No. 12-20784
2012-cv-2073 (USDC)
______________________________________________________________________________ IN THE
United States Court of Appeals
FOR THE FOURTEENTH CIRCUIT
____________________________________________________________________________
FRANK KIPP, AS TRUSTEE FOR THE HICKS IRREVOCABLE LIFE
INSURANCE TRUST, AND PRESIDENTIAL HOLDINGS, LLC.
Appellant,
v.
GUARANTY LIFE INSURANCE COMPANY,
Appellee.
_____________________________________________________________________________
ON WRIT OF CERTIORARI TO THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF NEW TEJAS
______________________________________________________________________________
BRIEF FOR THE APPELLANT
______________________________________________________________________________
Team 9
QUESTIONS PRESENTED
I.
Did the District Court erroneously declare the Hicks Life Insurance Policy
void ab initio when the Policy was secured by legitimate insurable
interest, lawfully transferred as a life settlement, and complied with the
insurance laws of New Tejas at the time of its inception?
II.
Did the District Court properly order all unearned premiums to be
returned to the Hicks Irrevocable Life Insurance Trust when well-settled
principles of recession require insurers to return anything of value
obtained under a policy, when the procured-by-fraud exception is
inapplicable to third-party purchasers for value, and when the insurer did
not properly seek rescission under the insurance laws of New Tejas?
ii TABLE OF CONTENTS
QUESTIONS PRESENTED ii
TABLE OF CONTENTS iii
TABLE OF AUTHORITIES v
OPINIONS BELOW........................................................................................................1
JURISDICTIONAL STATEMENT.................................................................................1
STATUTORY PROVISIONS INVOLVED ....................................................................1
STATEMENT OF THE CASE .......................................................................................1
A.
STATEMENT OF FACTS ........................................................................1
B.
PROCEDURAL HISTORY .......................................................................5
C.
STANDARD OF REVIEW ........................................................................5
SUMMARY OF ARGUMENT.........................................................................................5
SUMMARY OF ARGUMENT ........................................................................................6
ARGUMENT ...................................................................................................................9
I. A LEGITIMATE INSURABLE INTEREST SUBSTANTIATES THE
VALIDITY OF THE HICKS LIFE INSURANCE POLICY. ................9
A. At Inception, the Hicks Life Insurance Policy Was Predicated On
Legitimate Insurable Interest In the Life of the Insured. ........................12
1. Because the insured, Mr. Hicks, took out the Policy on his own life,
the Policy had a valid insurable interest at its inception. ..............14
2. Even if it can be said that someone other than Mr. Hicks procured
the Policy, under N. Tej. § 1409(a), a valid insurable interest still
existed at the Policy’s inception because the insured’s son, Sydney
Hicks, was the Policy’s sole beneficiary. ..........................................16
iii 3. Because the ownership and beneficial interest of the Hicks Policy
were held by the Hicks Trust, insurable interest can be derived
from Mr. Hicks as the Trust’s grantor and Sydney Hicks as the
Trust’s sole beneficiary ....................................................................18
B. The Hicks Trust Was Lawfully Transferrable to Presidential Because the
Hicks Policy Was Premised On Genuine Insurable Interest At Its
Inception. .....................................................................................................20
C. Because the 2009 Amendments to N. Tej. § 1409 Do Not Apply
Retroactively, N. Tej. §§ 1409(d)-(f) Should Have No Bearing On the
Outcome of This Case. ...............................................................................24
II.
THE DISTRICT COURT PROPERLY ORDERED THE PREMIUMS TO BE
RETURNED TO THE TRUST BECAUSE WELL-ESTABLISHED
PRINCIPLES OF RESCISSION REQUIRE THAT AN INSURER MUST
RETURN ANYTHING OF VALUE WHEN A POLICY IS VOID AB INITIO,
BECAUSE THE ‘PROCURED-BY-FRAUD’ EXCEPTION IS NOT
APPLICABLE, AND BECAUSE IF AN INSURABLE INTEREST EXISTS,
GUARANTY UNLAWFULLY RESCINDED THE POLICY. ..........................26
A. The Trust is Entitled to a Return of All Unearned Premiums Of An
Rescinded Policy That Was Declared Void Ab Initio, Even in the Case of
Fraud. ...........................................................................................................29
1. Equitable election of remedies preclude an insurer from both
rescinding a policy and retaining the unearned premiums. ...........30
2. When a policy is void ab initio, the insurers have not been exposed
to a risk of loss and must return all unearned premiums. .............33
B. The ‘Procured-By-Fraud’ Exception To The General Rule Requiring
Insurers To Return Premiums Is Not Applicable To The Trust. ...............36
1. The ‘procured-by-fraud’ exception is only applied in cases where the
insured, not third-parties, commit actual fraud. ............................37
2. An insurer’s access to accurate information negates reasonable
reliance on a material misrepresentation. ......................................40
C. If An Insurable Interest Exists, The Trust Still Is Entitled To A Return Of
All Unearned Premiums Because Guaranty Did Not Properly Rescind The
Policy Under N. Tej. §1408. .........................................................................43
CONCLUSION .............................................................................................................47
iv TABLE OF AUTHORITIES
UNITED STATES SUPREME COURT CASES
Conn. Mut. Life Ins. Co. v. Schaefer, 94 U.S. 457 (1876) .................................14, 18
Grigsby v. Russell, 222 U.S. 149 (1911) ......................................................................12
Grymes v. Sanders, 93 U.S. 55 (1876) .........................................................................25
Pan-Am. Petroleum & Transp. Co. v. United States, 273 U.S. 456, (1927) ..............21
Robb v. Voss, 155 U.S. 13 (1894) .................................................................................30
Warnock v. Davis, 104 U.S. 775 (1881) ........................................................................9
UNITED STATES COURT OF APPEALS CASES
Am. Gen. Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331 (11th Cir. 2009)
..................................................................................................................................26, 42
Blakeney v. Lomas Info. Sys., Inc., 65 F.3d 482 (5th Cir. 1995) ................................42
First Penn-Pacific Life Ins. Co. v. Evans, 313 F. App'x 633 (4th Cir. 2009) .............21
Jackson v. BellSouth Telecommunications, 372 F.3d 1250 (11th Cir. 2004) ...........31
PHL Variable Ins. Co. v. Faye Keith Jolly Irrevocable Life Ins. Trust ex rel.
Shapiro, 460 F. App'x 899 (11th Cir. 2012) ...........................................................25, 26
PHL Variable Ins. Co. v. Lucille E. Morello 2007 Irrevocable Trust ex rel. BNC Nat.
Bank, 645 F.3d 965 (8th Cir. 2011) .............................................................................26
St. Paul Fire & Marine Ins. Co. v. Mayor's Jewelers of Fort Lauderdale, Inc., 465
F.2d 317, 320 (5th Cir. 1972) .....................................................................................38
Sylvania Industrial. Corporation. v. Lilienfeld's Estate, 132 F.2d 887 (4th Cir. 1943)
........................................................................................................................................30
United States v. Texarkana Trawlers, 846 F.2d 297 (5th Cir. 1988) ........................27
William Penn Life Insurance Company v. Sands, 912 F.2d 1359 (11th Cir.1990) .37,
38
v TABLE OF AUTHORITIES (continued)
UNITED STATES DISTRICT COURT CASES
Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust,
No. 10-7560, 2012 WL 688817 (C.D. Cal. Feb. 3, 2012) .......................................26, 44
In re Int'l Forum of Fla. Health Benefit Trust, 607 So. 2d 432 (Fla. Dist. Ct. App.
1992) ) .....................................................................................................................26, 40
Lincoln Nat. Life Ins. Co. v. Snyder, 722 F. Supp. 2d 546 (D. Del. 2010) .......31,32 47
Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Trust, 638 F.
Supp. 2d 1170 (C.D. Calif. 2009) ..........................................................................13, 19
Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Riggs Nat. Bank of Washington, D.C.,
5 F.3d 554 (D.C. Cir. 1993) ..........................................................................................43
Penn Mut. Life Ins. Co. v. Greatbanc Trust Co., No. 09-06129, 2012 WL 3437161
(N.D. Ill. Aug. 15, 2012) .........................................................................................33, 35
PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d 1205 (N.D. Ga. 2011) ...26, 38, 40, 42
Principal Life Ins. Co. v. DeRose, No. 08-2294, 2011 WL 4738114 (M.D. Pa. Oct. 5,
2011) ........................................................................................................................19, 20
Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 774 F. Supp. 2d 674 (D.
Del. 2011) ............................................................................................................28, 29
Pruco Life Ins. Co. v. Brasner, No. 10-80804, 2011 WL 134056 (S.D. Fla. Jan. 7,
2011) ........................................................................................................................12, 30
Skinner v. Aetna Life and Cas., 804 F.2d 148 (D.C.Cir.1986) 39
Sun Life Assur. Co. of Canada v. Berck, 719 F. Supp. 2d 410, 418 (D. Del. 2010) 23,
27, 30, 35
TTSI Irrevocable Trust v. ReliaStar Life Ins. Co., 60 So. 3d 1148 (Fla. Dist. Ct. App.
2011) 35
vi TABLE OF AUTHORITIES (continued)
UNITED STATES DISTRICT COURT CASES (continued)
United States v. Idlewild Pharmacy, Inc., 308 F. Supp. 19 (E.D. Va. 1969) 30
Wells Fargo Bank, N.A. v. Lincoln Nat'l Life Ins. Co., 2009 U.S. Dist. LEXIS 129696
(C.D. Cal. Apr. 13, 2009) 27, 29
STATE SUPREME COURT CASES
Caldwell v. Hatcher, 248 S.W.2d 892 (Ky. 1952) 15
Currier v. Continental Life Ins. Co., 57 Vt. 496 (1885) 13
Dixon v. W. Union Assurance Co., 16 S.E.2d 214, (S.C. 1968) 16
Exchange Bank v. Fla. Nat'l Bank, 292 So. 2d 361 (Fla. 1974)
First Christian Church in Salem v. McReynolds, 241 P.2d 135 (Or. 1952) 15
Holloman v. Life Ins. Co. of Va., 75 S.E. 2d 169 (1940) 16, 17,
In re Texas Ass'n of School Boards, Inc., 169 S.W.3d 653 (Tex. 2005) 30, 34, 35, 36,
37
Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539 (N.Y. 2010) passim
Reserve Mut. Life Ins. Co. v. Kane, 81 Pa. 154 (1876) 13
Williams v. Washington Life Ins. Co., 31 Iowa 541 (1871) 13
Woods v. Woods' Adm'r, 113 S.W. 79, 82 (Ky. 1908)
ADDITIONAL STATE COURT CASES
American Century Life Insurance Company v. Rosenstein, 46 Ind. App. 537, 92 N.E.
