On February 15, 2008, the U.S. federal district court in Minnesota granted a motion by Coventry First, LLC (“Coventry First”) to dismiss a complaint by Sun Life Assurance Company of Canada (“Sun Life”) seeking to void a life insurance policy issued to John R. Paulson that was later acquired by Coventry First. (Click here to read the decision.) The policy was outside of its contestability period. Sun Life had argued that the policy issued to Mr. Paulson should be void ab initio because when Mr. Paulson procured the policy he intended to transfer the third party at a later date. Coventry First sought dismissal on the theory that Sun Life was time-barred from rescinding the policy outside of the contestability period.

Sun Life argued that Mr. Paulson’s intention to sell his policy at some later date meant that at the time of policy issuance Mr. Paulson had no insurable interest in the policy and that the policy should be rescinded and found void ab initio. The Court disagreed and held that Mr. Paulson’s intent to sell later was “irrelevant” unless at the time of policy issuance a third party intended to acquire the policy and further that Coventry First’s later acquisition of the policy was likewise “irrelevant” without evidence that Coventry First intended to acquire the policy at the time of issuance. Because the Court found the policy was not void ab initio, it dismissed Sun Life’s complaint on the basis that Sun Life could no longer contest the policy.

While this decision may be appealed, it is notable for its clear focus on insurable interest and whether mere intent of an insured to sell a policy later is enough to support rescission for lack of insurable interest. These are issues that have been the subject of much debate among advocates and opponents of life settlement.