In Blow to Opponents of “Stranger-Owned Life Insurance,” New York’s High Court Rules that New York Law Did Not Prohibit a Person from Purchasing a Life Insurance Policy and Immediately Transferring that Policy to an Individual Who Does Not Have a Traditional Insurable Interest in the Purchaser’s Life

The New York Court of Appeals, the state's highest court, has upheld the practice of “stranger-owned life insurance” (SOLI) transactions under New York’s Insurance Law as it existed in 2005.  In 2005, attorney Arthur Kramer (Kramer) purchased life insurance policies on his own life with aggregate death benefits of more than $56 million.  The policies were purchased through newly-established insurance trusts that named three of his children as beneficiaries.  The trusts then sold the policies to investors, and the children assigned their interests as beneficiaries to other investors.  After Kramer’s death, his wife refused to provide certified death certificates to the investors who were trying to collect the policy proceeds.  Litigation ensued in U.S. District Court for the Southern District of New York.  Appeals were taken to the Second Circuit, which determined that the validity of Kramer’s SOLI transactions turned on the interpretation of New York Insurance Law §3205(b), which governs purchases of life insurance policies by persons who have no insurable interest in the life of the original policy holder.  Kramer’s insurers claimed that the SOLI arrangement violated both common law and §3205(b).  The Second Circuit certified the question of the interpretation of §3205(b) to the New York Court of Appeals, which ruled that, under §3205(b), a person may purchase life insurance on his own life and immediately assign that policy to a stranger with no insurable interest in the insured.  This year, New York made SOLI deals illegal.  We summarize the Court of Appeals’ ruling.  For an overview of “life settlement” investments by hedge funds, see “Life Settlement Securitizations Offer Hedge Funds Efficient Access to an Inefficient Market,” Hedge Fund Law Report, Vol. 2, No. 44 (Nov. 5, 2009); “Key Tax Considerations for Hedge Funds When Investing in Life Settlements,” Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009); “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).

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