A five-judge majority of the New York Court of Appeals has declared that a person may procure an insurance policy on his or her own life and immediately transfer that policy to one without an insurable interest, regardless of the purchaser’s intent. Kramer v. Phoenix Life Insurance Co, Slip Op. 176 (Nov. 17, 2010). A copy of the Court’s opinion is available here. This decision may have limited applicability, however, in other states because of the unique language of the New York statute at issue and, even in New York, because the New York legislature has enacted significant changes to the statutory provision – and those changes took effect this past May.
The Court issued its ruling in response to a certified question from the US Court of Appeals for the Second Circuit. The underlying case stemmed from the purchase of several life insurance policies by Arthur Kramer, a prominent New York attorney, in 2008. Mr. Kramer purchased about $56 million in insurance on his own life over a period of several months in 2005, each time using a series of sophisticated transactions to transfer the policies to third parties. Mr. Kramer died in January 2008, and his widow sued in federal court for the policy proceeds. Her argument was that the transfer of the life insurance policies violated New York’s insurable interest rule; and, therefore, the proceeds should be paid to her as the representative of Mr. Kramer’s estate.
The Court of Appeals began by reviewing the plain language of Insurance Law § 3205(b). While observing that common law created the insurable interest doctrine to prevent the placement of wagers on a person’s life, the Court noted that the statute grants a purchaser of insurance on his own life complete discretion to name a policy beneficiary. The statute also stated that such a policy may be transferred or assigned, immediately, to anyone that the purchaser chooses.
The Court noted that the statute said nothing about whether the transferee or asignee had to have an insurable interest. It also stated that the “on his own initiative” language in the statute meant merely that the contemplated transaction had to be free of coercion.
The common law, according to the Court, had been modified by the unambiguous language of the statute. The court, therefore, declined to read a public policy prohibition on stranger-owned life insurance into Insurance Law § 3205(b); nor did the Court accept the invitation to “engraft an intent or good faith requirement” onto the statute.