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NO. 12-20784
UNITED STATES COURT OF APPEALS
FOR THE FOURTEENTH CIRCUIT
THE HICKS IRREVOCABLE LIFE INSURANCE TRUST,
APPELLANT,
V.
GUARANTY LIFE INSURANCE COMPANY,
APPELLEE.
ON APPEAL TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTEENTH CIRCUIT
BRIEF FOR APPELLANT
ORAL ARGUMENT REQUESTED
Team 78
Counsel for Appellant
ii
QUESTIONS PRESENTED
1. Whether the District Court of New Tejas improperly declared the subject
Policy void for lack of an insurable interest.
2. Whether the District Court of New Tejas properly ordered Guaranty Life to
return to the Trust all life insurance premium payments made on the Policy.
iii
TABLE OF CONTENTS
QUESTIONS PRESENTED .......................................................................................... ii
TABLE OF AUTHORITIES ......................................................................................... vi
OPINION BELOW ........................................................................................................ xi
STATUTORY PROVISIONS ........................................................................................ xi
STATEMENT OF JURISDICTION .............................................................................. 1
STATEMENT OF THE CASE ....................................................................................... 1
I. Secondary Life Insurance Market Background ............................................ 1
II. Factual Background ...................................................................................... 2
III. Procedural Background ................................................................................. 7
STANDARD OF REVIEW ............................................................................................. 9
SUMMARY OF THE ARGUMENT ............................................................................ 10
ARGUMENT ................................................................................................................ 12
I. THE POLICY WAS NOT VOID FOR LACK OF AN
INSURABLE INTEREST BECAUSE THE PROCUREMENT
AND SALE OF THE POLICY CONSTITUTED A VALID
LIFE SETTLEMENT. ................................................................................. 12
A. The Trust had an insurable interest in Mr. Hicks’s life
at the Policy’s inception. ........................................................................ 13
B. The Trust procured the Policy for a legitimate purpose
because the Trust and Presidential did not have the
mutual intent to sell the Policy at its inception. ................................... 16
1. A stranger did not procure the Policy using the
Trust as an instrumentality. ............................................................ 18
2. The Trust did not procure the Policy in contemplation
of an immediate assignment to Presidential. .................................. 21
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3. The Trust did not procure the Policy as a cover
for a wager. ....................................................................................... 23
C. The sale of the Policy was lawful because it did not
negate the insurable interest and life settlements operate
as valuable economic transactions. ....................................................... 26
1. The sale of the Policy did not negate the insurable
interest that existed at the Policy’s inception. ................................ 26
2. Life settlements operate as valuable
economic transactions. ...................................................................... 28
II. THE DISTRICT COURT PROPERLY ORDERED GUARANTY
LIFE TO RETURN PREMIUM PAYMENTS TO THE TRUST
BECAUSE GUARANTY LIFE BREACHED THE VALID
POLICY CONTRACT AND REPAYMENT IS NECESSARY
FOR RESTITUTION AND TO AVOID UNJUST ENRICHMENT. .......... 30
A. Guaranty Life breached the Policy by unlawfully rescinding
because the Trust did not materially misrepresent
or negligently misrepresent information............................................... 31
1. The Trust did not misrepresent material information. ................... 31
a. While misrepresentations were made, they were
not material to the formation of the Policy. .......................... 32
b. The Trust lacked knowledge of material
misrepresentations. ................................................................ 34
2. The Trust did not negligently misrepresent information. .............. 36
a. The Trust did not negligently supply
false information. ................................................................... 36
b. Guaranty Life did not reasonably rely on
false information. ................................................................... 37
c. Guaranty Life did not suffer economic injury. ...................... 39
3. The incontestability clause barred a challenge to
the Policy. .......................................................................................... 41
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B. The Trust is entitled to restitution. ....................................................... 43
C. Even if the Policy was void ab initio, the Trust is entitled
to a return of the payments to avoid unjust enrichment. ..................... 45
CONCLUSION ............................................................................................................. 48
CERTIFICATE OF SERVICE
CERTIFICATE OF COMPLIANCE
vi
TABLE OF AUTHORITIES
CASES
Adam Miguez Funeral Home, Inc. v. First Nat’l Life Ins. Co.,
234 So. 2d 496 (La. Ct. App. 1970) ................................................................... 19
Aetna Life Ins. Co. v. France,
94 U.S. 561 (1876) ................................................................................. 24, 26, 46
Alfa Mut. Gen. Ins. Co. v. Oglesby,
711 So. 2d 938 (Ala. 1997) ................................................................................ 32
Associated Elec. & Gas Ins. Servs., Ltd. v. Rigas,
382 F. Supp. 2d 685 (E.D. Pa. 2004) ................................................................. 43
AXA Equitable Life Ins. Co. v. Infinity Fin. Grp., LLC,
608 F. Supp. 2d 1349 (S.D. Fla. 2009) .............................................................. 27
Baker v. Ky. Farm Bureau Mut. Ins. Co.,
120 S.W.3d 713 (Ky. Ct. App. 2002) ................................................................. 33
Bankers’ Reserve Life Co. v. Matthews,
39 F.2d 528 (8th Cir. 1930) ............................................................. 17, 27, 30, 35
Batchelor v. Am. Health Ins. Co.,
107 S.E.2d 36 (S.C. 1959) ................................................................................. 32
Cedars Sinai Med. Ctr. v. Mid-West Nat’l Life Ins. Co.,
118 F. Supp. 2d 1002 (C.D. Cal. 2000) ............................................................. 40
Cozzi Iron & Metal, Inc. v. U.S. Office Equip., Inc.,
250 F.3d 570 (7th Cir. 2001) ............................................................................. 38
Curanovic v. N.Y. Cent. Mut. Fire Ins. Co.,
762 N.Y.S.2d 148 (N.Y. App. Div. 2003) ........................................................... 40
Dairyland Ins. Co. v. Kammerer,
327 N.W.2d 618 (Neb. 1982) ............................................................................. 31
Derrico v. Bungee Int’l Mfg. Co.,
989 F.2d 247 (7th Cir. 1993) ............................................................................... 9
vii
Eckel v. Renner,
41 Ohio St. 232 (1884) ....................................................................................... 24
Essex Ins. Co. v. Zota,
985 So. 2d 1036 (Fla. 2008) ............................................................................... 19
Fed. Kemper Life Assurance Co. v. First Nat’l Bank of Birmingham,
712 F.2d 459 (11th Cir. 1983) ........................................................................... 32
Frank Kipp ex rel. Hicks Irrevocable Life Ins. Trust v.
Guar. Life Ins. Co.,
No. 28-cv-9563 (D.N. Tej. 2011) .......................................................................... x
Gonzalez v. Eagle Ins. Co.,
948 So. 2d 1 (Fla. Dist. Ct. App. 2006) ................................................. 30, 45, 46
Grigsby v. Russell,
222 U.S. 149 (1911) ............................................................................... 13, 27, 28
Hardaway Co. v. Parsons, Brinckerhoff, Quade & Douglas, Inc.,
479 S.E.2d 727 (Ga. 1997) ................................................................................. 40
Hartford Life & Annuity Ins. Co. v. Doris Barnes Family
2008 Irrevocable Trust,
No. CV 10-7560 PSG (DTBX), 2012 WL 688817
(C.D. Cal. Feb. 3, 2012) ......................................................................... 17, 27, 42
Hillery v. Allstate Indem. Co.,
705 F. Supp. 2d 1343 (S.D. Ala. 2010) .............................................................. 37
Jeffries v. Econ. Life Ins. Co.,
89 U.S. (22 Wall.) 47 (1874) ........................................................................ 32, 38
Keckley v. Coshocton Glass Co.,
99 N.E. 299 (Ohio 1912) .............................................................................. 40, 46
Kramer v. Phoenix Life Ins. Co.,
15 N.Y.3d 539 (2010) ............................................................................. 18, 21, 24
Lincoln Life & Annuity Co. of N.Y. v. Berck,
No. D056373, 2011 WL 1878855 (Cal. Ct. App. May 17, 2011) ...................... 13
Lincoln Nat’l Life Ins. Co. v. Calhoun,
596 F. Supp. 2d 882 (D.N.J. 2009) ........................................................ 21, 23, 26
viii
Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman
Irrevocable Life Trust,
638 F. Supp. 2d 1170 (C.D. Cal. 2009) ................................................. 14, 17, 18
Lincoln Nat’l Life Ins. Co. v. Snyder,
722 F. Supp. 2d 546 (D. Del. 2010) ................................................................... 40
Lynn v. Village of West City,
345 N.E.2d 172 (Ill. App. Ct. 1976) .................................................................. 19
McNevins v. Prudential Ins. Co. of Am.,
108 N.Y.S. 745 (App. Term 1908) ..................................................................... 24
Mutual Life Ins. Co. of N.Y. v. Hilton-Green,
241 U.S. 613 (1916) ........................................................................................... 32
New England Mut. Life Ins. Co. v. Caruso,
535 N.E.2d 270 (N.Y. 1989) .............................................................................. 42
Nota Constr. Corp. v. Keyes Assocs., Inc.,
694 N.E.2d 401 (Mass. App. Ct. 1998) ............................................................. 40
Ohio Nat’l Life Assurance Corp. v. Davis,
No. 10 C 2386, 2011 WL 2680500 (N.D. Ill. July 6, 2011) ............................... 42
PHL Variable Ins. Co. v. Jolly,
800 F. Supp. 2d 1205 (N.D. Ga. 2011) .................................................. 36, 38, 44
PHL Variable Ins. Co. v. Lucille E. Morello 2007 Irrevocable Trust
ex rel. BNC Nat’l Bank,
645 F.3d 965 (8th Cir. 2011) ................................................................. 31, 34, 46
PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust
ex rel. Christiana Bank & Trust Co.,
28 A.3d 1059 (Del. 2011) ................................................................. 13, 14, 27, 42
PHL Variable Ins. Co. v. Robert Gelb Irrevocable Trust,
No. 10 C 957, 2010 WL 4363377 (N.D. Ill. Oct. 27, 2010) ............................... 44
Principal Life Ins. Co. v. DeRose,
No. 1:08-CV-2294, 2011 WL 4738114 (M.D. Pa. Oct. 5, 2011) .................... 9, 44
ix
Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust,
No. CA 08-488-MPT, 2012 WL 2401717 (D. Del. June 26, 2012) .......... 9, 18, 23
Pruco Life Ins. Co. v. Brasner,
No. 10-80804-CIV, 2011 WL 134056 (S.D. Fla. Jan. 7, 2011) .................. passim
Rylander v. Allen,
53 S.E. 1032 (Ga. 1906) ............................................................................... 24, 27
Sadler v. Loomis Co.,
776 A.2d 25 (Md. Ct. Spec. App. 2001) ............................................................. 18
Story v. Safeco Life Ins. Co.,
40 P.3d 1112 (Or. Ct. App. 2002) ...................................................................... 37
Sun Life Assurance Co. of Can. v. Paulson,
No. CIV.07-3877(DSD/JJG), 2008 WL 451054
(D. Minn. Feb. 15, 2008) ................................................................................... 17
Travelers Ins. Co. v. Reiziz,
13 F. Supp. 819 (E.D.N.Y. 1935)................................................................. 21, 23
Trinh v. Metro. Life Ins. Co.,
894 F. Supp. 1368 (N.D. Cal. 1995) ...................................................... 31, 32, 35
TTSI Irrevocable Trust v. ReliaStar Life Ins. Co.,
60 So. 3d 1148 (Fla. Dist. Ct. App. 2011) ................................................... 30, 43
United Benefit Life Ins. Co. v. Schott,
177 S.W.2d 581 (Ky. Ct. App. 1943) ................................................................. 32
Valton v. Nat’l Fund Life Assurance Co.,
20 N.Y. 32 (1859) ............................................................................................... 24
Werenzinski v. Prudential Ins. Co. of Am.,
14 A.2d 279 (Pa. 1940) ...................................................................................... 18
William Penn Life Ins. Co. of N.Y. v. Sands,
912 F.2d 1359 (11th Cir. 1990) ........................................................................... 9
Wuliger v. Mfrs. Life Ins. Co.,
567 F.3d 787 (6th Cir. 2009) ......................................................................... 9, 46
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STATUTORY PROVISIONS
28 U.S.C. § 1291 (2006) ................................................................................................. 1
N. Tej. § 1407 .......................................................................................................... xi, 41
N. Tej. § 1408 .................................................................................................... xi, 41, 43
N. Tej. § 1409 .............................................................................................. xi, 13, 14, 26
N. Tej. § 1409 (amended 2009) .................................................................................... xii
RULE OF PROCEDURE
Fed. R. Civ. P. 56(a) ....................................................................................................... 9
SECONDARY SOURCES
Neil A. Doherty & Hal J. Singer, The Benefits of a Secondary
Market for Life Insurance Policies,
38 Real Prop. Prob. & Tr. J. 449 (2003) ........................................................... 29
Eryn Mathews, Stoli on the Rocks: Why States Should Eliminate
the Abusive Practice of Stranger-Owned Life Insurance,
14 Conn. Ins. L.J. 521 (2008) ...................................................................... 28, 29
Douglas R. Richmond, Investing with the Grim Reaper: Insurable
Interest and Assignment in Life Insurance,
47 Tort Trial & Ins. Prac. L.J. 657 (2012) ........................................................ 28
xi
OPINION BELOW
The United States District Court, District of New Tejas issued its opinion on
December 14, 2011. The opinion appears at Frank Kipp ex rel. Hicks Irrevocable
Life Insurance Trust v. Guaranty Life Insurance Co., No. 28-cv-9563 (D.N. Tej.