380 (Ind. App. 1910) 43, 45, 46
American National Insurance Company v. Smith, 13 S.W.2d 720 (Tex. Civ. App.
1929) 32, 33
Baltimore Life Ins. Co. v. Floyd, 91 A. 653 (Del. Super. Ct. 1914) ..............................9
vii TABLE OF AUTHORITIES (continued)
ADDITIONAL STATE COURT CASES (continued)
Garamendi v. California Company Insurance Company, 2005 WL 3485747, (Cal. Ct.
App. Dec. 21, 2005) ......................................................................................................33
Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. App. 3d 169 (Ct. App. 1988) .34
Lincoln Life & Annuity Co. of New York v. Berck, 2011 WL 1878855 (Cal. Ct. App.
May 17, 2011) ...............................................................................................................21
Mark Patterson, Inc. v. Bowie, 237 A.D.2d 184 (1st Dep. N.Y. 1997) .......................38
Story v. Safeco Life Ins. Co., 179 Or. App. 688, 694-95, (Or. Ct. App. 2002) ............40
STATUTES AND TREATISES
40 PA. CONS.STAT. § 512 ...........................................................................................21
44 Am. Jur. 2d Insurance § 924 ...................................................................................28
N. Tej. § 1409(a) ...................................................................................................Passim
N. Tej. § 1409(b) ...................................................................................................Passim
N. Tej. § 1409(c) ...................................................................................................Passim
N. Tej. § 1409(d) ...................................................................................................Passim
N. Tej. § 1409(e) ...................................................................................................Passim
N. Tej. § 1409(f) ...................................................................................................Passim
N. Tej. § 1409(g) ...................................................................................................Passim
viii OPINION BELOW
The December 14, 2011 decision of the United States District Court For The
District Of New Tejas (No. 28-9563) is unreported. It can be found on the Record of
Appeal (“R.”) at 1-15.
STATEMENT OF JURISDICTION
This appeal originates from the District Court’s final judgment entered on
December 14, 2011. The district court had jurisdiction for the case pursuant to 28
U.S.C. § 1332(a)(1), and entered final judgment disposing all claims of all parties.
The Court of Appeals for the Fourteenth Circuit has jurisdiction pursuant to 28
U.S.C. § 1291, which grants jurisdiction for an appeal of the final judgment of a
district court.
STATUTORY PROVISIONS INVLOVED
This first issue before this court involves the interpretation of N. Tej. §§ 1407
and 1409(a)-(g) regarding the presence of a valid insurable interest in the Policy
owned by the Trust. The second issue before this court involves the interpretation
of N. Tej.§ 1408 regarding the return of premiums to the Trust following the
rescission of the Policy.
STATEMENT OF THE CASE
A.
Statement of Facts
On January 4, 2007, life insurance agent Reggie Hightower of Top Gun
Executive Insurance Agency met with prospective client Sydney Hicks to discuss
1 the planning of his 72-year-old father’s estate.
(R. at 10)1.
Although Sydney’s
father, Don Juan Hicks, (“Mr. Hicks”) was a man with relatively meager assets,
Sydney decided to approach him about purchasing life insurance. (R. at 10). On
January 10, 2007, after discussing the matter with Sydney, Mr. Hicks agreed to the
terms of a $500,000 policy (“the Policy”). (R. at 10). Living on limited income since
retiring as a cab driver, Mr. Hicks asked his son if he would assume responsibility
of the premium payments, and Sydney willingly agreed. (R. at 10). Upon receiving
the life insurance application (“Application”) and statement of client intent (“SOCI”)
form from Mr. Hightower, Sydney and his father executed the necessary paperwork,
and the completed documents were returned to Mr. Hightower on January 11, 2007.
(R. at 10). Mr. Hicks indicated his intent for the Policy to be held in a trust on the
completed SOCI form. (R. at 23). At all times during the application process, Mr.
Hightower served as liaison between the Hicks and the insurers. (R. at 7-12).
The Hicks Trust (“the Trust”) was created in early February 2007. (R. at 7).
The Trust designated Mr. Hicks as the grantor, Sydney Hicks as the sole
beneficiary, and family attorney Bryan Jones as the trustee. (R. at 7, n.3). After
receiving the executed Application from Sydney and Mr. Hicks, on February 6,
2007, Mr. Hightower proceeded to submit the materials to Guaranty Life Insurance
Company (“Guaranty”). (R. at 7).
Unbeknownst to Mr. Hicks and Sydney, the completed Application transmitted
to Guaranty contained several misrepresentations.
(R. at 7).
Rather than the
1 Cites to the Record (“R”) will follow the USCA numbering that incorporates all of
the attached exhibits.
2 $500,000 coverage agreed upon by Mr. Hicks and Sydney, the Application sought a
policy with a face value of $20 million. (R. at 7). Furthermore, the Application
represented Mr. Hicks as “a 72-year-old self- employed entrepreneur with a Net
worth of $1.2 billion and an annual earned income of $8.5 million” who lived “in an
oceanfront property on Jupiter Island, New Tejas.”
(R. at 7).
Mr. Hicks later
testified that he was unaware of any misrepresentations in the Application. (R. at
10-11). To his understanding, the policy provided $500,000 in coverage. (R. 10-11).
Upon reviewing the Hicks Application, two Guaranty underwriters became
suspicious. In a brief email exchange on February 8, 2007 between underwriters
Carl Strum and Ted Fink, Strum expressed to Fink: “A $1.2 billion cab driver?
Game over.” (R. at 11). Eight days later, Fink finally responded to Strum’s email:
“Have we looked at any third parties that may be driving the Hicks application?”
(R. at 11).
Although Guaranty’s Chief Underwriter testified that the company “would not
have issued the Policy had it known about the misrepresentations in the
Application [and] SOCI” forms, discovery eventually revealed that the underwriters
took no action to investigate the Hicks Application prior to the Policy’s issuance. (R.
at 12). Following a medical examination of Mr. Hicks, Guaranty issued the Hicks
Life Insurance Policy (“the Policy”) on February 16, 2007 with a face value of $20
million and a planned first year premium of $955,827. (R. at 7-8). The Policy
named the Hicks Trust as the owner and sole beneficiary. (R. at 8).
After receiving the Policy and Policy Acceptance Form from Guaranty, Mr.
3 Hightower returned the signed and completed documents, and the Policy officially
became effective on March 5, 2007.
(R. at 8 n.5) (stating that a Guaranty life
insurance policy does not go into effect “…until the executed Policy Acceptance
Form is received .”). On the same day of the Policy’s inception, Sydney paid the first
three-month premium in the amount of $238, 956.75. (R. at 8).
After the Policy went into effect, Sydney executed a Beneficial Interest
Transfer Agreement (“BITA”), assigning the beneficial interest in the Policy to
Presidential Holdings on March 7, 2007. (R. at 8). Under the terms of the BITA
agreement, Presidential did not solicit Sydney in any way for the purpose of
obtaining the beneficial interest in the Hicks Trust. By the Policy’s terms and
conditions, Guaranty expressly relinquished its control over the validity or
sufficiency of the Policy’s assignment.
On October 21, 2008, Presidential submitted both the Designation of Owner
and Designation of Beneficiary form to Guaranty outlining the transfer in beneficial
interest on the Policy to Presidential. (R. at 9). In response, on November 19, 2008,
Guaranty refused to accept the form stating that it needed whether the lawful sale
raised “any questions related to the issuance of the Policy.” (R. at 9). On December
8, 2008, the Trust informed Guaranty that it was entitled to change the beneficiary
and ownership under Sections 17 and 18 of the Policy. (R. at 9). On December 22,
2008, Guaranty, for the second time, refusal to process Presidential’s request
pursuant to the Policy. (R. at 9). In response, Presidential and the Trust filed suit
on January 5, 2009. (R at 9).
4 B.
Procedural History
The Investors filed suit on January 5, 2009, against Guaranty alleging claims
for breach of contract, conversion, breach of the covenant of good faith and fair
dealing, and fraud for its refusal to process the transfer of ownership and
beneficiary of the Policy.
(R. at 9, 13).
Shortly thereafter, on June 6, 2009,
Guaranty filed a counter for claim summary judgment seeking a declaration that
the Policy is void for lack of insurable interest and retention of the unearned
premiums paid on the Policy. (R. at 13).
The district court found the policy void ab initio, reasoning that it lacked an
insurable interest.
Further, the district court ordered Guaranty to return all
premiums to the Investors finding that this was required by the general principles
of rescission. (R. at 14).
C.
Standard of Review
The standard of review for a court of appeals granting of a motion for summary
judgment is de novo. BellSouth Telecommunications, Inc. v. Johnson Bros. Group,
106 F.3d 119, 122 (5th Cir.1997); Guillory v. Domtar Industries, Inc., 95 F.3d 1320,
1326 (5th Cir.1996). Additionally, the review of a district court’s interpretation of a
state statue also receives de novo review. F.D.I.C. v. Shaid, 142 F.3d 260, 261 (5th
Cir. 1998).
Here, this court is reviewing the district court’s grant of summary
judgment based on N. Tej. §§ 1407-09. Thus, the proper standard of review for this
case is de novo.
5 SUMMARY OF THE ARGUMENT
The Fourteenth Circuit Court of Appeals should find that at its inception, the
Hicks Life Insurance Policy was predicated on the insured’s unlimited interest in
his own life, or, alternatively, the father-son relationship of the insured and the
Policy’s original beneficiary. See N. Tej. § 1409(a)-(c). By the same token, the Hicks
Irrevocable Life Insurance Trust satisfies the insurable interest mandate because
the insured was the Trust’s grantor and his son was the named beneficiary.
Because insurable interest need only exist at inception, after the Hicks Policy
became effective, it was lawfully transferrable to a person or entity lacking
insurable interest. See N. Tej. § 1409(c). Such an assignment does not undermine
or invalidate the original insurable interest underlying the Policy.
New Tejas’
recently-enacted insurable interest provisions, which permit courts to scrutinize the
use of devices, schemes, artifices or special purpose entities to “counterfeit”
insurable interest, did not exist at the time of the Policy’s inception and are
retroactively inapplicable. See N. Tej. § 1409(d)-(g). Thus, the District Court erred
when it declared the Policy void due to the alleged “pre-arranged deal of the
investors to procure ownership and beneficial interests in the Policy.” (R. at 14).
