The Sixth Circuit Court of Appeals reversed a lower court ruling and held that under Ohio law, when a life insurance policy is void due to fraud, the insurer is not required to return premiums paid.
In Wuliger v. Manufacturers Life Ins. Co., No. 08-3342 (6th Cir., May 28, 2009), the receiver of a now-defunct viatical investment company sought to void three life insurance policies issued by Manufacturers Life Insurance Company (MLIC). The insureds purchased the policies with the intent of selling them to investors, who had no insurable interest in their lives. These policies were part of a large scheme developed by Liberte. After both the scheme and Liberte itself failed, MLIC sought to void the policies. In response, the receiver sought the return of premiums on these policies in order to recoup some portion of investment money in Liberte Capital Group, the Ohio-based viatical investment company.
After determining that the receiver had standing to bring a claim for rescission, the Sixth Circuit reversed the district court’s decision granting summary judgment to the receiver. After affirming that only the insurer may elect to rescind a policy based on fraud, the Court held that the insurer was not required to return premiums paid on a void policy. The Court rejected the receiver’s assertion that the insured be allowed to “announce the fraud and receive a refund on any premiums paid to date” and concluded that this would have the perverse effect of “allowing a defrauder [to] commit to paying premiums on his fraudulently procured policy knowing that if the premiums ever became unaffordable, he could declare his fraud and receive all of the previously paid premiums back.” Wuliger, supra, at p. 13.
The Court further determined that the equitable defense of unclean hands would bar receiver’s recession claim. Further, the Sixth Circuit ruled that the district court improperly concluded that the receiver was entitled to the return of premiums under the equitably theory of unjust enrichment. The receiver had argued that because Liberte did not have an insurable interest in the lives covered under the policies, the policies should never have been issued and so MLIC was unjustly enriched by the payment of premiums. The Sixth Circuit held that the premiums did not constitute a “benefit conferred,” but instead were consideration for MLIC’s contractual promise to insure the viators’ lives. The court remanded to the district court with an instruction to enter summary judgment dismissing the action against MLIC.
Although the Sixth Circuit’s decision may not be surprising to those familiar with life insurance litigation, it is notable for two reasons. First, in reversing the District Court’s decision, it overturned a troubling decision requiring the insurer – whom all parties agreed had no knowledge of the scheme involved – to refund premiums plus interest. Had that decision been affirmed, it would have had significant implications for many cases involving life insurance fraud of all types. Second, because there have been relatively few decisions interpreting Ohio law regarding life insurance, the Sixth Circuit’s decision may be valuable precedent for future litigation regarding alleged STOLI situations and a variety of rescission actions.
The full decision can be found at: http://www.bricker.com/legalservices/industry/insurance/09a0187.pdf