2011).
STATUTORY PROVISIONS
N. Tej. § 1407 – Incontestability
All life insurance policies, delivered or issued for delivery in this state, shall
contain in substance a provision stating that the policy shall be incontestable
after being in force during the life of the insured for a period of two years
from its date of issue, and that, if a policy provides that the death benefit
provided by the policy may be increased, or other policy provisions changed,
upon the application of the policyholder and the production of evidence of
insurability, the policy with respect to each such increase or change shall be
incontestable after two years from the effective date of such increase or
change, except in each case for nonpayment of premiums or violation of policy
conditions relating to service in the armed forces.
N. Tej. § 1408 – Rescission
If a representation is false in a material point, whether affirmative or
promissory, the injured party is entitled to rescind the contract from the time
the representation becomes false.
N. Tej. § 1409 – Insurable Interest
(a) An insurable interest, with reference to life and disability insurance, is an
interest based upon a reasonable expectation of pecuniary advantage through
the continued life, health, or bodily safety of another person and consequent
loss by reason of that person’s death or disability or a substantial interest
engendered by love and affection in the case of individuals closely related by
blood or law.
(b) An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance on
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his or her own life, health, or bodily safety and have the policy made payable
to whomsoever he or she pleases, regardless of whether the beneficiary
designated has an insurable interest.
(c) An insurable interest shall be required to exist at the time the contract of
life or disability insurance becomes effective, but need not exist at the time
the loss occurs.
N. Tej. § 1409 – Insurable Interest (Amended August 28, 2009)
(d) Trusts and special purpose entities that are used to apply for and initiate
the issuance of policies of insurance for investors, where one or more
beneficiaries of those trusts or special purpose entities do not have an
insurable interest in the life of the insured, violate the insurable interest law
and the prohibition against wagering on life.
(e) Any device, scheme, or artifice designed to give the appearance of an
insurable interest where there is no legitimate insurable interest violates the
insurable interest laws.
(f) This section shall not be interpreted to define all instances in which an
insurable interest exists.
(g) The 2009 Amendments are not to be applied retroactively.
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STATEMENT OF JURISDICTION
This Court has jurisdiction pursuant to 28 U.S.C. § 1291 (2006). Courts of
appeals shall have jurisdiction of appeals from all final decisions of the district
courts of the United States. Id. This case is an appeal from a final judgment
ordered by the United States District Court of New Tejas. R. at 15.
STATEMENT OF THE CASE
I. Secondary Life Insurance Market Background
The instant case relates to a developing derivative market for life insurance
involving the sale of life insurance policies to third parties. R. at 3. This market
has bred two types of policies: life settlements and stranger originated life
insurance (“STOLI”) policies. R. at 3. A life settlement transaction occurs when an
existing life insurance policy is sold to a third party. R. at 3. Life settlements are
lawful as long as the policy was procured for a legitimate purpose and an insurable
interest existed at the policy’s inception. R. at 3.
In contrast, STOLI policies are unlawful because they are not sought for
legitimate needs, but rather for resale to strangers who lack an insurable interest in
the insured’s life. R. at 3. STOLI policies are considered illegal wagering contracts
because their issuance results in speculation on the lives of others. R. at 3. The
typical STOLI policy targets financially successful individuals aged seventy years or
older. R. at 4. These individuals are more attractive investments to STOLI
promoters due to their qualifications for multimillion dollar insurance policies and
shorter life expectancies. R. at 4. STOLI schemes are crafted to circumvent the law
2
and cover the fact that the policies are procured to wager on human life, instead of
to satisfy legitimate insurance needs. R. at 3. For this reason, applicants and third
parties procuring STOLI polices frequently answer specific application questions
falsely in order to obtain the unlawful insurance policies. R. at 4.
Due to this newly created STOLI market, many states, including New Tejas,
have enacted insurable interest laws that require a policyholder to have an
identifiable interest in the insured’s continued life at the time the policy is
issued. R. at 3; see R. at 5. These laws were created to protect the integrity of life
insurance and prevent the wagering on human life. R. at 3. Insurance companies
have also implemented precautions such as requiring specific questions in the
application regarding the insured’s net worth and income, the purpose of the
insurance sought, and any intent to transfer the policy in order to prevent the
issuance of STOLI policies. R. at 4.
II. Factual Background
Mr. Don Juan W. Hicks (“Mr. Hicks”), a 72-year-old retired cab driver living
on social security in a low-rent apartment, discussed the virtues of life insurance
with his biological son, Sydney Hicks (“Sydney”). R. at 2, 10-11. Sydney contacted
his father only after insurance agent Reggie Hightower (“Hightower”) solicited
Sydney. R. at 10. After learning of the benefits, such as estate planning and
financial assurance, Mr. Hicks agreed to purchase a policy (“Policy”) worth $500,000
for Sydney’s benefit on the condition that Sydney agreed to pay the premiums. R. at
10. Sydney reassured his father he would take care of the premiums. R. at 10.
3
Hightower told Sydney he would arrange for reimbursement of the initial premium
payment. R. at 11. In furtherance of procuring the Policy, the Hicks Irrevocable
Life Insurance Trust (“Trust”) was created on February 5, 2007, naming Mr. Hicks
as the grantor and Sydney as the sole beneficiary. R. at 7.
Before the application for the Policy was submitted, Hightower sent a
friendly email to the Vice President of Business Development at Presidential
Holdings, LLC (“Presidential”) discussing fantasy football and the Hicks Policy. R.
at 10. Without consulting the Trust, Hightower “confirmed” the face value of the
Policy at $20 million and stated that he and Presidential should be able to flip the
Policy for three percent of the face value. R. at 10. However, Sydney testified that
he did not recall discussing the face value of the Policy with Hightower. R. at 10.
Mr. Hicks also testified that he was unaware of the increase in the amount of the
Policy. R. at 10.
Through Hightower, the Trust submitted a life insurance application
(“Application”) and Statement of Client Intent (“SOCI”) form to Guaranty Life
Insurance Company (“Guaranty Life”). R. at 7; Ex. 1, at 17; Ex. 3, at 22-23. The
Application submitted by Hightower represented Mr. Hicks as a 72-year-old, self-
employed entrepreneur living in an oceanfront property. R. at 7. His net worth was
listed as $1.2 billion with an annual income of $8.5 million. R. at 7. The Trust does
not dispute the misrepresentations related to Mr. Hicks’s finances. R. at 11 n.10.
However, Sydney testified that he could not recall if he signed blank documents or if
Hightower already filled in the relevant information. R. at 10 n.9. Mr. Hicks
4
asserted that he merely signed the papers as presented to him. R. at 11.
Collectively, the forms contained various spelling mistakes and remained blank in
multiple areas. See Ex. 1, at 17; Ex. 5, at 31, 33-34. Upon signing the forms, both
the Trust and Mr. Hicks affirmed that the statements made in the application were
“full, complete, and true to [their] best knowledge and belief.” Ex. 1, at 17.
Following discovery, Guaranty Life’s Chief Underwriter stated the company would
not have issued the Policy had it known of any misrepresentations. R. at 12.
In the SOCI, Mr. Hicks and the Trust declared their intent in procuring the
Policy. Ex. 3, at 22-23. The form stated none of the premium payments would be
borrowed, the payments would be made by cash and equivalents, the Policy was not
being purchased for the purpose of transferring to a third party within five years of
issuance, no agreement for another party to obtain rights to the Policy existed, and
no financial inducement was connected with the application. R. at 7; Ex. 3, at 22-
23. The Policy ultimately included a clause stating Guaranty Life relied on
everything in the Application and SOCI and any misrepresentations are construed
as material. Ex. 3, at 22-23. The SOCI also provided that Guaranty Life was
authorized to review the Trust Agreement before issuing the Policy. Ex. 3, at 23.