This court must base its ruling solely on the provisions in effect at the time of the
Policy’s inception.
Conversely, the Fourteenth Circuit Court of Appeals should uphold the
district court’s decision to order the return of all unearned premiums to the Trust.
6 It is well settled law that rescission of an insurance policy requires the insurer to
return anything of value obtained to the insured. This principle includes when a
policy is void ab initio, even in instances of fraud. The rationale for this principle is
two-fold.
First, allowing an insurer to retain premiums on an insurance policy that is
declared void ab initio leads to an inconsistent election of remedies. This is because
the insurer would be allowed to both avoid a policy and seek an affirmative
judgment by retaining the premiums paid on a policy that is said to have never
existed in the first place. Simply put, this court should not allow Guaranty to have
it both ways. Second, courts require an insurer to return the unearned premiums to
the insured because they have not suffered any risk of loss when a policy is declared
void ab initio. Premiums are considered the consideration an insured pays for the
risk the insurer takes when it issues a policy. Courts have determined that if a
policy is void from its inception, that at law, the insurer never assumed any risk of
loss.
As Guaranty never assumed any risk of loss on this policy, the Trust is
entitled to a return of the consideration it had paid, namely the unearned
premiums.
Further, the procured-by-fraud exception to the rule requiring an insurer to
return premiums to an insured is not applicable in the case at bar. This exception
to the general rule allows insurers to retain premiums only if the insured
committed actual fraud to procure the policy. The courts that have applied this
exception do so only after focusing the analysis on the actions of the insured, not
7 third party purchasers. They have determined that if the insured committed fraud
to obtain the policy than the insurer may retain some premiums. Here however, it
is undisputed that the insured, Mr. Hicks, did not commit fraud when he applied for
the policy.
Moreover, Guaranty cannot claim to have reasonably relied on any
misrepresentations made by the Investors, third party purchasers for value, during
the procurement of the Policy. An insurer cannot claim that a policy was procured
by fraud if has not reasonably relied on a material misrepresentation. An insurer
that has a reasonable belief of the presence of misrepresentations, but fails to
investigate the facts available to it with due diligence, cannot meet the reasonable
reliance element necessary to prove fraud. Here, Guaranty had knowledge of the
misrepresentations in the Policy before it was to Mr. Hicks and cannot claim it
reasonably relied on any misrepresentation made in the application for the Policy.
Thus, the procured-by-fraud exception to the rule requiring the Guaranty to return
all unearned premiums to the Trust is inapplicable and this Court must return all
of the unearned premiums to the Trust.
Finally, if this court determines that an insurable interest does exist then the
Trust is still entitled to a return of all unearned premiums because Guaranty
unlawfully rescinded the Policy. In order to properly rescind a policy, the insurer
must return the premiums in a reasonably timely manner when once it ascertains
the facts it will use to justify the rescission in the first place.
Courts have
determined that an insurer, that waited even a few months to return the premiums
8 to the insured, has acted unreasonably. Here, Guaranty unreasonably waited over
one year after it ascertained the knowledge that it based its claim to rescind the
contract on, and still has not returned any premiums to the Trust.
This Court should reverse the district court’s decision declaring the policy
void ab initio for lack of an insurable interest. Alternatively, if this Court finds no
insurable interest present, it should affirm the District Court’s decision ordering the
return of all premiums to the Trust.
ARGUMENT
I. A LEGITIMATE INSURABLE INTEREST SUBSTANTIATES THE
VALIDITY OF THE HICKS LIFE INSURANCE POLICY.
Insurable interest is the sole criterion that distinguishes valid life insurance
from commonplace gambling.
Therefore, to prevent “wagering on life,” most
jurisdictions in the United States have implemented an insurable interest
requirement, either through legislation or judicial ruling.
Generally, insurable
interest manifests itself through consanguinity, affinity or a pecuniary reliance on
the continued life of the insured. See Warnock v. Davis, 104 U.S. 775, 779 (1881).
This interest must be present at the inception of a life insurance policy, or else the
policy is void ab initio. See Baltimore Life Ins. Co. v. Floyd, 91 A. 653 (Del. Super.
Ct. 1914).
In New Tejas, insurable interest is statutorily recognized as “a reasonable
expectation of pecuniary advantage through the continued life, health, or bodily
safety of another person…or a substantial interest engendered by love and affection
9 in the case of individuals closely related by blood or law.”
N. Tej. § 1409(a).
Insurable interest can also be established via N. Tej. § 1409(b), which codifies the
widely-accepted rule that “[a]n 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 his or her own life, health, or bodily safety…”. Id. § 1409(b). Like
most other jurisdictions, New Tejas requires insurable interest to “exist at the time
the contract of life or disability insurance becomes effective.” Id. § 1409(c). Notably,
however, it does not need to exist “at the time the loss occurs.” Id.
In recent years, the emergence of stranger originated life insurance
(“STOLI”) policies has spurred many state legislatures to adopt more stringent
standards to regulate the life insurance market. (R. at 3). Some states, including
New Tejas, amended their existing insurance laws to target the use of certain
devices, entities and schemes that falsely give the appearance of insurable interest.
See id. § 1409(d)-(e). New Tejas’ 2009 Amendments (“the Amendments”), however,
are retroactively inapplicable, and therefore cannot be used by insurers to challenge
the validity of policies issued prior to August 28, 2009. See id. § 1409(g).
The Fourteenth Circuit Court of Appeals should overturn the decision of the
district court and find that the Hicks Life Insurance Policy (“the Policy”) issued on
February 16, 2007 is valid because a legitimate insurable interest underlies the
Policy. The insured, Mr. Hicks, had an unlimited insurable interest in his own life
and lawfully procured a life insurance policy in accordance with N. Tej. § 1409(b). If
this Court disregards the self-interest of the insured, however, the validity of the
10 Policy is nevertheless sustained by the insurable interest of Mr. Hicks’ son, Sydney,
the Policy’s original beneficiary. N. Tej. § 1409(a). If it is necessary to look even
further for a person or entity with an insurable interest in the Policy, this Court
should find that the Hicks Irrevocable Life Insurance Trust (“the Trust”), created
prior to the Policy’s inception, also had a valid insurable interest because Mr. Hicks
was the Trust’s grantor and Sydney was the Trust’s beneficiary. (R. at 7).
Because the Hicks Policy was secured by legitimate insurable interest, its
ownership and beneficial interest were legally transferrable after its inception.
Under § 1409(c) of New Tejas’ insurable interest law, insurable interest must only
exist on the date a policy becomes effective.
N. Tej. § 1409(c).
The statute
expressly provides, however, that this interest does not need to permanently attach.
Id. (stating that insurable interest “need not exist at the time the loss occurs.”). As
such, the re-assignment of the Policy to Presidential Holdings – a third party
lacking an insurable interest in Mr. Hicks’ life – does not undermine the legitimate
insurable interest present at inception, and does not invalidate the Policy.
Even if it could be definitively established that the Policy was obtained by
means of some “pre-arranged deal” between the insured and Presidential, the
insurance laws in effect at the time of the Policy’s procurement did not forbid it.
Since the enactment of the 2009 Amendments (“the Amendments”) to N. Tej. §
1409, courts in New Tejas may now examine certain devices, entities, and artifices
used to falsify insurable interest. See N. Tej. § 1409(d)-(e). When the Hicks Policy
was issued in 2007, however, New Tejas’ law did not permit courts to look beyond
11 the mere formalities of the contract.
Id. § 1409(a)-(c).
Because the 2009
Amendments are retroactively inapplicable, this Court must base its ruling solely
on the provisions in effect at the time of the Policy’s inception on March 5, 2007, and
should hold that the Policy is valid. Id. § 1409(g). A. At Inception, the Hicks Life Insurance Policy Was Predicated On
Legitimate Insurable Interest In the Life of the Insured.
To prevent investors from “wagering” on the lives of strangers, most
states have enacted insurable interest requirements to ensure the validity and
legitimacy of life insurance policies.
(R. at 3).
As aforementioned, insurable
interest provisions mandate that a policy owner or a beneficiary have a discernible
interest in the life and health of the insured at the time the policy is issued. Id.
The objective of the insurable interest requirement is to distinguish individuals who
possess genuine care and concern for the life of the insured, either through a close
familial bond or substantial economic relationship, from crafty third party investors
seeking to profit from the deaths of strangers. Id.
In nearly all jurisdictions, an individual is said to have an unlimited
insurable interest in his or her own life. Grigsby v. Russell, 222 U.S. 149, 156
(1911); See also Pruco Life Ins. Co. v. Brasner, No. 10-80804, 2011 WL 134056 (S.D.
Fla. Jan. 7, 2011) (stating that an insurable interest includes one’s interest in her
own life, body and health).
This is based on the presumption that people are
unlikely to gamble on their own demise.
12 Along that same logic, immediate family members generally have more to
gain from the continued life of the insured than from their untimely death. Reserve
Mut. Life Ins. Co. v. Kane, 81 Pa. 154, 154-55 (1876). For this reason, in New Tejas
and most other jurisdictions, a life insurance policy can also be founded on insurable
interest “engendered by love and affection in the case of individuals closely related
by blood or law.” N. Tej. § 1409(a). Where some familial ties have been deemed too
attenuated and disconnected to manifest true insurable interest, nearly all courts
that have addressed the matter recognize that immediate family members have
legitimate insurable interests in the lives of one another. See, e.g., Reserve Mut., 81
Pa. at 154-55 (holding that a son has an insurable interest in his father’s life);
Williams v. Washington Life Ins. Co., 31 Iowa 541, 543-54 (1871) (concluding that a
father had an insurable interest in his child’s life); Currier v. Continental Life Ins.
Co., 57 Vt. 496, 500 (1885) (stating that a wife has an insurable interest in the life
of her husband, and a husband in the life of his wife).
Although it has not been expressly codified in New Tejas, it is “well
established” in other jurisdictions that trusts “may purchase and hold life insurance
policies.” Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Trust,
638 F. Supp. 2d 1170, 1178 (C.D. Calif. 2009). Insurance trusts are common estate
planning tools, and they have been increasingly used in recent years to secure life
insurance policies. Id. The fact that an insurance policy is held by a trust, however,
does not diminish the need for insurable interest. If the ownership and beneficial
interest of a policy are held by a trust, insurable interest can be derived from either
13 the grantor or the beneficiary. Id. Generally, as long as insurable interest in the
policy is traceable to one of those two individuals, the trust is also deemed to have
valid insurable interest.
