New York Lawyer's widow shut out in $56M insurance 'wager'

By Pat Murphy

The Daily Record Newswire

New York's highest court last week issued a ruling that apparently dooms a bid by an attorney's widow to upset her husband's scheme to provide investors $56 million in life insurance benefits.

According to court records, Arthur Kramer, a prominent New York attorney, put together an investment arrangement involving "stranger-owned life insurance" before his death.

Arthur's precise goals are unclear, but what we do know is that Arthur established two insurance trusts naming his adult children as beneficiaries.

Transamerica Occidental Life Insurance Co. funded the first trust with life insurance policies on Arthur having a total death benefit of approximately $18.2 million. Phoenix Life Insurance and Lincoln Life & Annuity of New York funded the second trust with policies having a death benefit totaling $38 million.

Once the trusts were fully funded, Arthur's children assigned their interests to third-party investors.

Following Arthur's death in 2008, his wife, Alice, thought that the $56 million in death benefits should go to her instead of the investors. So she refused to hand over copies of Arthur's death certificate to those holding beneficial interests in the policies.

Alice also sued in federal court to make it perfectly clear that the $56 million was hers.

According to Alice, Arthur's investment scheme was contrary to New York law. In particular, she argued that Arthur's life insurance policies violated New York's insurable interest rule because her husband obtained them without the intent of providing insurance for himself or anyone with an insurable interest in his life.

Finding New York law unclear on this issue, the 2nd Circuit certified the matter to the New York Court of Appeals.

The New York high court decided that nothing in the state's insurance code prohibits the assignment of validly issued life insurance policies to investors, even if that was the intent all along.

The court explained that, under N.Y. Insurance Law §3205(b)(1), it is "plain that a [life insurance] contract 'so procured or effectuated' may be 'immediate[ly] transfer[ed] or assign[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. ...

"This freedom of assignment is not limited by §3205(b)(2), which addresses procurement of an insurance policy on another's life, 'either directly or by assignment,' because §3205 (b)(2) requires an insurable interest only 'at the time when such contract is made,' that is, when such insurance is initially procured." (Kramer v. Phoenix Life Insurance)

That this result completely eviscerates the insurable interest rule was of no moment to the court. The plain letter of the statute prevailed.

The common law insurable interest rule was designed to discourage the understandably pernicious practice of strangers wagering on someone's life. Under the rule, a life insurance beneficiary must be related to the decedent by blood or by law.

The decision by the New York Court of Appeals to recognize assignment without limit of beneficial interests in life insurance would appear to make the insurable interest rule largely a dead letter.

At least that's the way Associate Judge Robert S. Smith saw it in his dissent.

Judge Smith contended that "this rule of free assignability has always had an exception -- ... where the insured, at the moment he acquires the policy, is in substance acting for a third party who wants to bet on the insured's death."

Published: Wed, Nov 24, 2010