Guaranty Life conducted an underwriting process for the Policy based
entirely on Mr. Hicks’s medical exam and the Application Hightower submitted on
the Trust’s behalf. R. at 7. During this underwriting process, two Guaranty Life
underwriters discussed Mr. Hicks’s occupation as a cab driver, doubted his net
worth at $1.2 billion, and questioned whether any third parties were involved in the
5
procurement of the Policy. R. at 11. On February 8, 2007, one underwriter emailed
another stating, “A $1.2 billion cab driver? Game over.” R. at 11. Then on
February 15, 2007, the other underwriter emailed asking, “Have we looked at any
third parties that may be driving the Hicks application?” R. at 11. Even with these
concerns, Guaranty Life offered the Trust Policy No. UT8675309 only two days after
the Trust submitted the application. R. at 7. The Policy had an issue date of
February 16, 2007, a planned first year premium of $955,827, and a face value of
$20 million. R. at 7-8. The Application, the SOCI, and the Policy Acceptance Form
named the Trust as the policyholder and Sydney as the beneficiary. See R. at 9; Ex.
1, at 17; Ex. 3, at 23; Ex. 4, at 25. Hightower received $1.4 million in commission
from Guaranty Life for the sale of the Policy. R. at 8 n.4.
Guaranty Life delivered the Policy and Policy Acceptance Form to the Trust
on March 5, 2007. R. at 8. On that same day, Sydney sent the first three months’
premium payment of $238,956.75 to Guaranty Life, Hightower returned the fully
executed Policy Acceptance form, and the Policy became effective. R. at 8 & n.5.
Although the New Tejas incontestability statute provides for a two-year
contestability period from the effective date, Section 21 of the Policy started this
period on the issue date. R. at 5; Ex. 2, at 20. The parties further agreed Guaranty
Life may contest the validity of the Policy after the contestability period. Email
from Jennifer W. Floyd, Clerk, United States Court of Appeals for the Fourteenth
Circuit, to 2013 Judicial Panel No. 35 (Oct. 8, 2012) (Email to Counsel in Record).
6
The Policy Acceptance Form declared that the insured’s statements in the
Application “remain[ed] full, complete, and true as of this date.” R. at 8.
Two days after submitting the first premium payment on the Policy, Sydney
executed a Beneficial Interest Transfer Agreement (“BITA”) to Presidential. R. at 8.
The BITA stated that Presidential did not participate in the procurement of the
Policy, did not previously communicate with the Trust, and did not make any
previous agreements with Trust. Ex. 5, at 28. The BITA assigned all of his
beneficial interest in the Policy to Presidential. R. at 8. In consideration,
Presidential gave Sydney $838,956.75, equaling the value of three months’
premiums and three percent of the Policy’s face value. R. at 9. Presidential then
funded all further payments. R. at 13 n.11.
Contemplation of litigation began when Guaranty Life received the
Designation of Owner and Designation of Beneficiary forms from Presidential in
October 2008. R. at 9. These forms documented the Trust’s wish to transfer
ownership of the Policy. R. at 9. According to the Policy contract, Guaranty Life
agreed to be bound by any assignment that had consent of the irrevocable
beneficiary as of the assignment date. Ex. 2, at 20. This contract provision only
allowed Guaranty Life to take investigatory action before the filing of the
assignment. Ex. 2, at 20. Sydney consented to the assignment when he executed
the BITA. R. at 8. Still, Guaranty Life denied these change requests by
Presidential and instead decided to further investigate the issuance of the Policy.
R. at 9; Ex. 6, at 36.
7
On December 8, 2008, the Trust replied to Guaranty Life acknowledging its
right, as stated in the contract, to change the ownership and beneficiary of the
Policy. R. at 9; see Ex. 6, at 36; Ex. 7, at 38. The letter threatened a lawsuit to
recover damages for Guaranty Life’s breach of contract due to its failure to comply
with the transfer request. R. at 9; Ex. 7, at 38. Guaranty Life still did not process
the request. R. at 9; see Ex. 8, at 40-41. Instead, on November 19, 2008, Guaranty
Life demanded the Trust produce eighteen categories of documents and information
in order to “confirm the accuracy” of the statements provided in the Application. R.
at 9; Ex. 8, at 40-41. Guaranty Life threatened rescission of the Policy if the Trust
did not comply. R. at 9; Ex. 8, at 40-41. Presidential and the Trust responded by
filing a lawsuit in January of 2009. R. at 9, 13. Guaranty Life continued to accept
premium payments, even after rescinding the Policy and notifying Presidential that
no further premium payments were due. R. at 13 n.11. Presidential paid a total of
$4,779,135 in premiums through 2011. R. at 12-13.
III. Procedural Background
The Trust and Presidential initiated a lawsuit on January 5, 2009, in
response to Guaranty Life’s refusal to immediately record the change of ownership
forms. R. at 13. The Trust alleged claims against Guaranty Life for breach of
contract, conversion, breach of the covenant of good faith and fair dealing, and
fraud. R. at 13. Presidential also alleged fraud, as well as intentional and negligent
interference with contract and prospective economic advantage. R. at 13.
Collectively, the Trust and Presidential sought damages of $4.7 million in premium
8
payments paid by the Trust to Guaranty Life, as well as $600,000 paid to Sydney
Hicks in exchange for the execution of the BITA. R. at 13. Guaranty Life filed a
counterclaim on June 6, 2009, which sought to declare the Policy void for lack of an
insurable interest and to retain the premiums paid under the Policy. R. at
13. Guaranty Life submitted the Policy premiums paid to date, totaling $4,779,135,
into the Registry of the Court. R. at 13 n.11.
Both parties moved for summary judgment on May 12, 2011, the Trust and
Presidential on the claims for breach of contract and monetary damages and
Guaranty Life for rescission and retention of premiums paid on the Policy to
date. R. at 13. The United States District Court of New Tejas (“District Court”)
filed its judgment on December 14, 2011. R. at 15. The District Court granted in
part Guaranty Life’s Motion for Summary Judgment, declaring the Policy void ab
initio due to lack of an insurable interest, and denied the Trust and Presidential’s
Motion for Summary Judgment on each of the affirmative claims. R. at 14. The
District Court also denied in part Guaranty Life’s motion to the extent that it
sought to retain the Policy premiums, finding “there is no legal basis for Guaranty
Life’s request” and principles of rescission “require an insurer to return all
premiums.” R. at 14. As such, the District Court granted the Trust and
Presidential’s Motion for Summary Judgment, ordering Guaranty Life to return all
premiums to the Trust. R. at 15.
9
STANDARD OF REVIEW
This Court reviews a district court’s grant of summary judgment de novo.
Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 792 (6th Cir. 2009). The review is
“without deference for the view of the district judge and hence almost as if the
motion had been made to [this Court] directly.” Derrico v. Bungee Int’l Mfg. Co.,
989 F.2d 247, 249 (7th Cir. 1993). As such, this Court’s review is plenary. William
Penn Life Ins. Co. of N.Y. v. Sands, 912 F.2d 1359, 1361 (11th Cir. 1990).
An appellate court can affirm the district court only if, after construing the
evidence in the light most favorable to the nonmoving party, it finds there is no
genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(a); Sands, 912 F.2d at 1361. In
viewing all facts and drawing all reasonable inferences in favor of the non-movant,
the court must take as true all allegations of the non-movant that conflict with
those of the movant and resolve all doubts against the movant. Principal Life Ins.
Co. v. Lawrence Rucker 2007 Ins. Trust, No. CA 08-488-MPT, 2012 WL 2401717, at
*4 (D. Del. June 26, 2012). This review also requires the court to treat direct and
circumstantial evidence alike. Id. at *4. Summary adjudication serves to dispose of
those claims not presenting a genuine issue of material fact and for which “a jury
trial would be an empty and unnecessary formality.” Principal Life Ins. Co. v.
DeRose, No. 1:08-CV-2294, 2011 WL 4738114, at *4 (M.D. Pa. Oct. 5, 2011); see Fed.
R. Civ. P. 56(a).
10
SUMMARY OF THE ARGUMENT
This Court should reverse the District Court as to the validity of the Policy
and affirm as to the repayment of premiums. First, the sale of the Policy
constituted a valid life settlement because the Trust had an insurable interest at
the Policy’s inception, procured the Policy with a legitimate purpose, and
subsequently sold the Policy in a valid transaction. The District Court improperly
construed the facts and drew inferences in the light most favorable to the moving
party, Guaranty Life, in granting its Motion for Summary Judgment.
Life insurance policyholders may lawfully sell a policy to a third party that
lacks an insurable interest in the insured’s life as a valid life settlement if the policy
was procured for a legitimate purpose and there was an insurable interest at the
policy’s inception. The Trust possessed an insurable interest in Mr. Hicks’s life on
the effective date of the Policy because Sydney had an insurable interest in his
father’s life and was sole beneficiary of the Trust. Therefore, an insurable interest
existed at the Policy’s inception.
The Policy was procured for a legitimate purpose because the Trust and
Presidential lacked mutual intent to sell the Policy at its inception. Presidential did
not work with the Trust to procure the Policy with mutual contemplation of an
immediate assignment as a cover for a wager policy. The sale of the Policy did not
negate the initial insurable interest because life settlements are designed as
insurance transactions to sell a policy and transfer the beneficial interest lawfully.
Because an insurable interest existed at the Policy’s inception, the Policy was
11
procured for a legitimate purpose, and the sale of the Policy constituted a valid life
settlement, the Policy was not void for lack of an insurable interest. In granting
Guaranty Life’s Motion for Summary Judgment, the District Court improperly
construed the facts and inferences in the light most favorable to the moving party,
Guaranty Life. As an insurable interest existed at the Policy’s inception and the
subsequent sale of the Policy was valid, the Trust is entitled to judgment as a
matter of law. This Court should reverse the decision of the District Court and find
the Policy valid.
Second, the Trust is entitled to a return of all premium payments made on
the Policy as restitution for Guaranty Life’s breach. The Trust did not make
material or negligent misrepresentations in procuring the Policy. Thus, Guaranty
Life breached its contract with the Trust by rescinding the Policy without cause,
and it is not entitled to challenge misrepresentations outside the contestability
period. A refund of premiums paid is required to return parties to the status quo
following rescission or a declaration that the policy is void. Equitable remedies
necessitate that an unjustly enriched party make restitution to the other party.
Theories of equitable remedies require that Guaranty Life return all premium
payments to the Trust. The District Court properly found no genuine issues of
material fact existed and the Trust was entitled to judgment as a matter of law.
Thus, Guaranty Life should be required to return all payments made on the Policy.
This Court should reverse as to the validity of the Policy and affirm as to the
repayment of premiums.
12
ARGUMENT
This Court should reverse the District Court’s decision regarding the Policy’s
validity and affirm the decision regarding the return of premium payments. First,
the District Court erred in finding the Policy void for lack of an insurable interest.