1. Because the insured, Don Juan Hicks, took out the Policy on his
own life, the Policy had a valid insurable interest at its inception.
In insurance law, the goal of insurable interest is to prevent wagering on
human life. This requirement assures that life insurance policies are procured in
good faith and “not for the purpose of speculating upon the hazard of a life in which
the insured has no interest.”
457, 460 (1876).
Conn. Mut. Life Ins. Co. v. Schaefer, 94 U.S.
Nearly all jurisdictions, including New Tejas, consider the
procurement of life insurance to be bona fide and free from speculation if the
insured takes out the policy on his or her own life. See Baltimore Life, 91 A. at 6556; See also N. Tej. § 1409(b) (“An individual has an unlimited insurable interest in
his or her own life…”). The justification behind this common law notion is that a
policy obtained through the insured’s own self-interest is unlikely to be fraudulent.
Baltimore Life, 91 A. at 655.
Although the lower court correctly points out that the elderly are more prone
to fall prey to fraudulent STOLI schemes, it would be imprudent of this Court to
decisively categorize Mr. Hicks, or any 72-year-old retiree, as a feeble-minded senior
requiring protection from STOLI promoters. (R. at 4). The law does not require a
person to be of a specific age or mental capacity to have insurable interest in his or
her own life. See N. Tej. § 1409(a)-(b). In fact, in New Tejas, an individual is said to
14 have a statutorily “unlimited insurable interest in his or her own life, health and
bodily safety.” Id. § 1409(b) (emphasis added).
In this case, nothing in the Record indicates that Mr. Hicks was the subject of
coercion, undue influence or diminished capacity.
To the contrary, the post-
litigation facts in this case show that at the time of the Policy’s issuance, Mr. Hicks
lived independently and communicated with his son via email.
(R. at 10).
Furthermore, Mr. Hicks was obligated to undergo a medical examination prior to
the issuance of the Policy, and the Record does not denote any abnormalities in his
physical or mental wellbeing. (R. at 7). Because Mr. Hicks is presumed to have had
a full legal capacity to procure insurance on his own life in early 2007, the fact that
he was unable to recall the issuance of the Policy some years later is irrelevant. (R.
at 10-11).
If a person is legally competent upon entering into a contract, the
person’s later incompetency, incapacity, or forgetfulness generally has no bearing on
the validity of the contract. Caldwell v. Hatcher, 248 S.W.2d 892, 894 (Ky. 1952);
First Christian Church in Salem v. McReynolds, 241 P.2d 135, 138 (Or. 1952).
In finding the Policy void ab initio for lack of insurable interest, the district
court disregarded the plain language of N. Tej. § 1409(b) and did not trust Mr.
Hicks to make a decision about insuring his own life. Rather than focusing on the
undisputed facts that Mr. Hicks willfully assented to the transaction, underwent a
medical examination, and executed the required insurance forms, the lower court
opted to examine the transaction beyond its formalities and merely speculated as to
who “actually” procured the Policy. For this reason, this Court should overturn the
15 decision of the district court and find that a valid insurable interest existed at the
Policy’s inception.
2. Even if it can be said that someone other than Don Juan Hicks
procured the Policy, under N. Tej. § 1409(a), a valid insurable
interest still existed at the Policy’s inception because the insured’s
son, Sydney Hicks, was the Policy’s sole beneficiary.
Even if this Court determines that Mr. Hicks did not procure the Policy
out of his own insurable interest, the validity of the Policy is nevertheless sustained
by the insurable interest of his son, Sydney.
Although the clarity of insurable
interest begins to fade beyond the realm of the immediate family, courts have long
recognized that parents and children have insurable interests in each other. See,
e.g., Dixon v. W. Union Assurance Co., 16 S.E.2d 214, 218-19 (S.C. 1968) (noting
that a parent has an insurable interest in a son). As the Kentucky Supreme Court
expressed, “…[N]o relationship in life, arising from ties of blood, is more sacred or
more binding than that of parent and child.” Woods v. Woods' Adm'r, 113 S.W. 79,
82 (Ky. 1908).
According to the United States Supreme Court, “[t]he natural
affection in cases of this kind is considered as more powerful – as operating more
efficaciously – to protect the life of the insured than any other consideration.”
Warnock, 104 U.S. at 779.
While some courts have held that adult children do not have the necessary
pecuniary reliance on their parents to constitute insurable interest, they have also
held that the affinity and emotional bond between parents and adult children may
satisfy the requirement. Holloman v. Life Ins. Co. of Va., 75 S.E. 2d 169 (S.C.
1940). For example, in Holloman v. Life Insurance Company of Virginia, the South
16 Carolina Supreme Court held that an adult child had an insurable interest in the
life of his mother by mere fact of the relationship. Holloman, 75 S.E. 2d at 171. In
rendering its decision, the court expressed that it could not “…conceive…that a
policy of insurance taken out by a son on the life of his mother…would expose her to
dangers of any kind.” Id. The close familial relationship between the adult son and
his mother defeated any speculation that the policy was a wagering contract. Id.
New Tejas’ insurable interest law mirrors these sentiments. Under N. Tej. §
1409(a), insurable interest can manifest itself through “a substantial interest
engendered by love and affection in the case of individuals closely related by blood
or law.” N. Tej. § 1409(a). Here, it is undisputed that Sydney Hicks was the named
beneficiary of his father’s Policy via the Hicks Trust. (R. at 7). Under the terms of
N. Tej. § 1409(a), Sydney is “closely related by blood” to Mr. Hicks and has a
“substantial interest [in his life] engendered by love and affection.”
N. Tej. §
1409(a). This Court should adopt the view of the Holloman court and find that this
substantial interest is exemplified through the father-son relationship alone.
Furthermore, in compliance with N. Tej. § 1409(c), Sydney’s insurable
interest sustains the Policy’s validity because it existed at the time the contract was
formed. From the time the Application was submitted to Guaranty on February 6,
2007 until the Policy became effective on March 5, 2007, Sydney Hicks was the
Policy’s sole beneficiary. (R. at 7-8). Thus, under N. Tej. § 1409(a), an insurable
interest existed at inception, and the district court erroneously declared the Policy
void ab initio.
17 3. Because the ownership and beneficial interest of the Hicks Policy
were held by the Hicks Trust, insurable interest can be derived
from Mr. Hicks as the Trust’s grantor and Sydney Hicks as the
Trust’s sole beneficiary.
Because Mr. Hicks and Sydney have legitimate insurable interests in the Policy,
this Court should also find that that the Hicks Irrevocable Life Insurance Trust has
an insurable interest in the Policy. Insurance trusts are common estate planning
tools, and it is “well established” that such trusts “may purchase and hold life
insurance policies.” Lincoln Nat’l, 638 F. Supp. 2d at 1178. Typically, insurance
trusts are established for the purpose of shielding a policy’s beneficial interests from
federal estate tax upon the insured’s death. Id. at 1174. When the ownership and
beneficial interest of a life insurance policy are held in a trust, the trust’s insurable
interest can be derived from either the grantor or the beneficiary. Id.
In Lincoln National Life Insurance Company v. Gordon R.A. Fishman
Irrevocable Life Trust, the United States District Court for Central California’s
Eastern District upheld this principle when it approved the use of a trust as a
legitimate vehicle for procuring and holding a life insurance policy. See Lincoln
Nat’l, 638 F. Supp. 1170. In that case, Lincoln National, the issuing insurance
company, challenged two policies purchased on the life of Dr. Gordon Fishman by a
trust he set up naming his children as beneficiaries.
Id. at 1173-74. In 2007,
Lincoln filed suit against Dr. Fishman, alleging that the life insurance policies it
issued to the trust were unlawfully procured at the behest of the Mutual Credit
18 Corporation (“MCC”), the group that financed the policies’ premiums. Id. at 117071.
Reiterating California’s insurable interest law, the court asserted that a life
insurance policy “must, at its inception, have been held by someone…who has an
interest and advantage in the continued life, health or bodily safety of the insured
and who would suffer a consequent loss where any of those situations come to pass.”
Id. at 1177-78. Although the court acknowledged Lincoln’s “valiant attempts” to
proffer evidence of an elaborate scheme contrived by Fishman and MMC, it refused
to look beyond the formalities of the policies’ procurement. Id. at 1178. “Notably
absent
from
Lincoln’s
argument
is
any
citation
to
authority
from
California…allowing a court to basically look behind the terms and other
formalities of an insurance agreement.” Id. The court concluded that “the simple
fact remains that the law, as it is currently structured, allows for an arrangement
as that concocted by MCC.” Id.
For the same logic proffered by the court in Lincoln National, this Court
should hold that the legitimate insurable interests of Mr. Hicks and Sydney sustain
the validity of the Hicks Life Insurance Policy and, by the same token, the Hicks
Trust. As the Trust’s grantor and beneficiary, respectively, Mr. Hicks and Sydney
conferred their insurable interests in the Policy to the Trust at the time of the
Policy’s inception. Because the insurable interest laws in effect at the time of the
Policy’s procurement allowed for such an arrangement, the district court
erroneously invalidated the Policy.
19 B. The Hicks Trust Was Lawfully Transferrable to Presidential Because the
Hicks Policy Was Premised On Genuine Insurable Interest At Its
Inception.
To have legal merit, insurable interest must not only exist substantively, it
must also be readily identifiable at the inception of an insurance policy. See N. Tej.
§ 1409(c) (“…insurable interest shall be required to exist at the time the contract of
life or disability insurance becomes effective…”).
Akin to New Tejas’ law,
Delaware’s insurable interest statute defines the moment at which the requirement
applies as “the time when such contract was made,” or when the life insurance
contract becomes effective.
18 Del.C. 1953, § 2704 (2011).
Though the precise
language of the mandate varies across jurisdictions, the impetus of the “at
inception” requirement is well-rooted in common law. See Conn. Mut., 94 U.S. at
462-63 (recounting the evolution of English common law toward the requirement
that an interest in the insured exist at the time the insurance is effected, but need
not continue until death).
“In recent years, a derivative market for life insurance has developed in
which existing life insurance policies and certificates are sold to third parties who
lack an insurable interest in the life of the insured.” (R. at 3). More commonly
known as a “life settlement,” a policy backed by a legitimate insurable interest at
inception is legally transferrable to an individual or entity that lacks an insurable
interest. Id. This rule is reflected not only in § 1409 of New Tejas’ insurance law,
20 but also in the terms and conditions of a Guaranty life insurance policy. See N. Tej.
