A panel of life settlement experts offered their reaction to an important New York Court of Appeals decision in the Kramer case.
The Court came down with an opinion on November 17 in the case of Alice Kramer vs. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York. It specifically addressed the question of whether New York insurance law (3205(b) 1 and 2) prohibits an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured’s life, if the insured did not ever intend to provide insurance protection in the insured’s life. The transactions are called beneficial interest contracts.
The Court responded that there was no such prohibition, even in the case where the policy was obtained for just such a purpose.
The question was raised during the annual Life Insurance Executive Conference sponsored by Ernst & Young, the National Underwriter Company and Summit Business Media.
During the discussion, the panel was asked about the impact of Kramer. Jule Rousseau, a partner with Arent Fox LLP, New York, said that now New York has a decision specific to its state that to which it can refer rather than referring to case decisions in other states such as Arizona. He said that other major states will probably refer to the Kramer decision if similar cases are addressed.
David Goldman, director of the longevity markets group at Credit Suisse, New York, said that “it is clear that the ruling had an impact, but what is not yet clear is just how big an impact it will be.” He said that $10 billion to $12 billion in the life insurance market which are beneficial interest transactions are not legitimate transactions. However, he noted that up to $4 billion of that total could be disqualified because of potential fraud issues. He added that Credit Suisse does not participate in beneficial interest transactions.
Alan Buerger, co-founder and CEO of Coventry, Fort Washington, Pa., agreed that there could be a huge impact. He also noted that his firm does not participate in the beneficial interest market.
The case arose when Arthur Kramer, a prominent New York attorney and brother of Larry Kramer, a renowned playwright, purchased several policies with the intent to assign the beneficial interests to investors who did not have an insurable interest in his life. Upon his death, his widow, Alice Kramer, representing her husband’s estate, filed a complaint in U.S. District Court for the Southern District of New York seeking to have the $56,200,000 in death benefits paid to her, alleging that New York’s insurable interest law was violated.
In the court opinion, it states that 3205 “clearly provides that, so long as the insured is ‘of lawful age’ and acts ‘on his own initiative,’ he can ‘procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation.” The decision continues that “It is equally plain that a contract ‘so procured or effectuated’ may be ‘immediate[ly] transfer[ed] or assigned[ed]. The provision does not require the assignee to have an insurable interest and, given the insured’s power to name any beneficiary, such restriction on assignment would serve no purpose.”