In viewing all facts and drawing inferences in favor of the non-movant, the Trust,
this Court should find the Trust is entitled to a judgment as a matter of law. An
insurable interest existed at the time of the Policy’s inception, and the subsequent
sale of the Policy constituted a valid life settlement. Second, the District Court
properly ordered Guaranty Life to return all life insurance premium payments
made on the Policy to the Trust. Guaranty Life breached the Policy contract, and
the Trust is entitled to restitution. Alternatively, even if this Court finds the Policy
void ab initio, the Trust is still entitled to a return of the payments to avoid unjust
enrichment. The District Court properly construed all facts in favor of the non-
movant, Guaranty Life, and granted judgment as a matter of law to the Trust.
Thus, this Court should reverse the District Court’s decision as to the validity of the
Policy and affirm as to the return of the premium payments.
I. THE POLICY WAS NOT VOID FOR LACK OF AN INSURABLE
INTEREST BECAUSE THE PROCUREMENT AND SALE OF THE
POLICY CONSTITUTED A VALID LIFE SETTLEMENT.
The Policy constituted a valid life settlement because the Trust had an
insurable interest at the Policy’s inception, procured the Policy with a legitimate
purpose, and subsequently sold the Policy in a valid transaction. A life insurance
policyholder may lawfully sell a policy to a third party that lacks an insurable
13
interest in the insured’s life as a valid life settlement if the policy was procured for a
legitimate purpose and an insurable interest existed at the policy’s inception. Pruco
Life Ins. Co. v. Brasner, No. 10-80804-CIV, 2011 WL 134056, at *1 (S.D. Fla. Jan. 7,
2011).
The District Court improperly construed the facts and drew inferences in the
light most favorable to the moving party, Guaranty Life, in granting its Motion for
Summary Judgment. Because an insurable interest existed at the Policy’s
inception, the Policy was procured for a legitimate purpose, and the sale of the
Policy constituted a valid life settlement, the Policy was not void for lack of an
insurable interest. This Court should reverse the District Court’s decision and find
the Policy valid.
A. The Trust had an insurable interest in Mr. Hicks’s life at the Policy’s
inception.
The Trust had an insurable interest in the insured when it procured the
Policy because it had an interest in Mr. Hicks’s continued life. An insurable
interest exists when an individual has an interest in the continuation of another’s
life. Grigsby v. Russell, 222 U.S. 149, 155 (1911). The insurable interest
requirement applies at the time the life insurance contract becomes effective. N.
Tej. § 1409(c); PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust ex rel.
Christiana Bank & Trust Co., 28 A.3d 1059, 1074 (Del. 2011). An individual or
trust with an insurable interest in the insured must be the holder of the policy at
the time of the policy’s inception. Lincoln Life & Annuity Co. of N.Y. v. Berck, No.
D056373, 2011 WL 1878855, at *5 (Cal. Ct. App. May 17, 2011).
14
Under New Tejas law, an insured always has an insurable interest in his own
life. N. Tej. § 1409(b). However, if the insured is not the policyholder, the actual
owner must have an insurable interest in the life of the insured at the time of the
policy’s inception as well. Price Dawe, 28 A.3d at 1078. New Tejas Statutes define
an insurable interest for the purposes of life insurance as (1) “an interest based
upon a reasonable expectation of pecuniary advantage through the continued life
. . . of another person and consequent loss by reason of that person’s death” or (2) “a
substantial interest engendered by love and affection in the case of individuals
closely related by blood or law.” N. Tej. § 1409(a).
The Delaware Supreme Court held the proper inquiry for determining
whether an insurable interest in the insured’s life exists at a policy’s inception is
whether the owner of the policy, not the policy’s beneficiaries, had an insurable
interest. Price Dawe, 28 A.3d at 1078. When a trust holds the policy rather than
the insured, the insurable interest of the trust’s beneficiaries can provide the
necessary insurable interest to the trust. Id. Trusts are commonly used as estate
planning tools to hold life insurance policies and to use the insurance proceeds to
pay the deceased’s estate taxes upon the insured’s death. Lincoln Nat’l Life Ins. Co.
v. Gordon R.A. Fishman Irrevocable Life Trust, 638 F. Supp. 2d 1170, 1174 (C.D.
Cal. 2009). Thus, the owner of a policy, which may include the insured or a trust,
must have an insurable interest in the insured’s continued life at the time of the
policy’s inception, regardless of whether any policy beneficiaries have an insurable
interest. Price Dawe, 28 A.3d at 1078.
15
Here, an insurable interest in the life of Mr. Hicks existed at the inception of
the Policy. While Mr. Hicks undoubtedly had an insurable interest in his own
continued life and agreed to purchase a life insurance policy, he was not the stated
owner of the Policy. Sydney Hicks was also not the owner of the Policy, although he
had an insurable interest in his father’s life as well. In addition to these two
insurable interests, the Trust had an insurable interest in the life of Mr. Hicks upon
the Policy’s effective date, and the Trust was the ultimate owner of the Policy.
The Trust submitted the Application to Guaranty Life seeking the issuance of
the Policy. The Application, the SOCI, and the Policy Acceptance Form specifically
named the Trust as the owner. The Trust’s insurable interest in Mr. Hicks’s life
originates from Sydney’s role as beneficiary of the Trust. The applicable insurable
interest is not derived merely from Sydney’s relationship as the insured’s son or his
position as the beneficiary to the Policy. A policyholder must have an insurable
interest in the insured’s life. In this case, the Trust is the policyholder and Sydney
is the beneficiary of the Trust; thus, the Trust’s insurable interest is established
through its beneficiary’s, Sydney’s, insurable interest in his father’s continued life.
Further, the Trust, with Sydney as beneficiary, had an insurable interest in
Mr. Hicks’s life because it fit within the definition of New Tejas Statutes Section
1409(a). As Mr. Hicks’s son, Sydney had a reasonable expectation of pecuniary
advantage through Mr. Hicks’s continued life and a reasonable expectation of
consequent loss through Mr. Hicks’s death. Under section 1409(a), Sydney also had
a substantial interest engendered by love and affection in Mr. Hicks’s continued life
16
due to the close blood relation of biological father and son. Sydney’s interest in Mr.
Hicks’s life qualified as the Trust’s interest because he was the sole beneficiary of
the Trust. Because Sydney had an insurable interest in Mr. Hicks’s life and was
sole beneficiary of the Trust, the Trust possessed an insurable interest in Mr.
Hicks’s life on the effective date of the Policy.
In 2009, the New Tejas legislature added four provisions to New Tejas
Statutes Section 1409 supplementing the existing insurable interest requirements.
Although the Amendments are not to be applied retroactively, per section 1409(g), if
this Court were to consider the Amendments in determining the instant case and
how it would affect future cases, the law would still recognize the Trust’s insurable
interest in Mr. Hicks’s life. Section 1409(d) prohibits trusts from establishing
insurable interests only when one or more beneficiaries of the trust do not have an
insurable interest in the life of the insured. As Sydney was the sole beneficiary of
the Trust and had an insurable interest in Mr. Hicks’s life, the Trust meets the
requirements of section 1409(d). Therefore, under both the applicable statute and
the amended statute, an insurable interest existed at the inception of the Policy,
and this Court should reverse the District Court’s finding of lack of an insurable
interest.
B. The Trust procured the Policy for a legitimate purpose because the
Trust and Presidential did not have the mutual intent to sell the Policy
at its inception.
The lack of mutual intent between the Trust and Presidential to engage in
the sale of the Policy at its inception demonstrates that the Trust procured the
17
Policy for a legitimate purpose. A policy is rendered void ab initio for lack of an
insurable interest only when the insurer can prove an agreement existed between
the insured and a third party without an insurable interest at the policy’s inception,
destroying the requirement of good faith. Brasner, 2011 WL 134056, at *4. To
prove the unlawful mutual intent to sell or assign a policy to a third party at the
policy’s inception, there must be evidence of an agreement between the parties
shown through a three-part mutual intent test: (1) a stranger procuring the policy
(2) with the mutual contemplation of an immediate assignment (3) as a cover for a
wager. Bankers’ Reserve Life Co. v. Matthews, 39 F.2d 528, 529 (8th Cir. 1930).
The insured’s intent alone is “irrelevant without facts or allegations suggesting that
a third party lacking an insurable interest intended to acquire the policy” at the
time it was procured. Sun Life Assurance Co. of Can. v. Paulson, No. CIV.07-
3877(DSD/JJG), 2008 WL 451054, at *2 (D. Minn. Feb. 15, 2008). Similarly, intent
solely on the part of the insured to sell the policy in the future is legally irrelevant.
Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust,
No. CV 10-7560 PSG (DTBX), 2012 WL 688817, at *5 (C.D. Cal. Feb. 3, 2012).
Evidence of third party intent and an agreement with the insured must be
more than pure speculation. Paulson, 2008 WL 451054, at *2. For example, in
Gordon R.A. Fishman, the insured learned about a nonrecourse loan and premium-
financing program through a credit corporation prior to the inception of the policy,
demonstrating more than speculation. Gordon R.A. Fishman, 638 F. Supp. 2d at
1173. Although the court held the law allowed for the arrangement due to a
18
loophole, the court found that an agreement to sell the policy existed prior to the
policy’s inception. Id. at 1178. In the instant case, (1) a stranger did not procure
the Policy (2) with mutual contemplation of an immediate assignment (3) as a cover
for a wager policy. Accordingly, the Trust and Presidential lacked the three
elements of mutual intent to sell the Policy at its inception necessary to refute the
legitimate purpose of the Policy’s procurement.
1. A stranger did not procure the Policy using the Trust as an
instrumentality.
The third party, Presidential, did not procure the Policy using the Trust as an
instrumentality. A policy is procured under an illegal STOLI scheme if “a third
party with no insurable interest in the life of the insured used the insured as an
‘instrumentality’ to obtain the policy.” Principal Life Ins. Co. v. Lawrence Rucker
2007 Ins. Trust, No. CA 08-488-MPT, 2012 WL 2401717, at *6 (D. Del. June 26,
2012). An insured cannot be used as an instrument for a third party to “accomplish
what he could not have done directly.” Werenzinski v. Prudential Ins. Co. of Am.,
14 A.2d 279, 280 (Pa. 1940).
As a policyholder may not be used as an instrumentality in procuring
insurance policies, the policyholder must procure the policy on his own initiative,
although advice from an agent is acceptable. Kramer v. Phoenix Life Ins. Co., 15
N.Y.3d 539, 541 (2010). An agent is a person authorized to represent the insurer.
Sadler v. Loomis Co., 776 A.2d 25, 37 (Md. Ct. Spec. App. 2001). A four-factor test
is often used to determine whether an agency relationship exists: “who first set him
in motion, who could control his actions, who is to pay him, and whose interest was
19
he there to protect.” Lynn v. Village of West City, 345 N.E.2d 172, 175 (Ill. App. Ct.
