In U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, the Seventh Circuit, applying Wisconsin law, recently affirmed that an insurer may not void a life insurance policy solely on grounds that the policy’s original owner did not have an insurable interest in the life of the insured when the policy was issued. (In 2010, Wisconsin enacted a more comprehensive statute governing the life settlement industry and STOLI, but the parties agreed that it did not apply retroactively to the policy at issue.)
The case involved a $6 million life insurance policy issued to an 81-year-old man in 2007. U.S. Bank was substituted as the owner and beneficiary on the policy and continued to pay premiums until the insured’s death in 2014. After Sun Life refused to pay U.S. Bank the policy proceeds until it investigated the policy’s validity, U.S. Bank brought suit under section 631.07(4) of the insurance code, which provides that "no insurance policy is invalid merely because the policyholder lacks insurable interest" but authorizes the court to order the death benefit payable to another person "equitably entitled thereto." The district court ultimately awarded U.S. Bank the proceeds, along with 12 percent statutory interest, and bad faith damages.
The Seventh Circuit affirmed. It rejected the insurer’s argument that its refusal to pay the death benefits was permitted by another Wisconsin statute invalidating gambling contracts, pointing out that Wisconsin insurance code provisions trump other conflicting statutes. Similarly, the court found that Wisconsin’s constitution, which prohibits the legislature from authorizing gambling contracts, did not invalidate section 631.07(4) because that provision did not authorize the contracts but merely changed the remedy for the violation.