Know When to Hold ‘Em, Know When to Fold ‘Em: Assignments of Life Insurance Policies to Third-Parties with No Insurable Interest in the Life of the Insured
By: Brandon Howard
The Supreme Court of Georgia just clarified important rules in the “viatical settlement” market as it pertains to life insurance policies controlled by Georgia law. Crum v. Jackson Nat'l Life Ins. Co., S22Q0649, 2022 WL 14154472 (Ga. Oct. 25, 2022).
In 1999, Kelly Couch (the “insured”) procured a $500k life insurance policy from Jackson National Life Insurance Company (the “insurer”) with the unilateral intent to sell the policy to a third-party investor on a secondary “viatical settlement” market. In this type of transaction, an insured with a terminal illness will sell their life insurance policy to a third-party investor for less than its maturity value so the insured may obtain liquid funds for use while alive, while the third-party benefits from the full payout of the policy upon the insured’s death.
In this case, the insured sold his policy to Sterling Crum (the “investor”), and when the insured died in 2005, the investor sought to collect on the policy from the insurer. The insurer denied the claim on the basis that the entire transaction was prohibited by Georgia’s public policy against human-life wagering contracts. Litigation ensued, and ultimately the matter was certified to the Georgia Supreme Court for consideration. The basic question presented to the Supreme Court was whether a person can legally take out an insurance policy on his own life with the intent to turn around and sell that policy to a third party who has no ‘insurable interest’ in the policyholder's life. According to the court, Georgia public policy does not prohibit this practice.
Reviewing the issue, the court first noted that, under O.C.G.A. § 13-8-2(a)(4), Georgia’s general public policy forbids “wagering contracts.” However, in the context of insurance, and citing to O.C.G.A. § 33-24-3, the court specified the state’s general prohibition against wagering contracts is incorporated into a specific statutory requirement: the “insurable interest” rule. Thus, per the court, whether a “viatical settlement” transaction violates Georgia public policy must be judged based on the transaction’s compliance with the insurance code’s more specific insurable interest rule, and not the broader, amorphous statutory prohibition against wagering contracts.
Through a brief review of the history surrounding “insurance-based gambling” on human life, the court reasoned that the insurable interest rule fulfilled Georgia’s public policy on this point. According to the court, old-fashioned “gambling” on human life was typically done by third-parties with no relationship or interest in the lives of the individuals who were insured. The law’s response to this practice was to simply require that the individual procuring the insurance have an interest in the life of the insured.
So construed, the court concluded “our law generally relies on the insurable interest [doctrine] to distinguish between valid life-insurance policies and illegal wagering contracts.” Depending on whether Georgia’s insurable interest statute has been complied with or not will determine if policy is a valid life insurance policy or an illegal wagering contract.
Reviewing that statute, O.C.G.A. § 33-24-3, as it was in effect at the time the policy was created, the court found it carried two relevant prerequisites: (1) the individual procuring the policy must have an insurable interest in the insured’s life; and (2) the insurable interest “must exist at the time the [insurance] becomes effective but need not exist at the time the loss occurs.” Importantly, the court made clear that an individual has an “unlimited insurable interest” in her own life. Thus, the court reasoned, as long as a later assignment complies with the policy’s terms and conditions, “it follows . . . that a life-insurance policy that meets the above insurable-interest rules at the time it becomes effective may be assigned later to someone without an insurable interest.”
With this background in mind, the court turned to the question presented, which it reframed as follows: “is a life-insurance policy an illegal wagering contract if the insured takes out the policy on his own life with the intent to sell the policy to a third party with no insurable interest, but without a third party's involvement in causing the policy to be procured?” Answering the question, the court concluded that Georgia’s insurable interest statute does not prohibit an individual from purchasing a life insurance policy on their own life with the “secret[] intent[]” of monetizing it by later selling it to an individual with no insurable interest in that individual’s life. Moreover, the court found that, while the statute makes a life insurance policy procured by one upon the life of another “void” unless the procuring party has an insurable interest in the other individual’s life, “if no third party was involved when the policy was taken out, the policy could not have been procured or caused to be procured” by one without an insurable interest in the life of the insured.
Accordingly, insurers who issue life insurance policies may be required to accept an insured’s assignment of their insurance policy to others who may not have any connection to or insurable interest in the insured’s life.
Attorney Contact Info
Brandon Howard
brandon.howard@swiftcurrie.com
404.888.6170
