are not equally at fault; (4) the party seeking restitution did not engage in serious misconduct and withdrew before the invalid nature of the policy becomes effective; or (5) the party seeking restitution did not engage in serious misconduct, and restitution would put an end to the situation that is contrary to the public interest.
While the Superior Court had concluded that Brighthouse did not have actual notice that the policy lacked insurable interest, it failed to determine whether Brighthouse had inquiry notice of the same. The Court remanded the case to the Superior Court for a determination on this issue in light of the framework that it had adopted and articulated in its decision, and identified a number of facts either stipulated to by the parties or found by the Superior Court, some dating back to December of 2009, that could support a finding that Brighthouse was on inquiry notice of facts tending to suggest that the policy was void.
The Delaware Supreme Court’s decision in Seck requires courts applying Delaware law to take a balanced approach and consider the carrier’s actual and constructive knowledge in addition to the conduct and red flags that may have been available to the investor that seeks to recover premiums paid on a void policy. As the Court stated, in addition to incentivizing investors to actually and thoroughly investigate all policies to avoid the risk of losing their premiums, “[a] fault-based analysis also incentivizes insurers to speak up when the circumstances suggest that a policy is void for lack of insurable interest because they will not be able to retain premiums if they stay silent after being put on inquiry notice, and they might also be responsible for interest payments. In other words, our test incentivizes each player along the chain of these insurance policies to behave in good faith.”
But the Seck decision did not address which premiums an investor may be entitled to recover (all premiums paid for the policy by the current owner and prior investors, or just premiums that the current owner paid either directly or via a securities intermediary). And the decision did not explain the inquiries that carriers and investors should make in their respective capacities as they may pertain to the fault-based analysis under the Restatement.
Unfortunately, the Seck decision will likely increase litigation and its related costs on the return of premium issue—a subject that was fairly straightforward, at least with the Delaware federal courts which had predominantly ordered life insurers to automatically return premium in whole or in part if the policy was found to be void for lack of insurable interest.
By ArentFox Schiff’s Insurance & Reinsurance Practice Group