1976). As a representative of an insurer, an agent’s actions are imputable to that
insurer. Essex Ins. Co. v. Zota, 985 So. 2d 1036, 1046 (Fla. 2008). An insurer must
take responsibility for the acts of an agent in filling out an application form. Adam
Miguez Funeral Home, Inc. v. First Nat’l Life Ins. Co., 234 So. 2d 496, 498 (La. Ct.
App. 1970). The agent’s conduct does not “bind the innocent insured or beneficiary.”
Id.
Here, mutual intent and an agreement between the Trust and Presidential
are purely speculative, while intent and an agreement between Hightower and
Presidential can be inferred through their conduct. Hightower was not an agent of
the Trust dealing with Presidential to procure an illegal STOLI policy. He was an
agent of Guaranty Life. All four factors of the agency relationship test are shown
between Hightower and Guaranty Life: Guaranty Life presumably set Hightower
in motion, as he solicited Sydney; Guaranty Life controlled Hightower’s actions, as
it approved or denied the terms of the contract; Guaranty Life paid Hightower’s
commission; and Hightower protected Guaranty Life’s interest by ensuring it
attained further business transactions. Because Hightower’s actions in dealing
with Presidential are imputed to Guaranty Life through his agency, it was
Hightower and Guaranty Life who had intent to deal with Presidential, not the
Trust. Hightower demonstrated his relationship and friendly rapport with
Presidential in his email to the Vice President of Business Development. He not
only discussed his intention to “flip” the Policy, but also fantasy football results,
20
indicating his tendency to take risks. Whereas the facts might imply an agreement
between Hightower and Presidential to procure and sell the Policy as a cover for a
wager, the record lacks evidence to demonstrate the same between the Trust and
Presidential.
Proving intent is a high burden, and Guaranty Life has not provided any
direct evidence of actual collusion between the Trust and Presidential to meet this
threshold. Upon contemplation of procuring the Policy, Mr. Hicks and Sydney
discussed the virtues of life insurance. Mr. Hicks subsequently agreed to purchase
a $500,000 life insurance policy, but the Policy ultimately was procured with a $20
million face value. Mr. Hicks testified he was not aware of the change in face value
of the Policy, and Sydney does not recall discussing the face value with Hightower.
The record does not indicate that either Mr. Hicks or Sydney was aware of
Hightower’s email to the Vice President of Business Development at Presidential
discussing the “flip” of the Policy. Nothing in the record suggests Mr. Hicks ever
communicated with Hightower, let alone knew of his involvement in or adverse
intentions with the Policy. Mr. Hicks’s discussion with Sydney and lack of
knowledge regarding Hightower’s participation demonstrate that he believed he
was procuring a policy for the legitimate purpose of providing financial assurance to
his son upon his own death.
Furthermore, the BITA, which was executed following the Policy’s issuance,
stated that the owner did not have any prior communication or make any previous
agreements with Presidential and that Presidential did not participate in the
21
procurement of the Policy. There are no facts indicating mutual intent to transfer
the Policy at the time of inception. Presidential did not procure the Policy using the
Trust as an instrumentality; rather, the Trust procured the Policy for the legitimate
purpose of Sydney’s financial security upon Mr. Hicks’s death. Issues of intent are
crucial to the determination of whether the Policy was procured for a legitimate
purpose and are questions of fact. The District Court failed to draw all reasonable
inferences in favor of the non-movant, the Trust, and resolve all doubts against
Guaranty Life. Therefore, this Court should find that the Policy was not procured
by a stranger and reverse the District Court’s holding.
2. The Trust did not procure the Policy in contemplation of an
immediate assignment to Presidential.
As the Trust procured the Policy lawfully without contemplation of an
immediate transfer, it procured the Policy with a legitimate purpose. Mere
proximity of time between a policy’s inception and its assignment is insufficient to
prove prior contemplation of assignment between the policyholder and a third
party. Travelers Ins. Co. v. Reiziz, 13 F. Supp. 819, 821 (E.D.N.Y. 1935). Moreover,
the court in Kramer held an insured’s immediate transfer of a policy valid. Kramer,
15 N.Y.3d at 545. In fact, a STOLI policy generally is procured in order to
subsequently assign the policy to a third party following the lapse of the two-year
contestability period with the purpose of circumventing the law against wagering
contracts. Lincoln Nat’l Life Ins. Co. v. Calhoun, 596 F. Supp. 2d 882, 884 (D.N.J.
2009).
22
Here, the Trust legitimately procured the Policy without any contemplated
intent to immediately sell the Policy and assign the interest to a third party. The
SOCI asked if the insured or the owner of the Policy had the current intent or an
agreement for a third party to obtain interest in the Policy, to which Mr. Hicks and
the Trust answered “No.” Additionally, the Trust also answered that it was not
procuring the Policy for the opportunity to transfer to a third party within five years
of issuance. Thus, not only did the Trust not contemplate an immediate transfer of
the Policy, but it also did not contemplate a future transfer.
The Trust did not have a pre-negotiated agreement with Presidential to
assign the Policy. Yet, it was well within Mr. Hicks’s and the Trust’s rights to sell
the Policy and assign the interest to Presidential later. Although the sale and
interest assignment occurred only two days after the Policy became effective, mere
proximity of time between the inception and the assignment is insufficient to prove
prior contemplation. The Trust sold the Policy and transferred the beneficial
interest to Presidential shortly after procurement without hiding its actions or
waiting for the contestability period to expire. These actions taken by the Trust
demonstrate its lack of intent to unlawfully procure and sell the Policy. To satisfy
the elements of the mutual intent test, both parties must have participated in some
way. The Trust did not procure the Policy in contemplation of an assignment to a
third party, but instead procured the Policy for a legitimate purpose, and this Court
should reverse.
23
3. The Trust did not procure the Policy as a cover for a wager.
The Trust legitimately procured the Policy because it was not a cover for a
wager policy, such as a STOLI. When the insured and a third party share the
intent to sell and purchase the policy, a STOLI scheme may be substantiated.
Calhoun, 596 F. Supp. 2d at 889. A valid life settlement differs from an unlawful
STOLI policy in the intent of the insured and a third party at the time of the
policy’s inception. Brasner, 2011 WL 134056, at *1. If, at the time of the policy’s
inception, the policy was contemplated to enable the third party to obtain insurance
on a life in which it did not have an insurable interest, the policy would be deemed a
wager contract. Id. The procurement and sale of a policy must not be “a cloak to a
gambling transaction.” Reiziz, 13 F. Supp. at 819.
While an insured has a right to transfer a policy, even immediately after
procurement, that right is limited to a legitimate sale of a policy taken out in good
faith. Lawrence Rucker, 2012 WL 2401717, at *3. To prove the existence of a
wager contract, an insurer must demonstrate both a mutual intent to transfer the
policy to a third party immediately after procurement and financial inducement by
a third party. Id. at 6. In Lawrence Rucker, the insured paid the premiums with a
loan obtained through a premium-financing agreement. Id. at 5. Even with
evidence of possible financial inducement, the court found there were genuine
issues of material fact, and, thus, could not conclude that Rucker was a “mere
instrumentality.” Id. Therefore, the court could not find that the policy was
procured as a wagering contract. Id.
24
A majority of states hold that any person has the right to procure an
insurance policy and assign it to another, provided the policy is not procured as a
cover for a wager policy. Rylander v. Allen, 53 S.E. 1032, 1036 (Ga. 1906); see
Kramer, 15 N.Y.3d at 545 (holding that New York law permits an insured to
immediately transfer his policy, even when it was procured for that purpose);
Valton v. Nat’l Fund Life Assurance Co., 20 N.Y. 32, 38 (1859) (declaring it is
immaterial whether the assignee has an interest in the life of the insured);
McNevins v. Prudential Ins. Co. of Am., 108 N.Y.S. 745, 746 (App. Term 1908)
(holding insurance policies can be transferred the same as any other personal
property); Eckel v. Renner, 41 Ohio St. 232, 232 (1884) (stating the holder of a valid
policy may dispose of it as he sees fit). Additionally, as long as the policy is not a
cover for a wager policy, the arrangement that the insured and policyholder choose
to make regarding payment of the premiums is immaterial. Aetna Life Ins. Co. v.
France, 94 U.S. 561, 565 (1876).
In this case, Mr. Hicks’s intent was to procure a $500,000 life insurance
policy for the benefit of his son upon his death. The Trust obtained the Policy to
provide Sydney financial assurance. The Policy was not a cover for a wager
contract, as neither Mr. Hicks nor the Trust had the necessary intent or the
financial inducement for a wager contract. Guaranty Life failed to meet its high
burden of proof because it did not present evidence to suggest a transaction contrary
to the procurement of a legitimate policy. Sydney told his father he would take care
of the premiums; however, this is not a financial inducement to take out a policy.
25
Sydney did not borrow the money—he had the money to make the initial payment
and checked the box for cash and equivalents funding on the SOCI. Allowing
Sydney to pay the premiums does not equate to an agreement with a third party, as
Sydney is Mr. Hicks’s son and beneficiary of the Trust. The agreement that Mr.
Hicks and Sydney arranged between themselves regarding payment of the Policy’s
premiums is immaterial to the determination of a wager contract.
Furthermore, the Trust did not make any pre-procurement agreements
relating to the sale of the Policy, and Presidential did not promise any inducement
payments to the Trust. Following the procurement of the Policy and the subsequent
sale, Presidential paid the Trust $838,956.75, the equivalent of the first three
months’ premiums and three percent of the face value of the Policy. This payment
was in consideration for the exchange of the executed BITA. Because the payment
was for the purchase of the Policy and the transfer of the beneficial interest, the
Trust legitimately sold the Policy to Presidential with no prearranged financial
inducement. Thus, the Policy was not procured as a cover for a wager. Guaranty
Life cannot establish any of the three factors to prove mutual intent to sell the
Policy at its inception. This Court should find that the Trust procured the Policy
legitimately and is entitled to judgment as a matter of law. Therefore, this Court
should reverse the District Court.
26
C. The sale of the Policy was lawful because it did not negate the
insurable interest and life settlements operate as valuable economic
transactions.
The sale of the Policy did not negate the insurable interest that existed at
inception because a life settlement is an insurance transaction designed to sell a
policy and transfer the beneficial interest lawfully. A policyholder has the right to
assign the policy to another as long as the assignment is not executed as a cover for
a wager policy. France, 94 U.S. at 564. Life settlements provide life insurance
policyholders the opportunity to gain economic and social value from their personal
investment. Calhoun, 596 F. Supp. 2d at 885.
Here, the Trust obtained the Policy for a legitimate purpose and the later
sale of the Policy and transfer of interest did not negate the initial insurable
interest. The Trust participated in the lawful life settlement market for economic
value by selling the Policy and beneficial interest to a third party. These valid acts
demonstrate the procurement and sale of the Policy constituted a valid life
settlement. Therefore, this Court should reverse the District Court’s decision and
find the Policy valid.
