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    The Lawletter Blog

    INSURANCE: Life Insurance—Insurer's Right to Rescind After Incontestability Period Ends

    Posted by Gale Burns on Fri, May 13, 2011 @ 15:05 PM

    The Lawletter Vol 35 No 7, May 6, 2011

    Fred Shackelford, Senior Attorney, National Legal Research Group

    Can an insurer rescind a life insurance policy after the period of incontestability has expired?  In Sun Life Assur. Co. of Can. v. Berck, Civ. No. 09‑498‑SLR, 2011 WL 922289 (D. Del. Mar. 16, 2011), a 77-year-old man obtained a life insurance policy and transferred it to investors in the secondary life insurance market.  After the two-year incontestability period had expired, the insurer sought a declaratory judgment that the policy was void as a wagering contract, or stranger-oriented life insurance ("STOLI") policy.  In a STOLI arrangement, speculators collaborate with an individual to obtain life insurance and then sell some or all of the death benefit to stranger investors.  The Berck court noted that an insured must have an insurable interest and that this requirement discourages the use of insurance as a wagering contract.  A wagering contract gives the policyholder "a sinister counter interest in having the life come to an end."  Id. at *5.  The court ruled that expiration of the incontestability period does not preclude rescission of a life policy for which the policyholder lacked an insurable interest at the time the policy was procured, particularly when the incontestability clause was subject to a fraud proviso.  The court noted that no clear consensus exists as to what constitutes a lack of insurable interest at the time of procurement.  However, the court suggested that no insurable interest exists if a scheme to transfer the policy to an identifiable stranger is in place prior to submitting the application for insurance.  Id. at *7.  The court denied the defendants' motion to dismiss, allowing the insurer to conduct discovery in an effort to identify a specific party that was involved in the scheme from the outset.

    Topics: legal research, Fred Shackelford, Insurance, The Lawletter Vol 35 No 7, life insurance, period of incontestability, wagering contract, STOLI policy

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