The Delaware Supreme Court has made death arbitrage a tougher game. The court ruled that insurers can contest life insurance policies that pay investors when the subject of the policy dies. The insurers claimed such policies, so-called stranger-originated life insurance policies, were invalid because the beneficiaries were part of a scheme in which investors paid the premiums. The court ruled that under Delaware law, if a life insurance policy lacks an insurable interest at the inception, it is void, even after a two-year contestability period, because the policy violates state policy against wagering. The court's opinion was issued in response to certified questions received from a Delaware federal court involving two cases where there were allegations that the policies were obtained pursuant to an arrangement under which the policies would be immediately transferred to an unrelated third party investor by the insured acting as a straw man.
PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, C.A. No. 10-964 (Del. Sup. Ct. Sept. 20, 2011) and Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Trust, C.A. No. 09-506 (Del. Sup. Ct. Sept. 20, 2011).