§ 1409(b); See also (R. at 19-20).
While N. Tej. § 1409(b) expressly permits the insured to designate whomever
he chooses as a beneficiary, there are no New Tejas statutes prohibiting the transfer
of policy ownership or beneficial interests.
See N. Tej. § 1409(a)-(g). Like the
insurance statutes governing many other states, New Tejas’ insurable interest law
does not contain an intent element. See, e.g., Principal Life Ins. Co. v. DeRose, No.
1:08-2294, 2011 WL 4738114 (M.D. Pa. Oct. 5, 2011); Kramer v. Phoenix Life Ins.
Co., 15 N.Y.3d 539 (N.Y. 2010); Lincoln Nat’l, 638 F. Supp. 2d at 1170. Thus, as
long as the purchaser of the life insurance policy demonstrates the requisite interest
in the insured under § 1409(a) or § 1409(b) at inception, the policy is lawfully
transferrable as a life settlement.
In Kramer v. Phoenix Life Insurance Company, the New York Court of
Appeals contrasted a fraudulent STOLI scheme with a lawful life settlement,
finding the latter to be permissible under New York insurance law. Kramer, 15
N.Y.3d at 539. The court determined that an individual may procure a policy on his
or her own life and immediately reassign the policy to another individual who lacks
an insurable interest in the life of the insured. Id. at 545. Notably, the court
emphasized that the transaction was permissible even if the original policy was not
procured for the protection of a person with an insurable interest. See id. (stating
that “New York law permits a person to procure an insurance policy on his or her
own life and immediately transfer it to one without an insurable interest in that
21 life, even where the policy was obtained for just such a purpose.”).
The Kramer decision turned on the court’s determination that the pertinent
New York insurance statute lacked an intent element. Id. at 551. As such, the
court disregarded the policy purchaser’s motivation for procuring life insurance in
the first place. Id. The court reiterated that it was not within the realm of judicial
authority “to engraft an intent or good faith requirement onto a statute” that by
itself “permits an insured to immediately assign the policy.” Id. at 553.
In 2011, a U.S. District Court in Pennsylvania also affirmed that the
subjective intent of the insured to transfer a life insurance policy to a third party
lacking insurable interest is irrelevant as long as an insurable interest existed at
the policy’s inception. See DeRose, 2011 WL 4738114. In DeRose, the insurer,
Principal Life, issued three insurance policies on the life of the insured, JoAnn
DeRose. Id. at *1. Ownership and all beneficial interests in the policy were held by
a trust, which designated Mrs. DeRose’s children as beneficiaries. Id. When the
trustees later executed forms of “Assignment of Life Insurance” on each of the
policies, Principal Life sought a declaratory judgment that the policies lacked
insurable interest at inception. Id. at *3.
Finding Pennsylvania’s insurable interest statute to be unambiguous on its
face, the court noted that the law did not contain any language regarding the intent
of the insured in procuring the policy. Id. at *7. Pennsylvania’s insurable interest
statute declares that “no transfer of a [life insurance] policy or any interest
thereunder shall be invalid by reason of a lack of insurable interest of the transferee
22 in the life of the insured or the payment of premiums thereafter by the transferee” if
an insurable interest existed at inception. Id. at *4 (citing 40 PA. CONS.STAT. §
512). Following Kramer as persuasive authority, the court further remarked that
that the insurable interest statute did not require subsequent transfers of insurance
policies to be conducted in “good faith.” Id. at *7-8 (citing Kramer, 15 N.Y.3d at
542). As such, the court determined that intent was irrelevant to the existence of
an insurable interest. Id. at *8.
Kramer and DeRose are consistent with a number of other recent decisions
holding that an insurable interest need only exist at the inception of a life insurance
policy, notwithstanding an intent to assign the ownership or beneficial interest of
the policy to a third party investor. California, Arizona and Minnesota are among
several states that have also affirmed this principle. See, e.g., First Penn-Pacific
Life Ins. Co. v. Evans, 313 F. App'x 633 (4th Cir. 2009) (applying Arizona law); Sun
Life Assur. Co. of Canada v. Paulson, 2008 WL 451054 (D. Minn. Feb. 15, 2008);
Lincoln Life & Annuity Co. of New York v. Berck, 2011 WL 1878855 (Cal. Ct. App.
May 17, 2011),
Although this is an issue of first impression in New Tejas, this Court should
follow the aforementioned persuasive authority and hold that the Hicks Policy was
freely transferrable to Presidential Holdings because it was secured by legitimate
insurable interest. Under the insurance laws of New Tejas, as long as insurable
interest is established at the time a policy becomes effective, either through the selfinterest of the insured himself, a familial connection, or a substantial economic
23 relationship between the insured and a beneficiary, procuring a policy and
subsequently reassigning the ownership or beneficial interest to a third party
lacking insurable interest does render the policy invalid.
N. Tej. § 1409(a)-(c).
Here, insurable interest can be established via Mr. Hicks, Sydney or their
respective interests in the Hicks Trust.
Id. § 1409(c). These interests were in
existence at the time of the Policy’s inception on March 5, 2007. (R. at 7-8). Thus,
the district court erred when it declared the Policy void ab initio.
C. Because the 2009 Amendments to N. Tej. § 1409 Do Not Apply
Retroactively, N. Tej. §§ 1409(d)-(f) Should Have No Bearing On the
Outcome of This Case.
Not all jurisdictions have been successful in eradicating STOLI transactions,
and many have been forced to amend and modify their existing insurance codes to
deter unscrupulous investment schemes.
For example, following the Kramer
decision in 2010, where the New York Court of Appeals affirmed that a person may
take insurance out on his or her own life for the specific purpose of selling the policy
to a stranger, New York State enacted statutory provisions that prohibited such
activity.
Similarly, in 2009, New Tejas augmented its own insurable interest
statutes to deter the promulgation of STOLI policies in the state’s life insurance
market. See N. Tej. §§ 1409(d)-(g).
The district court plainly disregarded statutory instruction and erroneously
found that the Hicks Policy was void ab initio for lack of insurable interest because
it premised its determination on these recently-enacted amendments to N. Tej. §
1409. (R. at 14). However, according to § 1409(g) of New Tejas’ insurable interest
24 law, “[t]he 2009 Amendments are not to be applied retroactively.” N. Tej. § 1409(g).
Because the Hicks Policy was issued on February 16, 2007, more than two years
prior to the enactment of the 2009 Amendments, this Court should regard the preamended version of § 1409 as authoritative in this case.
Pointing to the alleged “pre-arranged deal of the investors to procure
ownership and beneficial interest in the Policy,” the district court found that the
Policy lacked a valid insurable interest and was therefore void as a matter of law.
(R. at 14). According to the amended statute, § 1409(e) declares that “[a]ny 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.” N.
Tej. § 1409(e).
However, because § 1409(g) explicitly asserts that New Tejas’
amended insurable interest provisions are not to be applied retroactively, the
conduct of the third party investors in procuring the Hicks Policy should not have
impacted the court’s decision. Id. § 1409(g). Here, the Policy was executed in 2007,
two years prior to the enactment of the statutory amendments to § 1409. Because
the determination of insurable interest occurs at the time of an insurance policy’s
inception, and because the Hicks Policy’s inception preceded the 2009 amendments,
§ 1409(e) is not pertinent to this case. The legitimate insurable interest of Sydney
Hicks, the Policy’s beneficiary, is the only factor this Court should consider.
Furthermore, the fact that the ownership and beneficial interest of the Policy
were held by the Hicks Irrevocable Life Insurance Trust should also not influence
this Court’s analysis. On the date of the Policy’s inception, N. Tej. § 1409(d), which
25 prohibits the use of trusts and special purpose entities “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,” did not exist. N. Tej. § 1409(d). This provision was enacted two
years later as an amendment to New Tejas’ pre-existing insurable interest law.
Therefore, because of the limitation § 1409(g) imposes on the retroactive application
of the 2009 Amendments, this Court need not focus its attention on the identity of
the Policy as a Trust. Even if this Court believed the Hicks Trust to be a red flag
for fraudulent conduct and erroneously examined this case through the lens of §
1409(d), Mr. Hick’s interest in his own life and Sydney’s interest in the life of the
insured, his father, satisfies New Tejas’ insurable interest standard.
The district court blatantly disregarded New Tejas’ statutory law when it
examined the procurement and assignment of the Hicks Policy beyond its “four
corners.” At the time of the Policy’s inception and transfer, N. Tej. § 1409(d)-(g) did
not exist, and these amended provisions cannot be applied retroactively. Thus, in
the absence of STOLI legislation predating the Policy’s inception that would allow
purported schemes and artifices to be scrutinized, this Court should abstain from
speculating on the subjective intentions of the insured and his beneficiary.
II.
The District Court Properly Ordered The Premiums To Be
Returned To The Trust Because Well-Established Principles Of
Rescission Require That An Insurer Must Return Anything Of
Value When A Policy Is Void Ab Initio , Because the ‘Procured-ByFraud’ Exception Is Not Applicable, And Because If An Insurable
Interest Exists, Guaranty Unlawfully Rescinded the Policy
26 The District Court properly concluded that Guarantee was required to return
the unearned premiums to the Hick’s Trust. (R. at 14-15). Its is hornbook law that
when a contract is rescinded, “the parties are to be placed as far as possible in the
situation in which they would have stood if there had never been any such
transaction.” Pan-Am. Petroleum & Transp. Co. v. United States, 273 U.S. 456,
505, (1927).
Indeed, courts have long recognized that the rescission of a life
insurance policy “requires the insurer to refund premiums” so that both parties can
be returned to their status quo. Sun Life Assur. Co. of Canada v. Berck, 719 F.
Supp. 2d 410, 418 (D. Del. 2010). Notably, this principle has been held true even in
cases concerning fraud and material misrepresentations. PHL Variable Ins. Co. v.
Faye Keith Jolly Irrevocable Life Ins. Trust ex rel. Shapiro, 460 F. App'x 899, 902
(11th Cir. 2012) (holding that recession requires an insurer “to return any
premiums paid under the contract, even where the insured person originally
obtained the policy by fraud.”) Thus, Guarantee’s rescission of the Policy under N.
Tej, § 1408 requires all unearned premiums to be returned to the Trust.
