This article serves as a follow-up to the April 2023 article, “Feeling Conflicted: Arizona Supreme Court to Resolve Conflict in Laws Affecting Enforceability of Life Insurance Policies.” Since publication, the Arizona Supreme Court made its final decision on the question of whether “Arizona law permit[s] an insurer to challenge the validity of a life insurance policy based on lack of insurable interest after the expiration of the two-year contestability period required by A.R.S. § 20-1204?”[i] The Court said no.[ii]
Arizona has an incontestability statute, A.R.S. § 20-1204, under which an insurer cannot contest a life insurance policy after two years from issuance.[iii] But Arizona law also does not allow a life insurance policy to be issued on the life of another unless the benefits are “‘payable to the individual insured or his personal representatives, or to a person having, at the time the contract was made, an insurable interest in the individual insured under both common law and statute.’ A.R.S. § 20-1104.”[iv]
In Columbus, a life insurance policy was issued on the lives of Howard and Eunice Peterson by Columbus Life Insurance Co. (“Columbus”) in May 2004, originally with H & E Peterson Family Partnership LLLP as the beneficiary and owner.[v] The policy premiums were paid for by the LLLP and it remained in the LLLP’s name until the two year non-contest provision elapsed, after which the policy was sold.[vi] After a series of transactions, Wilmington Trust N.A. (“Wilmington Trust”) became owner of the policy in 2013 as a securities intermediary.[vii]
Following the Petersons’ deaths, Columbus filed suit, seeking a declaratory judgment that the policy was void from the start (void ab initio) as a STOLI (Stranger-Owned Life Insurance), or illegal wagering contract.[viii] Wilmington Trust filed a motion for judgment on the pleadings, invoking both an incontestability provision in the policy and the incontestability statute, A.R.S. § 20-1204, to argue Columbus could not challenge the policy’s validity since the contestability period had expired.[ix] Because the district court was confronted with contradictory laws and there no controlling precedent on the issue of whether Columbus could challenge the policy’s validity, the court certified the issue to the Arizona Supreme Court.[x]
In arriving at its holding that A.R.S. § 20-1204 does not allow challenges to the validity of the policy after the incontestability period (with the exception of nonpayment of premiums), the Arizona Supreme Court viewed the statutes as a whole to determine the legislature’s intent.[xi] The Court found that:
Reading these statutes in concert indicates a comprehensive statutory scheme governing the types of policies at issue here and establishing exclusive remedies. First, it is unlawful for someone lacking an insurable interest to procure such a contract. Second, doing so exposes the purchaser to a misdemeanor penalty. Third, life insurance policies must contain an incontestability provision limiting challenges to the policy’s validity to two years. Fourth, the only exception to the two-year limitation is nonpayment of premiums. Fifth, the civil remedy for an impermissible third-party insurance contract is recovery of proceeds from the beneficiary by the insured’s estate.[xii]
The Supreme Court found this consideration of the statutory scheme “gives effect to every statutory provision.”[xiii] Whereas accepting Columbus’ argument would destroy the insured’s remedy under Arizona’s statute which prohibits obtaining life insurance on another unrelated person’s life, A.R.S. § 20-1104; as well as extinguish the only exception under the incontestability statute—the nonpayment of premiums. [xiv] The Court also pointed to the legislature’s inclusion of the term “contract” and omission of the word “void” in the statutory scheme to show it was supposed that a contract (policy) was in existence and that there was no provision for voiding the contract, which is expressly provided for in other similar statutes.[xv]
The court considered the caselaw cited by the parties and was persuaded by New England Mutual Life Insurance Co. v. Caruso[xvi] and its line of cases because they support Arizona’s statutory scheme on these issues. Based on a similar incontestability statute, in Caruso, the New York Court of Appeals found the statute “rests on the legislative conviction that a policyholder should not indefinitely pay premiums to an insurer, under the belief that benefits are available, only to have it judicially determined after the death of the insured that the policy is void because of some defect existing at the time the policy was issued.”[xvii]
The Arizona Supreme Court answered no to the question that was certified, finding that an insurer cannot challenge the validity of a life insurance policy based on lack of insurable interest after the expiration of the two-year contestability period.[xviii]
The question posed on my last article on the topic was: “Will the Court leave the regulation of STOLIs to the legislature?” With this decision, correctly or incorrect, the Court did just that. In response to Wilmington’s argument regarding the gap that would be left open for exploitation of insurance companies by STOLIs, the Supreme Court refrained asserting a position and stated, “such concerns must be directed to the legislature.”[xix] Until that legislative change comes in Arizona, insurance companies may be at the mercy of death wagering STOLIs and their beneficiaries, who can now more easily engage their deceit.
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[i] Columbus Life Ins. Co. v. Wilmington Tr. NA, No. CV-22-0202-CQ, Opinion, ¶ 1 (Ariz. July 27, 2023).
[ii] Id. at ¶¶ 1, 25.
[iii] “There shall be a provision that the policy, exclusive of provisions relating to disability benefits or to additional benefits in the event of death by accident or accidental means, shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of two years from its date of issue.” A.R.S. § 20-1204.
[iv] Columbus Life Ins. Co. v. Wilmington Tr. NA, CV-21-00734, unpublished Order (D. Ariz. August 10, 2022).
[v] Columbus Life, No. CV-22-0202-CQ, Opinion at ¶ 2.
[viii] Id. at ¶¶ 3-4.
[ix] Id. at ¶ 5.
[x] Id. at ¶ 6.
[xi] Id. at ¶¶ 9-11.
[xii] Id. at ¶ 15.
[xiii] Id. at ¶ 16.
[xiv] Id. at ¶ 16-17.
[xv] Id. at ¶ 18.
[xvi] 535 N.E.2d 270 (N.Y. 1989).
[xvii] Columbus Life, No. CV-22-0202-CQ, Opinion at ¶ 21 (quoting Caruso, 535 N.E.2d at 272), and ¶ 23.
[xviii] Id. at ¶¶ 1, 25.
[xix] Id. at ¶ 24.