Columbus Life Ins. Co. v. Wilmington Trust, N.A., – 7/27/2023

September 5, 2023

Arizona Supreme Court holds that an insurer cannot challenge the validity of a life insurance policy based on a lack of insurable interest after the expiration of the required two-year contestability period.

In this case, the insureds’ limited liability partnership bought a life insurance policy on the lives of the two insured partners. The policy provided that the insurer could not contest the policy after it had been in effect for two years. During the two-year period, the limited liability partnership paid the premiums consistently while the insureds were alive. The partnership eventually sold the policy to a third party.

After both insureds passed away, the third party submitted a claim for death benefits under the policy, which the insurer refused to pay. The insurer argued that policy was acquired as part of a Stranger Originated Life Insurance (STOLI) scheme, which typically involves inducing senior citizens to procure life insurance policies on their own lives with the intent to assign those policies to third parties in exchange for a payment in advance. The insurer claimed that STOLI schemes violate insurable interest laws. Therefore, the insurer claimed a lack of an insurable interest made the policy void ab initio, and thus the contract and its contestability period never existed. After summary judgment briefing, the U.S. District Court for the District of Arizona certified to the Arizona Supreme Court the question of whether the insurer could challenge the policy in light of the incontestability provision in the policy and A.R.S. § 20-1204.

The Arizona Supreme Court answered the certified question in the negative. Analyzing Arizona’s statutory scheme, the court recognized that insurance contracts lacking an insurable interest are prohibited, subjecting the purchaser to a misdemeanor penalty. The court, however, noted that A.R.S. § 20-1204 requires a provision in all life insurance contracts stating that the policy “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.” Giving effect to each statutory provision, the court found that while it is unlawful for someone to procure a policy lacking an insurable interest, the only exception to the two-year limitation is nonpayment of premiums.

Justice Bolick authored the unanimous opinion.

Posted by: Brandon T. Delgado