The fraud exception to this general rule is not applicable as it requires
“actual fraud” perpetrated by the insured and the Trust is an innocent third party
purchaser for value. Wells Fargo Bank, N.A. v. Lincoln Nat'l Life Ins. Co., 2009
U.S. Dist. LEXIS 129696, 11 (C.D. Cal. Apr. 13, 2009). This is an exception to the
general rule and allows an insurer to retain the premiums when the policy was
procured by actual fraud of the insured. PHL Variable Ins. Co. v. Lucille E. Morello
2007 Irrevocable Trust ex rel. BNC Nat. Bank, 645 F.3d 965, 969 (8th Cir. 2011).
27 Additionally, Guaranty knew of the material misrepresentations before it
issued the policy to the insured.
(R. at 11).
An insurance company cannot
reasonably rely on a material misrepresentation to void an insurance policy if it
fails to exercise due diligence and draw on information within its own company.
PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d 1205, 1212 (N.D. Ga. 2011) aff'd sub
nom. 460 F. App'x at 901 (11th Cir. 2012). Moreover, a party that is in the best
position to avoid the misrepresentations should be the party to bear the loss. In re
Int'l Forum of Fla. Health Benefit Trust, 607 So. 2d 432, 437 (Fla. Dist. Ct. App.
1992. Here, as Guaranty was in the best position to avoid the misrepresentations in
the first place, it should bear the loss, and not place the burden on, a third party
purchaser for value.
Finally, if this Court determines that an insurable interest does exist, the
Trust is still entitled to a return of all premiums placed in the Court’s Registry.
Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust,
No. 10-7560, 2012 WL 688817 at *6 (C.D. Cal. Feb. 3, 2012) (holding that the policy
in question had an insurable interest at the inception and the insurer was required
to return the premiums to the insured that were tendered to the court’s registry).
In orderly to properly rescind a contract the party seeking rescission “must restore,
or offer to restore, the consideration received, as a condition precedent to bringing
the action.” Am. Gen. Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331, 1342
(11th Cir. 2009). Further, “[w]here a party desires to rescind upon the ground of
mistake or fraud, he must, upon the discovery of the facts, at once announce his
28 purpose, and adhere to it.” Grymes v. Sanders, 93 U.S. 55, 62, (1876). Here, after
Guaranty waited over a year of the “discovery of the facts” to rescind the policy and
has yet to return any premiums to the Trust. Thus, if this Court determines that
an insurable interest does exist in the Policy, it must order Guaranty properly
rescind the contract by immediately returning the premiums to the Trust.
A. The Trust is Entitled to a Return of All Unearned Premiums Of A
Rescinded Policy That Was Declared Void Ab Initio, Even in the Case of
Fraud.
The District Court’s decision, which properly recognized that principles of
rescission required Guaranty to return all premiums to the Trust, must be upheld.
(R. at 15).
Rescission does not terminate a contract, but rather, “requires the
parties to unmake the contract.” United States v. Texarkana Trawlers, 846 F.2d
297, 304 (5th Cir. 1988) (internal quotations omitted). The Supreme Court has
stated that the lynchpin of rescission is that “he who seeks equity must do equity[.]”
Pan Am. Petroleum, 273 U.S. at 505. In other words, the rescission of a contract
should “restore the parties . . . to the status quo that existed before the contract was
formed.” Texarkana, 846 F.2d at 304.
When an insurance policy is rescinded, or declared void ab initio for lack of an
insurable interest, the insurer must return anything of value including—unearned
premiums. Wells Fargo Bank, N.A., 2009 U.S. Dist. LEXIS 129696 at *9; see also
44 Am. Jur. 2d Insurance § 924 (“The return of premiums paid upon an insurance
policy void ab initio because the applicant did not have an insurable interest will be
allowed where the policy was obtained through no fraud of the procurer, even
29 though the insurance company or its agent has not acted fraudulently.”) This is
justified even in situations involving fraud. Lincoln, U.S. Dist. Lexis at *9; see also
Jolly, 460 F. App'x at 901.
The justification for this principle is twofold. First, allowing an insurance
company to both rescind a policy and retain unearned premiums creates an
inconsistent election of remedies. Principal Life Ins. Co. v. Lawrence Rucker 2007
Ins. Trust, 774 F. Supp. 2d 674, 679 (D. Del. 2011). Second, striking the policy void
from its inception signifies that insurers are not exposed to any risk of loss. In re
Texas Ass'n of School Boards, Inc., 169 S.W.3d 653, 658 (Tex. 2005) (“If risk has
never attached because an insurance policy was void ab initio, the insured is
entitled to a return of all premiums paid.”) Following these two principles, in this
case allowing Guaranty to retain the unearned premiums and rescind the contract
allows it to have an inconsistent election of remedies as well as to keep the
consideration for a risk it never actually assumed. 1. Equitable election of remedies preclude an insurer from both
rescinding a policy and retaining the unearned premiums.
The Investors are entitled to a return of the unearned $4.7 million in
premiums paid on a policy that has been declared void at its inception.
As
previously mentioned, the principle of rescission is applicable to life insurance
policies that are declared void ab initio for a lack of an insurable interest. Berck,
719 F. Supp. 2d at 418 (deciding that if a policy is void ab initio the principles of
rescission apply and require premiums returned to the insurer). This is because
allowing an insurer to seek equitable relief through both rescission and retention of
30 premiums leads to an inconsistent election of remedies. Lincoln Nat. Life Ins. Co. v.
Snyder, 722 F. Supp. 2d 546, 565 (D. Del. 2010). The insurer “must place the
insured back in the same position the insured was in before the effective date of the
policy.” Brasner, 2011 WL 134056 at *7.
In Snyder, the district court held that an insurer could not retain unearned
premiums of an insurance policy that was void for lack of an insurable interest. 722
F. Supp. at 564. In that case, an insurer sued the trustee of a life insurance trust
and a third party investor for allegedly participating in a STOLI transaction with
the insured. Id. The insurer sought to void the policy ab initio and retain the
premiums it had already collected. Id. at 555. The Court denied the insurer’s claim
that it was entitled to retain the premiums and held, “[A]n election of remedies
prevents an insurer from both rescinding a policy and retaining the premiums.” Id.
at 564. When reaching this conclusion, the court determined that rescission, as an
equitable relief, precludes an inconsistent election of remedies. Id. at 565. Here,
the Investors seek the same protection that was afforded to the Trust in Snyder. (R.
at 15).
Like the insurer in Snyder, the district court properly determined that
Guaranty is not entitled to an inconsistent form of remedies.
Similarly, in Lawrence Rucker 2007 Insurance Trust, the district court
required an insurer to return its premiums to the insured when the policy in
question was void ab initio. 774 F. Supp. 2d at 679. Citing Snyder, the court
determined that it would be inequitable to allow the insurer to both rescind a policy
and retain the premiums. Id. at 682. Specifically, the court held “the [insurers]
31 could not have it both ways” by seeking rescission of the policy and retention of the
premiums. Id. at 683. Yet, this is exactly what Guaranty asks this Court to do. (R.
at 13). Much like the insurer in Snyder, Guaranty seeks to “have it both ways” by
rescinding the Policy and keeping the unearned premiums. Id.
Here, Guaranty has claimed that the Investors made “false representations”
in order to obtain the Policy; yet still seek both rescission as well as retention of
unearned premiums. (R. at 12). However, it is well settled that “one who complains
of fraud and deceit has the right either to rescind what was done as a result of the
fraud and deceit, or to affirm what had been done and sue for damages caused by
such fraud.” United States v. Idlewild Pharmacy, Inc., 308 F. Supp. 19, 22 (E.D. Va.
1969) citing Robb v. Voss, 155 U.S. 13 (1894). Indeed, the insurer may choose one
remedy or the other, but not both. Id.
Moreover, in Sylvania Industrial. Corporation. v. Lilienfeld's Estate,2 the
Fourth Circuit explained that
When one takes legal steps to enforce a contract, this is a
conclusive election not to recind [sic]. The converse is also true,
so that one who commences an action to rescind has made his
election and cannot maintain an action on the contract.
132 F.2d 887, 893 (4th Cir. 1943). The court explained that rescission is a remedy
that is rooted in the avoidance of a contract. Id. Importantly, if a party elects for a
remedy that avoids a contract, it would be inconsistent to simultaneously seek an
2 While this case involved a breach of contract arising from the execution of a will,
the court specifically noted that “[t]he case here is not different in principle from
that which would be presented by a suit to have a policy of insurance declared void
for breach of conditions subsequent[.]” Id.
32 affirmative remedy on a contract that no longer exists. Id.; See also Jackson v.
BellSouth Telecommunications, 372 F.3d 1250, 1279 (11th Cir. 2004) (“The two
remedies .... are mutually exclusive.
A claim for rescission is predicated on
disavowal of the contract. A claim for damages is based upon its affirmance. The
plaintiffs cannot pursue a claim for damages, since doing so would require them to
affirm the settlement agreement, including the waiver of claims contained within
the general releases they signed.”)
Here, it is undisputed that Guaranty elected to rescind the Policy. (R. at 12).
As the Fourth Circuit explained, this remedy is rooted in avoidance of a contract.
Sylvania, 132 F.2d at 887. The affirmative claim for retention of the unearned
premiums is inconsistent with election of the remedy of rescission, as the two
“cannot coexist.”
Id.
Thus, it would be inconsistent to award Guaranty the
unearned premiums after it has already elected to rescind the policy. This Court
should so hold.
2. When a policy is void ab initio, the insurers have not been exposed
to a risk of loss and must return all unearned premiums.
The Trust is entitled to a return of all of the premiums it paid to Guaranty
because a risk of loss does not exist in a policy that is declared void ab initio. To
reiterate, a policy declared void ab initio has no legal effect from its inception and
“must be treated as though it never existed.” Penn Mut. Life Ins. Co. v. Greatbanc
Trust Co., No. 09-06129, 2012 WL 3437161 at *7 (N.D. Ill. Aug. 15, 2012)3. In other
3 Notably, courts have construed rescinded policies in a similar manner. Leonardo
v. State Farm Fire & Cas. Co., 675 So. 2d 176, 179 (Fla. Dist. Ct. App. 1996)
33 words, when a policy is rescinded, the legal fiction is that the Investors were never
insured under the policy in the first place. See, e.g., Imperial Cas. & Indem. Co. v.
Sogomonian, 198 Cal. App. 3d 169, 184, (Ct. App. 1988).
Accordingly, any
consideration paid by the insured for the policy must be returned to it when the
policy is rescinded. Id.
In In re Texas, the Supreme Court of Texas determined that a premium paid
by the insured “is the consideration for which the insurer agrees to assume the risk
specified in the policy.”
