June 2012 / Special Alert
d
A legal update from Dechert LLP
Related Practices
■ Real Estate Finance
and Investing
■ Structured Finance
and Securitization
Recent Developments in the Life Settlement
Industry
The Delaware General Assembly is considering
new legislation to address a contentious issue
in the life settlement industry. A new law
proposed in May 2012, Delaware Senate Bill
No. 220 (the Senate Bill), would require a life
insurance company that rescinds an insurance
policy on the grounds that the policy holder
lacked an insurable interest to refund the
premiums that the insurer has collected from
the owner of the rescinded life insurance
policy.1 I f enacted, the Senate Bill would codify
the Delaware common law with the stated goal
of protecting investors in the secondary market
for life insurance in Delaware. 2 This DechertOn-
Point discusses the Senate Bill’s content and
intended effect.
The Senate Bill has its origins in an issue that,
in the last decade, has faced the life settlement
industry not only in Delaware, but in a number
of U.S. jurisdictions. Courts across the United
States have been confronted with a significant
amount of litigation between life insurance
companies and policy owners in whi ch the point
in dispute is whether an insurance policy should
be deemed void on the grounds that the
1 See S.B. 220, 146th Gen. Assemb., Reg. Sess.
(Del. 2012).
2 See id.
insurance policy lacked an “insurable inter-
est.”3 Relat ed to this question is whether, in the
event the life insurance company obtains a
favorable decision in the dispute over the
insurable interest, the life insurance company
should be permitted to keep the premiums paid
by the policy owner. According to the sponsors
of the Senate Bill, insurance companies
continue to file pleadings in Delaware courts
seeking to withhold the premiums paid by the
policy owners, despite the “we ll-settled”
common law rule that “an insurer must return
the premiums it has collected on the policy.” 4
While the sponsors of the Senate Bill have cited
a number of cases demonstrating that this
controversy may be well-settled in Delaware, 5
other states have reached the conclusion that
3 See Lincoln Nat’l Life Ins. Co. v. Joseph Schlanger
2006 Ins. Trust, 28 A.3d 436 (Del Supr. 2011);
Kramer v. Phoenix Life Ins. Co., 940 N.E.2d 535
(N.Y. 2010); Lopez v. Life Ins. Co. of America, 406
So.2d 1155 (Fla. 4th DCA 1981); Equitable Life
Assur. Soc. of U.S. v. Johnson, 127 P.2d 95 (Cal.
App. 1942); Holland v. Pyramid Life Ins. Co. of
Little Rock, 199 F.2d 926, 929 (5th Cir. 1952)
(applying Texas law). For previous DechertOn-
Points that have discussed insurable interest and
the life settlement industry in general, see Oct.
2009 “Life Settlement Securitizations Under
Scrutiny,” Aug. 2010 “Additional Governmental
Oversight Recom-mended for Life Settlement
Industry,” Feb. 2011 “Recent Developments in
the Life Settlement Industry,” Nov. 2011 “Recent
Developments in the Life Settlement Industry.”
4 S.B. 220.
5 See id.
