Is selling a life insurance policy to an investor illegal "human-life wagering"?
One attorney said there was “nothing wrong” with selling a policy, and the judge replied, “There is something wrong with what happened here.”
Does buying someone else’s life insurance policy constitute illegal human-life wagering? That was the question before the Georgia Supreme Court this week.
Sterling Crum, a secondary market investor, purchased a policy from a stranger named Kelly Couch, who had recently tested positive for HIV at a time when such a diagnosis was viewed as hopeless.
Arguing for Crum, Attorney Scott Zweigel told the court that Georgia law allows the buyer of a life insurance policy to sell or transfer it to “whomever” the individual chooses. “There is nothing wrong with selling a policy on the secondary market,” he told the justices. To rule otherwise would result in “disastrous consequences for the life insurance market and turn the industry “upside down on its head.”
Michael Miller of Cozen O’Conner in Philadelphia argued for Jackson National Life, the company that purchased Life Insurance Co. of Georgia. “The insured can do whatever they want with the policy, but it can’t be a wager,” Miller said.
Both lawyers were subjected to a robust line of questioning that included some challenging statements.
Justice Verda Colvin told Miller that his client, Jackson National Life, “should have done its due diligence to find out all this” in the two-year period for policy review.
And after Zweigel’s argument that there was “nothing wrong” with selling a policy, Justice Nels Peterson replied, “There is something wrong with what happened here.”
A clear summary of what happened came from Judge Julie Carnes of the U.S. Court of Appeals for the Eleventh Circuit, which sent the case to the Georgia Supreme Court with a question about state law.
“This case presents an issue of first impression regarding what constitutes an illegal wagering contract under Georgia insurance law,” Carnes said. “Jackson National Life Insurance Company issued a $500,000 life insurance policy to Kelly Couch after the latter falsely represented that he was not HIV positive. At the time, during the 1990s, HIV-positive individuals had a greatly diminished life expectancy, which led to high demand for HIV-positive insureds willing to engage in viatical settlements.”
Carnes explained in a footnote that a viatical settlement is “an arrangement whereby a person, usually with a terminal illness, sells a life insurance policy to a third party for less than its mature value in order to obtain funds that the insured can use while alive.”
Carnes said it “seems clear that Couch obtained the policy for the sole purpose of selling it to a third-party buyer and pocketing the purchase price.”
All agreed that if Kelly Couch had “entered into a purchase agreement with a buyer at the time he applied for the policy, the policy clearly would have been void as an illegal wagering contract,” Carnes said. “He did not do that, however. Instead, at some undetermined point before or after procurement of the policy, Couch began working with an intermediary—a brokerage agency specializing in viatical settlements—to find a buyer for his policy.”
Eight months later, Sterling Crum entered the scene. He bought the policy and paid the premiums through a reserve fund set up by the broker until after the two-year contestability period for the policy expired in 2001. After that, Crum made the payments directly until he let the policy lapse in 2009. “As it turned out, Couch had died in 2005,” Carnes said. It took Crum 11 years to figure that out and make a claim, which Jackson National Life declined to pay.
Jackson filed a declaratory judgment action seeking a determination that, under Georgia law, the “policy was void ab initio as an illegal human life wagering contract” and also that Crum’s claim was barred by the 11-year delay.
District Court Judge William Ray II of the U.S. District Court for the Northern District of Georgia conducted a bench trial and found that Couch took out the insurance on his own life “with the intent to sell the policy in the near future to one without an insurable interest.” Ray concluded that the insurance policy was “void and unenforceable as an illegal human life wagering contract under Georgia law.”
Crum appealed, arguing that “Couch’s unilateral intent to sell the policy is insufficient to declare the policy void ab initio,” Latin for from the beginning, Carnes said. “Rather, [Crum] contends, Georgia law also requires the knowing and direct involvement of an identified third-party beneficiary at the time of the initial procurement of the policy before one can characterize the policy as an illegal human life wagering contract.”
Carnes said Georgia case law does not provide definitive guidance. So the panel asked the Supreme Court to clear up the picture.
“Thus, the question before this Court is whether a life insurance policy is void ab initio if it is procured by an individual on his own life for the sole purpose of selling the policy to a third party without an insurable interest in the insured, but without the complicity of the ultimate purchaser at the time of procurement.”
And a simple yes or no won’t be enough. The Eleventh Circuit also asked the justices to provide “further guidance as to the circumstances that determine when the policy is void ab initio and when it is not.”