Bloomberg News

Insurers Can Contest Stranger-Originated Policies, Court Rules

September 26, 2011

Sept. 26 (Bloomberg) -- Insurers can challenge life policies that pay investors when the subject of the policy dies, the Delaware Supreme Court ruled, citing state policy, as well as 18th-century British law.

The federal court in Wilmington had asked the state high court to interpret Delaware law on the question of honoring such policies, according to two opinions filed Sept. 20. The insurers said such so-called stranger-originated life insurance policies are invalid because the beneficiaries were part of a “multi- layered trust scheme” in which investors paid the premiums.

“Under Delaware common law, if a life insurance policy lacks an insurable interest at the inception” it is void, even after a two-year contestability period, because it violates state policy against wagering, the justices decided.

The decision arose from two cases filed since 2009 in federal court -- one involving a $6 million policy from Lincoln National Life Insurance Co. on Joseph Schlanger, and the other a $9 million policy on Price Dawe from PHL Variable Insurance Co. (Phoenix), according to court papers. Both people have died.

Life insurance dates to the 16th century, the justices wrote, and in England, “dead pools and the use of insurance to wager on strangers’ lives actually became a popular pastime.”

The British Life Assurance Act of 1774 prohibited the practice, and in 1881, the U.S. Supreme Court said such a wager provided “a sinister counter interest in having the life come to an end,” according to the Delaware decision.

The two lawsuits filed by the insurers are continuing in federal court in Wilmington.

The cases are Variable Insurance v. Price Dawe Insurance Trust, 10-CV-964; and Lincoln National v. Joseph Schlanger 2006 Insurance Trust, 09-CV-506, U.S. District Court, District of Delaware (Wilmington).

--Editors: Andrew Dunn, Stephen Farr

To contact the reporter on this story: Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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