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New York's top court ruled Wednesday that state law allows people to buy life insurance policies and immediately sell them to investors who make money when the insured person dies.
The Court of Appeals, in a 5-2 ruling, said the practice is legal in New York even where the policy was obtained solely for that purpose.
The case involved transactions before the law was amended by the Legislature last year to regulate so-called "stranger originated life insurance," or STOLIs. Those changes took effect in May.
The question was 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. Instead, the unrelated investor pays the premiums and collects the benefits.
The court majority concluded that state law permits an insured adult, acting "on his own initiative," to get a life insurance policy for the benefit of any person, firm association or corporation he or she chooses.
"Common sense dictates that some outside influence is acceptable -- advice from a broker or pension planner, for example," Judge Carmen Beauchamp Ciparick wrote. Chief Judge Jonathan Lippman and Judges Victoria Graffeo, Susan Read and Theodore Jones Jr. concurred.
Dissenting judges said similar transactions, wagers on death, have been condemned by courts for more than a century.
"There are good reasons why the common law ... invalidated stranger-originated life insurance," Judge Robert Smith wrote. "Even if we ignore the possibility that the owner of the policy will be tempted to murder the insured, this kind of `insurance' has nothing to be said for it. It exists only to enable a bettor with superior knowledge of the insured's health to pick an insurance company's pocket."
Judge Eugene Pigott Jr. agreed with Smith.
In this case, Alice Kramer sued for about $56 million in coverage on behalf of the estate of her late husband, who died in 2008. 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.
The investor Lifemark paid $1.9 million in 2007 to buy one $10 million policy on Kramer, who died the next year. Investors also filed claims with the insurers, who argued the policies were void under New York law.
Calls to attorneys for the insurers, Lifemark and Alice Kramer were not immediately returned.
Smith wrote that the 2009 amendments to the law may have repaired the potential harm.
The change prohibits intermediaries, without any personal interest in an insured individual, from arranging or planning in advance for someone to obtain a policy and designate the intermediary as beneficiary. It also prohibits such transfers, or life settlement contracts, for two years after a policy is issued.
According to the American Council of Life Insurers, about 30 states have enacted laws in the last few years to curb the practice.