1. The sale of the Policy did not negate the insurable interest that
existed at the Policy’s inception.
The subsequent sale of the Policy and assignment of interest did not negate
the insurable interest that existed at inception. Although an insurable interest is
necessary at the time a life insurance policy becomes effective, that insurable
interest is not necessary at the time the loss occurs. N. Tej. § 1409(c). An assignee
of a life insurance policy need not have an insurable interest for the assignment to
27
be valid. Rylander, 53 S.E. at 1036. Courts have long held the holder of a valid life
insurance policy is permitted to transfer it to whomever he “is not afraid to trust” so
as not to “diminish appreciably the value of the contract in the owner’s hands.”
Grigsby, 222 U.S. at 155-56. Further, an insured or a policyholder is entitled to
assign the policy to a third party without an insurable interest, provided the policy
was taken out for the benefit of an individual with an insurable interest. Bankers’
Reserve Life Co., 39 F.2d at 529.
The requirement of an insurable interest at inception does not restrict the
later sale or assignment of a policy. Price Dawe, 28 A.3d at 1074. Florida, a state
with insurance statutes similar to New Tejas, also provides, “an insurable interest
need not exist after the inception date” of the policy and, further, explicitly permits
the assignment of policies to those without an insurable interest in the life of the
insured. AXA Equitable Life Ins. Co. v. Infinity Fin. Grp., LLC, 608 F. Supp. 2d
1349, 1356 (S.D. Fla. 2009). Because no insurable interest is required after the
policy takes effect, the insured may transfer the policy to any person he chooses.
Doris Barnes, 2012 WL 688817, at *3.
Because there was an insurable interest at the Policy’s inception, Mr. Hicks
and the Trust were entitled to later assign the Policy to a third party with no
insurable interest. The assignment of the Policy to Presidential following the
effective date of the Policy did not affect the insurable interest that existed at the
time it became effective. The initial insurable interest was all that was necessary,
and, after procurement, the Trust could transfer the Policy to whomever it chose.
28
Whether the Policy was sold two days following the inception or years later is
irrelevant. It was a valid policy at inception, and the owner and insured had the
right to make a valid assignment at any point thereafter. Thus, the assignment to
Presidential did not negate the insurable interest existing at the Policy’s inception.
This Court should reverse the decision of the District Court, finding the Policy was
not void due to lack of an insurable interest.
2. Life settlements operate as valuable economic transactions.
Life insurance has become one of the most widely used forms of investment
and estate planning. Grigsby, 222 U.S. at 156. Due to the benefits the sale of
insurance policies provide, the life settlement market is rapidly growing. Eryn
Mathews, Stoli on the Rocks: Why States Should Eliminate the Abusive Practice of
Stranger-Owned Life Insurance, 14 Conn. Ins. L.J. 521, 525 (2008). The secondary
life insurance market was estimated at $200 million in 1998, quickly increased to
$13 billion in 2008, and is expected to exceed $160 billion by 2030. Douglas R.
Richmond, Investing with the Grim Reaper: Insurable Interest and Assignment in
Life Insurance, 47 Tort Trial & Ins. Prac. L.J. 657, 663 (2012).
While life settlements are legal insurance policy transactions and valuable
investments, STOLI policies are the “illegitimate offspring” of life settlements.
Mathews, supra, at 525. STOLI policies not only lack an insurable interest at
inception, but they are also procured specifically for the purpose of resale to third
parties. Brasner, 2011 WL 134056, at *1. Whereas a STOLI is merely a wager
contract, a life settlement is a valid sale of a policy procured for a legitimate
29
purpose. Id. In a valid life settlement transaction, a policyholder may sell a
legitimately procured policy based on a change in life circumstances such as divorce,
death of a spouse, retirement, disability, or bankruptcy. Mathews, supra, at 524-25.
An individual may experience a multitude of life situations calling for capital
quickly, and legitimately selling an expensive life insurance policy could function as
an effective and lawful means to the end for a policyholder. Neil A. Doherty & Hal
J. Singer, The Benefits of a Secondary Market for Life Insurance Policies, 38 Real
Prop. Prob. & Tr. J. 449, 453-54 (2003). Such possibilities include the elimination of
one of many life insurance policies, requirement of funds to pay for medical
expenses, wishing to maintain a standard of living in final years, or a change in the
holder’s estate that would eliminate the need for the policy. Id.
The growing secondary market allows for the distribution of economically and
socially valuable transactions. The Trust took advantage of the value life
settlements offer by selling the Policy and transferring the beneficial interest to
Presidential. While STOLI policies are generally transferred following the
expiration of the two-year contestability period due to their unlawful nature, the
Policy here was sold two days after its procurement, further distinguishing this
transaction from a STOLI. Because life settlements operate as flexible instruments
used to allow investors or estate planners to adapt to changing markets and
economic conditions, the Trust was able to benefit from the advantages of selling
the Policy as a life settlement. Regardless of the need for the payoff from the sale,
the sale of the Policy was executed legally following the procurement of a legitimate
30
policy. The Trust procured the Policy with lawful intent and not as a cover for a
wager. Any doubts as to conflicting allegations between the parties should have
been resolved against the movant, Guaranty Life. Thus, this Court should reverse
the District Court’s decision and find the Policy valid.
II. THE DISTRICT COURT PROPERLY ORDERED GUARANTY LIFE TO
RETURN PREMIUM PAYMENTS TO THE TRUST BECAUSE
GUARANTY LIFE BREACHED THE VALID POLICY CONTRACT AND
REPAYMENT IS NECESSARY FOR RESTITUTION AND TO AVOID
UNJUST ENRICHMENT.
The Trust is entitled to a return of all premium payments made on the Policy
as restitution for Guaranty Life’s breach. Parties to insurance policy contracts are
entitled to the same remedies as ordinary contracts because insurance policies are
construed in the same manner as ordinary contracts. Bankers’ Reserve Life Co., 39
F.2d at 536. As such, a refund of premiums paid is required to return parties to the
status quo following rescission or a declaration that the policy is void. TTSI
Irrevocable Trust v. ReliaStar Life Ins. Co., 60 So. 3d 1148, 1150 (Fla. Dist. Ct. App.
2011). Equitable remedies require a party that has been unjustly enriched to make
restitution to the other. Gonzalez v. Eagle Ins. Co., 948 So. 2d 1, 3 (Fla. Dist. Ct.
App. 2006). Equity requires Guaranty Life to return all premium payments to the
Trust. The District Court properly found no genuine issues of material fact existed
and the Trust was entitled to judgment as a matter of law. Thus, this Court should
affirm the decision of the District Court as to the return of payments made on the
Policy.
31
A. Guaranty Life breached the Policy by unlawfully rescinding because
the Trust did not materially misrepresent or negligently misrepresent
information.
Guaranty Life breached its contract with the Trust by rescinding the Policy
without cause, and it is not entitled to challenge misrepresentations outside the
contestability period. When an insurer learns of alleged fraud, it has the following
two choices: cancel the policy and return all premiums or waive the fraud, retaining
the premiums and responsibility of the policy. Dairyland Ins. Co. v. Kammerer, 327
N.W.2d 618, 620 (Neb. 1982). If the insurance company chooses to rescind the
policy, the insurance company must return all premiums paid, except in the event of
actual fraud by the insured. PHL Variable Ins. Co. v. Lucille E. Morello 2007
Irrevocable Trust ex rel. BNC Nat’l Bank, 645 F.3d 965, 969 (8th Cir. 2011).
Because the Trust did not make material or negligent misrepresentations,
Guaranty Life breached the contract when it rescinded the Policy, and the Trust is
entitled to restitution. Therefore, this Court should affirm.
1. The Trust did not misrepresent material information.
Although the Policy contained false statements, the statements do not satisfy
both elements necessary to establish a material misrepresentation. An insurance
company has the right to rescind a policy when (a) the applicant made a
misrepresentation that was material, and (b) the applicant knew that he made a
material misrepresentation. Trinh v. Metro. Life Ins. Co., 894 F. Supp. 1368, 1372
(N.D. Cal. 1995). Because the elements necessary for Guaranty Life’s right to
rescind the Policy were not all satisfied, namely, the materiality of the
32
misrepresentation and the applicant’s knowledge of that misrepresentation,
Guaranty Life breached the contract by rescinding the Policy. Therefore, the Trust
is entitled to a return of the premiums paid, and this Court should affirm the
District Court’s decision.
a. While misrepresentations were made, they were not material to
the formation of the Policy.
An untrue statement made as a fact is a misrepresentation in insurance
contracts. See Mutual Life Ins. Co. of N.Y. v. Hilton-Green, 241 U.S. 613, 622
(1916). The burden of proving material misrepresentations is on the insurer. Fed.
Kemper Life Assurance Co. v. First Nat’l Bank of Birmingham, 712 F.2d 459, 462
(11th Cir. 1983). In determining whether a misrepresentation was material, courts
look to the “probable and reasonable effect that truthful disclosure would have had
upon the insurer.” Trinh, 894 F. Supp. at 1372.
To establish materiality, an insurer must show that it would not have issued
the policy had it known the true facts. See Alfa Mut. Gen. Ins. Co. v. Oglesby, 711
So. 2d 938, 940-41 (Ala. 1997). Misrepresentations may be material when they
influence an insurer’s decision to issue a policy. Jeffries v. Econ. Life Ins. Co., 89
U.S. (22 Wall.) 47, 56 (1874). While a misrepresentation as to income is material to
wage-based periodical benefits such as disability benefits, the same
misrepresentation generally will not prevent recovery for lump sum benefits, such
as life insurance payouts. United Benefit Life Ins. Co. v. Schott, 177 S.W.2d 581,
583 (Ky. Ct. App. 1943). Additionally, an insured may procure a policy for any
value he so chooses as long as he is able to pay the policy premiums. Batchelor v.
33
Am. Health Ins. Co., 107 S.E.2d 36, 40-41 (S.C. 1959). An insurance contract, like
any other contract, is measured by its terms unless the terms violate a statute, a
regulation, or public policy. Baker v. Ky. Farm Bureau Mut. Ins. Co., 120 S.W.3d
713, 716 (Ky. Ct. App. 2002).
Here, several finance-related representations made on the insurance
application were untrue; however, an insured’s financial situation is irrelevant to
the formation of an insurance policy as long as he can pay the premiums. Neither
party contests these incorrect statements constituted misrepresentations.
Nevertheless, misrepresentations alone do not amount to material
misrepresentations entitling the insurer to lawfully rescind the insurance policy.
Although the SOCI form stated any misrepresentations are construed as material,
insurance policies cannot contract against the law. The Trust’s misrepresentations
are only material if Guaranty Life can prove it would not have issued the Policy had
it known the true facts.
