Background
A $9 million policy was issued on Price Dawe’s life to a trust. After he died, more than two years after issue, the insurer sued, claiming the policy was stranger-originated life insurance (STOLI), a bet on his life by investors with no insurable interest. A federal court asked the Delaware Supreme Court three questions of Delaware law.
What the court held
- Yes, an insurer may challenge a policy for lack of insurable interest after the contestable period. A policy that lacks an insurable interest at inception is void as against public policy, so none of its terms, including the incontestability clause, ever took effect.
- No, Delaware law does not bar people from buying a policy on their own lives and promptly transferring it to someone without an insurable interest, as long as the purchase is genuine and not a cover for a wager.
- Yes, a trustee of a trust the insured created can have the needed insurable interest. But where a third party directly or indirectly funds the premiums under a pre-negotiated plan to take over the policy, the policy fails at inception.
Why it matters
This is the main exception insurers raise against large policies after the contestable period. It mostly arises with investor-owned policies, not ordinary family coverage. The law differs by state: the court declined to follow a New York decision that treated such policies differently. The 1911 Supreme Court case Grigsby v. Russell, 222 U.S. 149, is the starting point for the rule that a valid policy can be sold.
Read the opinion
PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust (Del. Sept. 20, 2011), on the Delaware courts’ website.
Not legal advice. This page summarizes general rules and the specific statutes cited. Your policy's wording, the state whose law applies, and whether the coverage came through an employer can all change the result. See the disclaimer and editorial policy.