On June 8, 2018, the United States Court of Appeals for the Second Circuit issued a unanimous opinion that declined to recognize a fraud exception to New York's two-year contestability period for life insurance policies.
In AEI Life LLC v. Lincoln Benefit Life Company1, Lincoln Benefit Life Company sought a ruling that would render void ab initio (from the beginning) a policy procured through a life insurance application that contained gross misrepresentations regarding the policyholder's income and net worth, as well as an allegedly forged signature. A subsequent investigation revealed that a stranger had procured the US$6.65 million policy in 2008 as an investment and funded all premiums due under the policy, making it a Stranger-Originated Life Insurance (STOLI) policy.
Three years after policy issuance, the trust beneficiary sold the policy to Progressive Capital Solutions, which promptly resold it to AEI Life LLC. Two years later, in 2013, Lincoln discovered the fraud and sought to invalidate the policy—approximately five years after issuance. Judge Jack Weinstein of the Eastern District of New York granted AEI's requested declaration. On appeal, the Second Circuit affirmed.
In affirming, the Second Circuit first determined that New York law, rather than New Jersey law, governed the dispute. This finding was critical, as the court recognized that unlike New York, "New Jersey allows an insurance company to contest the validity of a policy obtained by fraudulent means even after two years have expired since the policy became effective."
The court then considered whether New York's two-year contestability period precluded Lincoln's challenges to the policy after such period. Lincoln argued that the court should declare the policy void ab initio on grounds that it constituted a wager on a human life in violation of public policy. Under this theory, New York's incontestability law would be irrelevant because the policy was void at its inception, i.e., it never took effect in the first place.
The Second Circuit rejected this argument. Relying on the New York Court of Appeals' opinion in New England Mutual Life Insurance Co. v. Caruso2, the court found that New York law does not permit an exception to incontestability provisions for wagering insurance contracts entered into for the benefit of parties that lack an insurable interest. Per the court, the insurer's sole remedy in such circumstance is to challenge the voidable policy within the two-year contestability period.
The court's opinion also considered whether the alleged forgery of the policyholder's signature on the application rendered the policy void ab initio or merely voidable. Relying again on Caruso, the court reached the latter conclusion, finding that the New York Court of Appeals would conclude, if the question were squarely before it, "that policies lacking consent because of forgery are only voidable at the request of the insurer within the contestability period." The court thus rejected Lincoln's forgery challenge as outside the contestability period.
As seen above, the Second Circuit's opinion in AEI Life reaffirms the continuing vitality of the two-year contestability period in New York—and rejects arguments seeking to create exceptions to this rule as permitted in some other states.
Footnotes
1 No. 17-224, 2018 WL 2746589 (2d Cir. 2018)↩
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