Insurers request policy applicants to answer specific questions with the
alleged purpose of deciding whether to issue a policy. Yet, if an insured was
procuring a policy as a cover for a wager policy, he would not answer the questions
truthfully. An assertion in an application can only be material if it influenced the
insurer’s decision to issue a policy. Guaranty Life’s Chief Underwriter asserts
Guaranty Life would not have issued the Policy to the Trust had it known about the
misrepresentations in the Application. This is pure speculation. As an employee of
Guaranty Life, the Chief Underwriter cannot be expected to admit that Guaranty
34
Life still may have issued the Policy under truthful disclosure. An employee may
surrender to the insurer’s, Guaranty Life’s, requests due to fear of reprisal when his
job is on the line. Guaranty Life did nothing to check on the validity of the
representations. Two underwriters even had concerns regarding the statements,
but did not follow through on examining their validity, and instead issued the
Policy. Had the representations been material to Guaranty Life’s decision to issue
the Policy, it likely would have investigated those representations.
The record does not provide any evidence to suggest that Guaranty Life does
not issue large policies to individuals similarly situated to Mr. Hicks. As the Policy
was a lump sum benefit life insurance policy, the amount of the insured or the
policyholder’s income would not prevent the recovery of the benefit and was,
therefore, immaterial. The law permitted the Trust to procure the Policy for any
value as long as it could pay the premiums. Thus, as the misrepresentations made
on the Application cannot be said to have influenced Guaranty Life in issuing the
Policy, the misrepresentations were not material. By rescinding the Policy when
the Trust did not make material misrepresentations, Guaranty Life breached the
Policy contract. This breach entitles the Trust to restitution, and this Court should
affirm.
b. The Trust lacked knowledge of material misrepresentations.
If a party makes a statement that is “willfully false or intentionally
misleading” in the procuration of a policy, the policy is voidable. Lucille E. Morello,
645 F.3d at 969. Misrepresentations alone do not void a contract, provided they
35
were made in the belief they were true. Bankers’ Reserve Life Co., 39 F.2d at 537.
Thus, the insured must make the misrepresentations knowing of their falsity. Id.
An insurer is not entitled to rescission when the insurance applicant “had no
knowledge of the facts sought, or failed to appreciate the significance of information
related to him.” Trinh, 894 F. Supp. at 1373.
Even if this Court finds the misrepresentations were material, the
statements do not meet the additional element necessary for lawful rescission, the
insured party’s knowledge of the material misrepresentation. Thus, Guaranty Life
is required to return the premium payments. Sydney could not recall if he signed
blank documents or if the information was filled in when he received the
documents. If the documents were blank at the time Sydney received them, he had
no knowledge of the facts later misrepresented in the Application. Likewise, the
Trustee had no knowledge of the misrepresentations in the Application. Nothing in
the record indicates that the Trustee would know the details of Mr. Hicks’s finances.
Hightower provided the information on the forms, and any knowledge of
misrepresentations would be imputed to Guaranty Life through Hightower as the
agent. Because the Trust did not have knowledge of any material
misrepresentations, Guaranty Life has failed to prove the Trust materially
misrepresented information on the Application. Thus, Guaranty Life cannot
establish an exception to the rule requiring it to pay restitution to the Trust, and
this Court should affirm.
36
2. The Trust did not negligently misrepresent information.
While false information was contained in the Application, the information
does not meet all necessary elements for negligent misrepresentation. Negligent
misrepresentation requires (a) negligent supply of false information, (b) reasonable
reliance upon that false information, and (c) economic injury as a result of the
reliance. PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d 1205, 1212 (N.D. Ga.
2011). Because Guaranty Life cannot establish any of the three elements, it cannot
prove negligent misrepresentation on the part of the Trust. Without negligent
misrepresentations, Guaranty Life cannot establish an exception to the rule of
paying restitution to the Trust. Therefore, this Court should affirm the District
Court’s decision as to the return of the premium payments to the Trust.
a. The Trust did not negligently supply false information.
An insured or the owner of an insurance policy negligently supplies false
information when he does not affirmatively verify the information supplied to the
insurer. Jolly, 800 F. Supp. 2d at 1214. In Jolly, the trustee merely represented the
information in the policy was “true to the best knowledge and belief of the Trust.”
Id. The determination must be assessed in light of the insured’s actual knowledge
and belief. Id. at 1213. In Jolly, the trustee who procured the policy had no
knowledge the information in the application was misrepresented. Id. The court
held the defendant could not be liable for negligent misrepresentation. Id. at 1314.
Here, the Trustee presumably lacked personal knowledge as to Mr. Hicks’s
finances. The Trustee simply acknowledged the information supplied was true to
the best of his knowledge. Sydney stated he could not remember if the forms were
37
completed when he received them from Hightower. Thus, the Trustee may have
signed off on incomplete paperwork. Whether the forms were completed before or
after the Trustee signed them, the representations made were to the best of his
knowledge at the time. The executed forms contained various spelling mistakes and
remained blank in multiple areas, an indication that Hightower, not the Trust or
Mr. Hicks, hurriedly and mistakenly completed the documents. However, even if
the Trust negligently supplied false information, Guaranty Life cannot assert
negligent misrepresentation as a defense without reasonable reliance or economic
injury.
b. Guaranty Life did not reasonably rely on false information.
Guaranty Life cannot establish reasonable reliance on the false information.
After being put on notice of misrepresentations, an insurer cannot establish
reasonable reliance where it did not exercise due diligence to investigate or when
the misrepresentation was the fault of the insurer’s agent without the insured’s
participation. Hillery v. Allstate Indem. Co., 705 F. Supp. 2d 1343, 1358 (S.D. Ala.
2010). An insurer must demonstrate it had a right to rely on the representations
based on the known facts. Story v. Safeco Life Ins. Co., 40 P.3d 1112, 1116 (Or. Ct.
App. 2002). After an insurer makes a prima facie showing of reasonable reliance,
the burden shifts to the insured to present evidence to show the insurer knew of the
misrepresentations or that a reasonable person would be put on notice of the
misrepresentations. Story, 40 P.3d at 1117. An insured can show this if there are
facts that indicate the insurer became, or would become, aware of “facts sufficient to
give it the required notice.” Id.
38
When an insurer or an underwriter acknowledges inconsistencies, the “red
flags” require the insurer to exercise “additional due diligence.” Jolly, 800 F. Supp.
2d at 1211. In Jolly, the insurer was put on notice of inconsistencies in the policy,
but did not attempt to verify the information given by the insured. Id. at 1210. An
insurance company has the responsibility to distinguish between what is “prudent
and wise” versus what is “unwise and imprudent” in making contracts. Jeffries, 89
U.S. (22 Wall.) at 53-54. The insurer may not complain of deceit by the insured if
entering the transaction with “its eyes closed to available information.” Cozzi Iron
& Metal, Inc. v. U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001). If an
insurer has failed to exercise due diligence to discover the truth behind a
misrepresentation, the insurer cannot demonstrate reasonable reliance. Jolly, 800
F. Supp. 2d at 1212.
Here, Guaranty Life relied on the information provided in the insurance
application without exercising due diligence upon notice of red flag statements.
According to the SOCI, the Trust expressly authorized Guaranty Life to a review of
the Trust Agreement before issuing the Policy. However, the record does not
indicate that any review occurred, and Guaranty Life issued the Policy two days
after the Trust submitted the Application. Further, when Guaranty Life’s
underwriters emailed each other, they indicated some level of concern about the net
worth and occupation statements. On February 8, 2007, two days after the Trust
submitted the Application, one underwriter stated, “A $1.2 billion cab driver?
Game over.” Yet, that same day, Guaranty Life offered the Policy to the Trust.
39
Although a second underwriter questioned whether any third parties may have
been driving the Application on February 15, Guaranty Life issued the Policy the
following day.
Guaranty Life had an opportunity to determine that offering the Policy could
be “unwise and imprudent” knowing that some statements made in the Application
could have been questionable. Whether any of the statements were actually
negligent misrepresentations is irrelevant because Guaranty Life did not exercise
due diligence in investigating. Deciding to issue the Policy regardless of the truth of
the Trust’s assertions, Guaranty Life could not reasonably rely on the information.
Despite the contract stating Guaranty Life relied on everything in the Application,
it cannot establish reasonable reliance if it did not properly review the
supplemental documents and thoroughly investigate prior to issuing the Policy.
Guaranty Life attempted to investigate long after the Policy’s inception and asked
for documents such as financial statements. If Guaranty Life had acted reasonably,
it would have performed this inquiry before issuing the Policy. The lack of due
diligence in attempting to discover the truth bars Guaranty Life from complaining
of deceit. Thus, Guaranty Life cannot meet the negligent misrepresentation
element of reasonable reliance. Because there was no negligent misrepresentation
on the part of the Trust, the Trust is entitled to restitution, and this Court should
affirm.
c. Guaranty Life did not suffer economic injury.
Guaranty Life cannot establish negligent misrepresentation on the part of
the Trust because it did not suffer economic injury. The damages recoverable for a
40
negligent misrepresentation are the pecuniary losses suffered because of the
reliance upon the misrepresentations. Nota Constr. Corp. v. Keyes Assocs., Inc.,
694 N.E.2d 401, 405 (Mass. App. Ct. 1998). The insurer must show a certain
pecuniary loss—mere speculation of economic injury is insufficient. Hardaway Co.
v. Parsons, Brinckerhoff, Quade & Douglas, Inc., 479 S.E.2d 727, 730 (Ga. 1997).
The object of an insurance policy is the payout to the beneficiary upon the
insured’s death. Keckley v. Coshocton Glass Co., 99 N.E. 299, 300 (Ohio 1912).
Thus, the contemplated economic injury is the performance of the insurance
contract, which is ultimately the payout of a policy claim. See, e.g., Lincoln Nat’l
Life Ins. Co. v. Snyder, 722 F. Supp. 2d 546 (D. Del. 2010) (insurer sought to deny
payment of death benefit claim, alleging negligent misrepresentation and lack of
insurable interest); Cedars Sinai Med. Ctr. v. Mid-West Nat’l Life Ins. Co., 118 F.
Supp. 2d 1002 (C.D. Cal. 2000) (insurer sought to deny payment of health insurance
claim, alleging negligent misrepresentations by insured in insurance application);
Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 762 N.Y.S.2d 148 (N.Y. App. Div. 2003)
(insurer sought to deny payment of home owner’s insurance claim, alleging
negligent misrepresentations by insured in insurance application).
In this case, Guaranty Life has not established that it suffered a pecuniary
loss sufficient to meet the economic injury requirement for negligent
misrepresentation. For five years, Guaranty Life was regularly receiving premium
payments. Guaranty Life received a total of $4,779,135 in premium payments on
the Policy. Any overhead Guaranty Life expended was likely negligible and
41
presumably would have been expended on an altered version of this Policy or on
another policy if this policy was denied. Guaranty Life’s only disbursement was
$1.4 million in commission on the Policy to Hightower. Even subtracting any
overhead costs and Hightower’s commission from the premium payments received,
Guaranty Life likely received a net benefit of millions, and did not suffer economic
injury.