169 S.W. 3d at 658.
The Court explained that the
foundation of insurance is the distribution of various risks taken by the insurers in
providing coverage to the insured and that “premiums are a function of [this]
calculated risk.” Id. at 659. Importantly, the Court noted that premiums are not
due until such a risk is attached, at which point the premiums become earned. Id.
Therefore, the Court held that “if risk has never attached because an insurance
policy [is] void ab initio, the insured is entitled to a return of all premiums paid.”
Id.
It is important to note that this is not a novel principle.
In American
National Insurance Company v. Smith, the Texas Civil Court of Appeals explained
that
premiums paid upon a void policy of insurance may be recovered
because the underwriter receives a premium for running the
risk of indemnifying the insured, and whatever cause it may be
owing to, if he does not run the risk the consideration for which
(equating an insurance policy that is voided by the court to a policy voidable
through rescission).
34 the premium or money was paid into his hands fails, and
therefore he ought to return it.
13 S.W.2d 720, 723 (Tex. Civ. App. 1929) (internal quotations omitted). Similarly,
in Garamendi v. California Company Insurance Company, the California Court of
Appeals determined that “[r]einsureds were entitled to return of the whole
premium, because rescission of the contract from its inception signifies that
Reinsurers had not been exposed to any risk of loss.” 2005 WL 3485747, at *6 (Cal.
Ct. App. Dec. 21, 2005) (internal quotations omitted).
Here, the Investors paid Guaranty $4.7 million in premiums. (R. at 12, 13).
The premium payments were consideration for the assumption of risk Guaranty
was taking by issuing the policy of insurance to Mr. Hicks.
Thus, it was the
attachment of risk that initially required the Investors to pay the premiums as a
form of consideration to Guaranty. In re Texas, 169 S.W. 3d at 658. However, as
rescission “unmakes” the contract, no risk of loss to the insurer can exist because
the policy itself is said to have never existed at law. Greatbanc Trust Co., 2012 WL
3437161 at *7. Moreover, since the policy was declared void ab initio, Guaranty was
never exposed to any risk of loss in the first place. Id.
Notably, in Berck, the District Court of Delaware addressed this exact
concern. 719 F. Supp. 2d at 418-19. In Berck, the court refused to allow an insured
to retain premiums after a policy was declared void ab initio. Id. There, the Court
posited that allowing for the retention of premiums, “would have the undesirable
effect of incentivizing insurance companies to bring rescission suits as late as
possible, as [] they continue to collect premiums at no actual risk.” Id. Here, if
35 Guaranty retains any premiums, they will do so while undertaking no actual risk.
Similar to the district court in Berck, this Court should not incentivize Guaranty, or
any insurer for that matter, to prolong rescission of a policy in order to earn
premiums free of any risk. Id.
In fact, even without this additional incentive, it still took Guaranty over
nine months from its “initial investigation” into the policy to file its counter-claim
seeking rescission.
(R. at 9, 12).
Accordingly, allowing Guaranty to retain
unearned premiums in this case will unquestionably incentivize it to sit on its
hands and collect risk free premiums in future cases. The Investors are entitled to
a return of all of the premiums paid in regards to the Policy as no risk was ever
attached to Guaranty in relation to the Policy. In re Texas, 169 S.W. 3d at 658. To
find alternatively would not only reward Guaranty’s lax investigation of policies,
but incentivize it to prolong rescission to collect risk free premiums. Berck, 719 F.
Supp. 2d at 418-19
For this reason, the Court should affirm the District Court’s holding and find
that Guaranty is not entitled to retain premiums as consideration for a policy that
never had an attached risk of loss.
B. The ‘Procured-By-Fraud’ Exception To The General Rule Requiring
Insurers To Return Premiums Is Not Applicable To The Trust.
The District Court’s decision properly did not apply the ‘procured-by-fraud’
exception to a rescinded policy against a third party purchaser for value. (R. at 15).
The general rule remains that a policy void ab initio requires the insurer to return
all unearned premiums paid on a policy, even in the case of fraud. Jolly, 460 F.
36 App'x at 901. However, some courts have recognized a narrow exception to this rule
when the insured commits actual fraud when procuring the policy.
Morello, 645
F.3d at 969 (holding that the fraud exception applied only in the case of actual
fraud of the insured) (emphasis added). Here, this rationale is inapposite because
the Policy was declared void ab initio for lack of an insurable interest, not for fraud.
(R. at 14).
In order to rescind a contract based on fraud, the insurer must at least show
that it reasonably relied on a material misrepresentation made by the insured.
Jolly, 800 F. Supp 2d at 1212. Importantly, an insurer “cannot show reasonable
reliance if he has failed to exercise due diligence to discover the information
withheld.” Id. Here, Guaranty knew of misrepresentations before it issued the
policy and failed to exercise any due diligence by conducting further investigations
before it issued the Policy. (R. at 11).
1. The ‘procured-by-fraud’ exception is only applied in cases where the
insured, not third parties, commit actual fraud.
A third party purchaser for value who has not committed fraud cannot fall
into the procured by fraud exception because returning the premiums is not “an
invitation to commit fraud.” Morello, 645 F. 3d at 696. Importantly, the cases that
have applied this procured-by-fraud exception have done so only when the insured,
not a third party, commits fraud in order to obtain the insurance policy. See, e.g.,
Morello, 645 F. 3d at 696; see also TTSI Irrevocable Trust v. ReliaStar Life Ins. Co.,
60 So. 3d 1148, 1150 (Fla. Dist. Ct. App. 2011) (finding that the fraud committed by
the insured is what voided the policy.) (emphasis added). Here, it is undisputed,
37 that the insured, Mr. Hicks, had no knowledge of any misrepresentations in the
policy. (R. at 10-11). In this case, the insured, Mr. Hicks, could not have defrauded
the insurance company, as he had no knowledge any misrepresentations made in
the application for the Policy.
In Morello, a woman was approached by a disbarred lawyer and an insurance
agent and was offered free life insurance on the condition that she sell her interest
in the policy after it was issued. Morello, 645 F. 3d at 967. Ms. Morello consented
to the scheme and knowingly confirmed all of the misrepresentations relating to her
annual income.
Id.
An innocent third party investor ultimately loaned the
premiums to Ms. Morello for the policy. Id. The district court determined that
allowing a return of the premiums to a third party would be “an invitation to
commit fraud” based on the knowing misrepresentations by Ms. Morello, not the
third party investor. Morello, 2010 WL 2539755 at *4. Thus, the court allowed the
insurer to retain the premiums because Ms. Morello—the insured, not the third
party—knowingly made false representations to procure the policy in the first
place. Id. at *5.
This case underscores a critical distinction in the rationale for the procuredby-fraud exception. In determining where the fraud exception should apply, courts
look to the actions of the insured, not third parties. Id. at 4. It is undisputed that
Mr. Hicks had no knowledge of any misrepresentations regarding the application
for insurance. (R. at 10-11). Unlike the insured in Morello, Mr. Hicks did not
38 consent to, nor have knowledge of, any misrepresentations made in the application
for insurance. Id.
Additionally, the signature page of Mr. Hicks’s application contains the
clause that the statements he made were “true to the best knowledge and belief of
the undersigned.”
(R. at 17).
Importantly, in William Penn Life Insurance
Company v. Sands, the Eleventh Circuit Court of Appeals found that this type of
clause in an insurance contract had the effect of:
shifting the focus, in a determination of the truth or falsity of an
applicant's statement, from an inquiry into whether the facts
asserted were true to whether, on the basis of what he knew, the
applicant believed them to be true. Thus [the applicant's]
answer must be assessed in the light of his actual knowledge
and belief.
912 F.2d 1359, 1363 (11th Cir.1990) (quoting Skinner v. Aetna Life and Cas., 804
F.2d 148 (D.C.Cir.1986)). Here, Mr. Hicks has represented that his belief when he
signed the application page was that he was being issued a $500,000 policy, not a
$20,000,000 policy. (R. at 10-11). Accordingly, the focus of Mr. Hicks’ actions must
be assessed “in the light of his actual knowledge and belief,” and not on the
accuracy of the information in the representation. Sands, 912 F.2d at 1363.
Thus, the rationale underlining the procured-by-fraud exception is not
present in this case.
Unlike the insured in Morello, the insured here did not
consent to be a part of any scheme, nor knowingly make false representations to
obtain the insurance policy. Morello, 645 F. 3d at 967. Additionally, because Mr.
Hicks signed a clause representing that the information provided was true to his
“best knowledge and belief,” the focus of the court is placed on what he actually
39 believed. Sands, 912 F.2d at 1363. As it is undisputed that Mr. Hicks believed he
was being issued a $500,000 policy, the rationale for the application of the procured
by fraud exception is inapposite. (R. at 10-11). Thus, because there is no possibility
that Mr. Hicks will have “an invitation to commit fraud,” the procured-by-fraud
exception is inapplicable and the district court properly returned the premiums to
the Trust.
2. An insurers access to accurate information negates reasonable
reliance on a material misrepresentation.
Courts have refused to apply the procured-by-fraud exception, even when the
insured has made material misrepresentations, if the insurer has not reasonably
relied on the misrepresentations. Jolly, 800 F. Supp.2d at 1213; see also, St. Paul
Fire & Marine Ins. Co. v. Mayor's Jewelers of Fort Lauderdale, Inc., 465 F.2d 317,
320 (5th Cir. 1972) (finding that to void an insurance policy, a misrepresentation
must have been relied upon by the insurer).
Importantly, an insurer cannot
reasonably rely on a representation it knew might be false. Jolly, 800 F. Sup. 2d. at
1212 (holding that an insurer “cannot show reasonable reliance if he has failed to
exercise due diligence to discover the information withheld.”); see also Mark
Patterson, Inc. v. Bowie, 237 A.D.2d 184, (1st Dep. N.Y. 1997) (“[the] justification
for such reliance is negated by the fact that plaintiff had independent access to this
information.”).
In Jolly, a trustee was alleged to have had affirmed the misrepresented net
worth of the insured when executing a policy on behalf of a trust. Id. The insurer
requested
to
retain
the
premiums
based
40 on
the
affirmation
of
this
misrepresentation. Id. at 1207. The district court denied this request, holding that
it “finds no factual, legal or equitable basis for permitting plaintiff to obtain policy
premiums being held in the registry of the court” because the insurers could not
prove their claim for misrepresentation.
800 F. Supp. 2d at 1215.
The Court
explained that “[w]here a plaintiff did not draw on information which was available
to it and within its own company and the industry generally, there can be no
reasonable reliance as a matter of law.” Id. The court determined that several “red
flags”
existed
that
served
to
put
the
insurer
on
notice
of
potential
misrepresentations. Id.
