In a closely watched case, New York state's highest court ruled that it is legal for somebody to take out a life-insurance policy and immediately sell it to a stranger.
The ruling is a blow to insurers and a victory for hedge funds that have bought billions of dollars of such policies in recent years, part of a controversial practice in which thousands of people have taken out life policies and quickly sold them to investors, who pay the premiums and collect when the insured dies.
The case, a focus of a page-one article in The Wall Street Journal in June, involves a dispute over $56 million in life insurance taken out by the late Arthur Kramer, a Manhattan attorney who died in 2008. Just after taking out the policies, Mr. Kramer sold the right to collect on them to hedge funds.
His widow, Alice, later sued, claiming the transactions were illegal under a state "insurable interest" law, which says people can't procure life insurance on someone they aren't close to. Because the law was violated, his widow argued, the Kramer estate should instead collect.
The litigation became a three-way fight. The investors argued they were entitled to the proceeds from policies they paid for, while two of the insurers contended they shouldn't have to pay anything because the policies were illegal from the start.
In a 5-2 decision, the New York Court of Appeals ruled that the state's laws allow a person to take out an insurance policy with the intent of selling it to a stranger. The majority ruled that this didn't violate insurable-interest laws, which are intended to ban transactions tantamount to wagers on a stranger's life.
The ruling is valid only in New York, but some legal experts predict its influence will be broader. Scores of similar disputes over alleged "stranger-originated" life-insurance policies are being litigated across the U.S.I have seen investments collateralized with life policies, real actuarial stuff. Personally, I believe an insured should be able to assign or sell the payout on his/her life policy. The whole insurable interest and person your close to argument doesn't hold water with me. Example: You divorce your wife, you die, she collects. Were you close to her?
As an aside, would you rather bet on death or home ownership?
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