Lincoln Nat’l Life Ins. Co.: Life Insurance Policy without Insurable Interest is Void

In Lincoln Nat’l Life Ins. Co. v. Joseph Schlanger 2006 Insurance Trust, C.A. No. 178 (Del. Sept. 20, 2011), two separate insurance companies filed suit against two trusts, alleging multi-layered trust schemes that allowed a third party to speculate on the beneficiary’s life.  

In the case involving the Joseph Schlanger 2006 Insurance Trust, Lincoln National Life Insurance Company (“Lincoln”) issued a $6 million life insurance policy for Joseph Schlanger with the Schlanger Trust as the beneficiary.  This insurance policy contained an incontestability clause, which stated that Lincoln would not contest the policy after it had been in effect for two years from the issue date.  Schlanger died more than two years after the policy’s issue date, at which time Lincoln learned that Schlanger was no longer the beneficiary of the trust. Instead, Schlanger had sold his interest in the trust to GIII, a private investing entity.  GIII paid all the premiums and then used the trust to speculate on Schlanger’s life. The District Court for the District of Delaware consolidated this case with PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, C.A. No. 10-964-BMS (D. Del. Nov. 12, 2010), which also involved a life insurance policy that lacked an insurable interest.  The court then certified the following question to the Supreme Court of Delaware: “Can a life insurer contest the validity of a life insurance policy based on a lack of insurable interest after expiration of the two-year contestability period set out in the policy as required by 18 Del. C. § 2908?”

To answer this question, the Supreme Court of Delaware looked at the origins and purpose of the incontestability provision.  These provisions were first created to encourage potential customers to buy insurance policies.  Life insurance companies included these clauses to ensure that after the customer paid the premium on the policy for a number of years, the company would not contest the policy due to innocent misrepresentations in the application.  With this in mind, the court determined that the language of Section 2908 of the Delaware Insurance Code makes the incontestability period of the policy directly contingent on the formation of a valid contract.  Because this contract lacked an insurable interest and violated Delaware’s public policy against wagering, the policy was void ab initio under Delaware common law.  Therefore, the court held that an insurer “could challenge the enforceability of a life insurance contract after the incontestability period on the basis of a lack of an insurable interest.”

The primary materials for this case may be found on the DU Corporate Governance website.

Erica Woodruff