Here, Guaranty’s counterclaim alleged that the Trust knew “that Mr. Hicks
did not have a net worth of $1.2 billion or income of $8 million at the time it
executed the Application,” and that it “made false representations to the contrary in
order to obtain the Policy.”4 (R. at 12). However, Guaranty had knowledge of the
potential misrepresentations before it issued the policy. (R. at 11). One email sent
between Carl Strum and Ted Fink, two underwriters for Guaranty, stated, “A $1.2
billion cab driver? Game over.” Id. A second email between the two, sent the day
before the policy was issued expressed further concern, stating, “Have we looked
into any third parties that may be driving the Hicks application?” Id.
4 The only indicated correspondence between the Trust and Mr. Hightower, who set
up the insurance policy, indicates that Mr. Hightower actually represented to
Presidential that the face value of the policy was confirmed at $120,000. (R. at 10).
Thus, any confirmation made by the Trust was based on its reasonable belief at the
time of the application, which must be the courts focus when determining actions
taken by the trust. Sands, 912 F.2d at 1363.
41 Importantly, courts have recognized that, “[a]n insurer can be charged with
knowing that the representations were false if it had information sufficient to put a
reasonable person on notice that the representations were false and the information
that it had would lead such a person to start an inquiry that, if carried out with
reasonable thoroughness, would confirm that fact.” Story v. Safeco Life Ins. Co.,
179 Or. App. 688, 694-95, (Ore. 2002). Similar to the insurer in Jolly, Guarantee
was aware of certain “red flags” that should have alerted it to potential
misrepresentations. Jolly, 800 F. Supp. 2d at 1215. Two underwriters at Guaranty
sent two separate emails expressing concern over the value of the policy being
issued. (R. at 10). Moreover, an email was sent the day before the policy was
issued inquiring about the presence of any third parties. Id.
Because Guaranty did not “draw on the information available to it” and
“failed to exercise due diligence” it cannot claim to have reasonably relied on any
misrepresentation made in the application. Jolly, 800 F. Supp. 2d at 1207, 1212.
As Guaranty had knowledge of the misrepresentations made in the policy arranged
by Mr. Hightower, it, not the Trust, must bear the responsibility for the loss. In re
Int'l Forum of Fla. Health Benefit Trust, 607 So. 2d 432, 437 (stating that “if two
innocent parties are injured by a third party, either by negligence or fraud, the one
who made the loss possible must bear legal responsibility.”); see also, Exchange
Bank v. Fla. Nat'l Bank, 292 So. 2d 361, 363 (Fla. 1974) (“[I]f one of two innocent
parties is to suffer a loss, it should be borne by the one whose negligence put in
motion the flow of circumstances causing the loss.”)
42 Here, Guaranty was in the best position to avoid loss. Nat'l Union Fire Ins.
Co. of Pittsburgh, Pa. v. Riggs Nat. Bank of Washington, D.C., 5 F.3d 554, 557 (D.C.
Cir. 1993) (“placing liability with the least-cost avoider increases the incentive for
that party to adopt preventive measures and ensures that such measures would
have the greatest marginal effect on preventing the loss.”) Thus, the Trust must
have the premiums returned, and Guaranty should not be incentivized to continue
lax underwriting policies.
C. If An Insurable Interest Exists, The Trust Still Is Entitled To A Return Of
All Unearned Premiums Because Guaranty Did Not Properly Rescind the
Policy under N. Tej. §1408.
If this Court determines that an insurable interest exists than the Trust is
still entitled to a return of all unearned premiums paid to Guaranty as it unlawfully
rescinded the Policy without first returning the premiums.5 (R. at 13 n.11). In New
Tejas, if “a representation” is false in a material point,” than the party seeking
rescission “is entitled to rescind the contract from the time the representation
becomes false.” N. Tej. § 1408. It is axiomatic that, “[a] party who seeks rescission
must restore, or offer to restore , the consideration received, as a condition
5 The distinction between rescission and a declaration that a policy is void ab initio
is that rescission renders the policy voidable as opposed to void until the insurer
rescinds the policy. Blakeney v. Lomas Info. Sys., Inc., 65 F.3d 482, 485 (5th Cir.
1995) (finding that election to rescind made the contract voidable). Here, that
distinction is of no moment as Guaranty has already rescinded the contract. (R. at
13 n.11). Thus, for all intents and purposes, the policy should be considered void,
not voidable, as if it were declared void ab initio. See Hartford Life & Annuity Ins.
Co. v. Doris Barnes Family 2008 Irrevocable Trust, No. 10-7560, 2011 WL 759554
(C.D. Cal. Feb. 22, 2011) (stating in dicta that whether a policy was rescinded or
declared void by the court made no difference in its determination regarding the
potential retention of premiums).
43 precedent to bringing the action.”
Schoenthal Family, LLC, 555 F.3d at 1342
(emphasis in original) (internal quotations and citations omitted.);6 See also,
BellSouth, 372 F.3d at 1279 (“the prerequisite to rescission is placing the other
party in status quo.”)
Additionally, the Fifth Circuit determined that in order to properly rescind a
contract the party seeking rescission must “restore the status quo ante” and the
rescission “had to occur shortly after the discovery of the alleged deficiency.”
Blakeney v. Lomas Info. Sys., Inc., 65 F.3d 482, 485 (5th Cir. 1995). This principle
remains true even when a party seeks to rescind the contract on the basis of fraud
or misrepresentation. Schoenthal, 555 F.3d at 1332. Here, Guaranty did not even
attempt to place the parties status quo before rescinding the contract and as such,
the rescission was unlawful and requires an immediate return of all premiums to
the Trust. (R. at 13 n.11)
In BellSouth, the Eleventh Circuit Court of Appeals explained what proper
actions a party seeking to rescind a contract on the basis of fraud must undertake.
372 F.3d at 1278. There, the plaintiffs attempted to rescind a settlement agreement
that they claimed they were fraudulently induced into signing. Id. However, the
plaintiffs refused to return certain benefits they received from a portion of the
settlement. Id. The Court determined that “to be excused from the consequences” of
the settlement, the party would have to “disgorge the benefits they have already
received under the contract.” Id. at 1279. The Court noted that until the Plaintiffs
6 The main justification for this principle, much as for a policy void ab initio, is to
prevent an inconsistent election of remedies.
44 remitted the consideration they received from the settlement, rescission would be
improper as it would violate the election of remedies principle. Id.
Here, it is undisputed that Guaranty rescinded the insurance contract while
simultaneously retaining the unearned premiums paid by the Trust.
(R. at 13
n.11). Similar to the party seeking rescission in BellSouth, Guaranty’s rescission of
the Policy was improper as it has not “disgorged the benefits” it has already
received under the Policy. BellSouth, 372 F.3d at 1279.
Additionally, in American Century Life Insurance Company v. Rosenstein,
the Indiana Court of Appeals determined that it was improper for a party seeking
rescission to wait an extended amount of time to return the consideration to the
rightful party. 46 Ind. App. 537, 92 N.E. 380, 381 (1910). The Court stated that
before a party can have a rescission of a contract for fraud or for
breach of warranty, he must not only return or offer to return
whatever of value he had received by the contract, but he must
elect to rescind and place the other party in status quo within a
reasonable time, or with reasonable promptitude after
knowledge of the facts relied on for a rescission .
Id. (internal quotations omitted) (emphasis added). The court determined that
waiting for over one year to register the premiums into the court was unreasonable
and found that the rescission was improper. Id. at 383. Importantly, the Supreme
Court has recognized this same principle. Sanders, 93 U.S. at 62 (“Where a party
desires to rescind upon the ground of mistake or fraud, he must, upon the
discovery of the facts , at once announce his purpose, and adhere to
it.”)(emphasis added).
45 Here, it is undisputed that Guaranty underwriters had knowledge of
potential misrepresentation of the Policy on February 8, 2007, well over a year
before Guaranty tendered the premiums to the court’s registry.
(R. at 11).
Guaranty contacted the Investors on November 19, 2008 regarding these concerns
and still retained the premiums. (R. at 12). Indeed, Guaranty had “knowledge of
the facts” they later “relied on for a rescission” and failed to act in “reasonable time,
or with reasonable promptitude” in returning the premiums. Rosenstein, 92. N.E.
at 383. Similar to court in Rosenstein, this Court should likewise hold that waiting
over one year, to turn the premiums over to the court, after having the facts used to
justify the rescission, is unreasonable. Id.
Finally, courts have ordered the return of premiums when an insurable
interest is present in a policy. In Hartford Life & Annuity Insurance, the District
Court for the Central District of California ordered the return of premiums that had
been tendered to the court by the insurer back to the insured after it determined
that an insurable interest existed in the policy. 2012 WL 688817 at *6. Specifically,
the court held, “because the Court finds the Policy is not void ab initio, [the
insurer’s] motion for summary judgment that [it] is entitled to all premiums paid in
connection with the Policy is DENIED.” Id. Here, Guaranty Life unilaterally and
unlawfully rescinded the Policy on June 6, 2009. R. at 13 n.11. Similar to the
district court in Hartford, if this Court determines that an insurable interest does
exist in the Policy, it must order Guaranty to promptly return all unearned
premiums deposited in the Court’s Registry to the Trust. Id.
46 In summary, the district court properly ordered Guaranty to return all
unearned premiums to the Trust.
(R. at 15.)
This is required by the general
principles of rescission because allowing Guaranty to retain the premiums would
allow it to have an inconsistent election of remedies and retain consideration for a
risk it never actually assumed. Snyder, 722 F. Supp. at 564; In re Texas,169 S.W.
3d at 658.
Also, the procured-by-fraud exception to this general rule is not
applicable because it requires the insurer to prove that the insured committed
actual fraud when procuring the policy. Morello, 645 F. 3d at 696. Here, Mr. Hicks
did not commit fraud when procuring the Policy and Guaranty cannot establish
reasonable reliance on any misrepresentation because it failed to exercise due
diligence before issuing the Policy. (R. at 10-11). Finally, if this court determines
that an insurable interest exists, Guaranty is still required to return all premiums
to the Trust because Guaranty did not properly rescind the contract under N. Tej §
1408.
CONCLUSION
For all of the aforementioned reasons, this Court should overturn the district
court’s invalidation of the Hicks Life Insurance Policy.
Conversely, this Court
should affirm the district court’s to order Guaranty to return all premiums to the
Trust.
47