Because Mr. Hicks did not pass away, the contingency that would have
required Guaranty Life to make the substantial $20 million payout to the Policy’s
beneficiaries did not occur. The payout is the only occurrence that would have
established the necessary certain pecuniary loss. Mr. Hicks did not die, Guaranty
Life did not make the death benefit payout, and any other economic injury
Guaranty Life claims is purely speculative. Because Guaranty Life did not suffer a
certain economic injury, it cannot prove all three elements necessary to establish
negligent misrepresentation on the part of the Trust. As neither the material nor
negligent misrepresentation exception to the requirement of restitution applies, the
Trust is entitled to restitution, and this Court should affirm.
3. The incontestability clause barred a challenge to the Policy.
Even if this Court finds the Trust made material misrepresentations or
negligent misrepresentations on the Application, the incontestability clause barred
Guaranty Life’s challenge to the Policy. New Tejas law mandates all life insurance
policies contain an incontestability clause requiring insurance companies to bring
an action seeking rescission within two years of a policy’s issuance. N. Tej. §§ 1407-
1408. The purpose of such incontestability provisions is to motivate insurers to
42
investigate possible misrepresentations in a timely fashion. Ohio Nat’l Life
Assurance Corp. v. Davis, No. 10 C 2386, 2011 WL 2680500, at *6 (N.D. Ill. July 6,
2011).
When an insurance policy is not void ab initio because an insurable interest
existed at the inception of the policy, the incontestability clause of the policy is
valid. Doris Barnes, 2012 WL 688817, at *6. A policy contested due to fraud
relating to inducement to enter the contract is voidable, not void. Price Dawe, 28
A.3d at 1067. The majority of courts follow the public policy prohibiting an
insurance company from contesting a voidable policy after the contestability period
expires. Brasner, 2011 WL 134056, at *6. The obligation of the insurer to fulfill the
duties of the contract become absolute if the insurer fails to challenge a
misrepresentation before the contestability period expires. New England Mut. Life
Ins. Co. v. Caruso, 535 N.E.2d 270, 271 (N.Y. 1989).
The New Tejas Statutes provide that a policy must contain a clause
constraining a contestability period to two years after a policy’s effective date.
However, Section 21 of the Policy contained an incontestability clause stating the
Policy would be incontestable two years after the Policy’s issue date for any claims
other than nonpayment of premiums or policy violations relating to service in the
armed forces. Guaranty Life issued the Policy on February 16, 2007, and it became
effective on March 5, 2007. The parties contracted to limit the contestability period
to two years following the Policy’s issuance, expiring sooner than the statute
43
requires. Thus, at any date following February 16, 2009, the incontestability clause
barred all challenges regarding misrepresentations.
The parties agreed Guaranty Life may contest the Policy after the expiration
of the contestability period in challenging the validity due to insurable interest, or
lack thereof; however, it cannot contest for misrepresentations. Guaranty Life is
entitled to challenge the existence of an insurable interest at the Policy’s inception,
but that was the only challenge it could make to the Policy when it filed suit on
June 6, 2009—nearly four months after the contestability period ended. Guaranty
Life failed to contest the Policy before the contestability period expired. Therefore,
the incontestability clause barred Guaranty Life from challenging the Policy’s
validity under any theory other than lack of insurable interest. Because Guaranty
Life unlawfully rescinded the contract outside the contestability period, the Trust is
entitled to a return of the premiums. Thus, this Court should affirm.
B. The Trust is entitled to restitution.
Due to Guaranty Life’s breach of contract, the Trust is entitled to restitution.
Only where one party makes a misrepresentation in a material point is the other
party entitled to rescind the contract. N. Tej. § 1408. A party seeking rescission is
responsible for placing the insured back in the position he was in prior to the policy.
Brasner, 2011 WL 134056, at *7. The goal of rescission is to “undo the original
transaction and restore the former status of the parties.” TTSI Irrevocable Trust,
60 So. 3d at 1150. Restitution in the insurance context is the return of premiums.
Associated Elec. & Gas Ins. Servs., Ltd. v. Rigas, 382 F. Supp. 2d 685, 691 (E.D. Pa.
2004). Thus, the party rescinding is required to return the premiums paid on an
44
insurance policy while the other party is entitled to the premiums as restitution.
Principal Life Ins. Co. v. DeRose, No. 1:08-CV-2294, 2011 WL 4738114, at *11 (M.D.
Pa. Oct. 5, 2011).
A party may only recover the amounts conferred as a benefit upon the other
party. PHL Variable Ins. Co. v. Robert Gelb Irrevocable Trust, No. 10 C 957, 2010
WL 4363377, at *4 (N.D. Ill. Oct. 27, 2010). In Robert Gelb, the court held the
insurance company was not entitled to retain premium payments to cover the
commission because the commission was not a benefit to the trust. Id. Because the
trust did not receive a benefit, the insurance company was not entitled to
restitution. Id. In Jolly, the court found the insurance company was not entitled to
the retention of policy premiums on a factual, legal, or equitable basis, as there was
insufficient evidence to create a question of fact that Jolly made misrepresentations
causing the insurer damage. Jolly, 800 F. Supp. 2d at 1215.
Here, while the Trust did not misrepresent information causing Guaranty life
damage, Guaranty Life breached the valid insurance policy contract by rescinding.
Guaranty Life’s letter to the Trust on November 19, 2008, stated it would not
acknowledge the change of owner and beneficiary until it completed an
investigation. The Policy contract bound Guaranty Life to the terms giving the
Trust the right to change the owner and beneficiary at any time. Guaranty Life did
not have the right to reject the Trust’s request and investigate the prior
procurement of the Policy. It is the duty of Guaranty Life to complete its
45
investigation preceding the Policy’s issuance. Thus, Guaranty Life breached the
Policy contract.
Because courts treat insurance policy contracts in the same manner as any
other contracts, the remedy will be the same. Guaranty Life unlawfully rescinded
the Policy and must pay the Trust restitution in the form of the premium payments
already made on the Policy. This is a remedy that returns the parties to the
position they were in prior to the creation of the Policy. By returning the payments
to the Trust, Guaranty Life would restore the former status of both parties. There
would be no contract for life insurance, and the Trust would not have paid
premiums for a benefit it did not receive. Just as in Robert Gelb and Jolly, there is
no basis for Guaranty Life to retain the $4,779,135 in premium payments made on
the Policy. Accordingly, the Trust is entitled to restitution as a matter of law, and
this Court should affirm the District Court’s decision regarding the return of
payments made on the Policy.
C. Even if the Policy was void ab initio, the Trust is entitled to a return of
the payments to avoid unjust enrichment.
If this Court is to find the Policy void ab initio, Guaranty Life must still
return the payments made on the Policy to the Trust to avoid unjust enrichment.
When an insurance contract is rendered void, the insurer is required to return
premiums paid on the policy to the insured. Brasner, 2011 WL 134056, at *7. The
insured is entitled to be returned to the position he was in before the inception of
the policy. Gonzalez, 948 So. 2d at 3. Unjust enrichment operates as an equitable
doctrine to prevent one party from retaining benefits that justly belong to another
46
in a quasi-contractual situation. Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 799
(6th Cir. 2009). A plaintiff establishes unjust enrichment where (1) the plaintiff
conferred a benefit to the defendant, (2) the defendant is aware of the benefit, and
(3) it would be unjust for the defendant to retain that benefit. Id. An insurer’s
retention of premiums upon the declaration of a void contract is “contrary to the law
of contract and unjust enrichment.” Gonzalez, 948 So. 2d at 2.
An insurance policy is an assurance of one’s life. France, 94 U.S. at 563. As
such, it is a contract to pay a definite sum of money to the beneficiary at the end of
an indefinite period of time. Keckley, 99 N.E. at 300. When a policy is declared
void and the insurer will not be paying the beneficiary upon the insured’s death, it
would unjustly enrich the insurer to keep the premiums paid while not conferring
any benefit to the other party. See Gonzalez, 948 So. 2d at 2. Even when a policy is
rendered void ab initio, the court may require a return of the premiums as a
condition of cancelling the contract. Lucille E. Morello, 645 F.3d at 970.
Here, even if this Court finds the Policy void ab initio, the Trust is entitled to
a return of the premium payments to avoid unjustly enriching Guaranty Life. The
Trust has established all three elements of unjust enrichment because (1) the Trust
conferred a benefit to Guaranty Life, (2) Guaranty Life was aware of the benefit,
and (3) it would be unjust for Guaranty Life to retain that benefit.
First, the Trust paid five years of premiums on the Policy to Guaranty Life,
equaling $4,779,135. Although discovery revealed that Presidential funded all
payments made by the Trust for the Policy, according to France, the agreement
47
made for paying the premiums is immaterial. Who actually funded the premiums is
not of importance; all that is legally relevant is that the premium payments were
made on behalf of the policyholder, the Trust. Second, Guaranty Life was aware the
Trust paid the premiums. Guaranty Life received premium payments from 2007
through 2011. It collected the payments and entered the total of $4,779,135 into the
Registry of the Court. Third, it would be unjust for Guaranty Life to retain the
premiums while conferring no return benefit to the Trust. As life insurance
operates as an assurance of financial security upon an individual’s death, and Mr.
Hicks’s death did not occur, Guaranty Life was not required to make the payout on
the Policy. Instead, Guaranty Life seeks to retain the windfall benefit of all
premiums paid, totaling $4,779,135.
If Guaranty Life retains the premium payments made on the Policy, the
Trust can establish all three elements of unjust enrichment. Thus, even if this
Court finds the Policy void ab initio, it should uphold the decision of the District
Court granting the Trust’s Motion for Summary Judgment. This Court should
affirm the order requiring Guaranty Life to return all premium payments made on
the Policy to the Trust.
48
CONCLUSION
For the reasons stated above, this Court should reverse as to the validity of
the Policy and affirm as to the repayment of premiums.
/s/ Team 78
Respectfully Submitted,
Team 78
Counsel for Appellant
CERTIFICATE OF SERVICE
Team 78 hereby certifies that a true and correct copy of the foregoing brief
has been furnished, in Portable Document Format and as a Word file, via electronic
mail, this 19th day of November, 2012, to the Championship Director,
/s/ Team 78
Respectfully Submitted,
Team 78
Counsel for Appellant
CERTIFICATE OF COMPLIANCE
We hereby certify that the brief of Team 78 has been prepared and served in
accordance with the Championship Rules.
/s/ Team 78
Respectfully Submitted,
Team 78
Counsel for Appellant
