A civil lawsuit related to a high-profile criminal prosecution has resulted in the First Circuit referring two questions respecting Rhode Island law on annuities to the Rhode Island Supreme Court. The questions are: 1) If the owner and beneficiary of an annuity with a death benefit is a stranger to the annuitant, is the annuity infirm for want of an insurable interest, and 2) Does a clause in an annuity that purports to make the annuity incontestable from the date of its issuance preclude the maintenance of an action based on the lack of an insurable interest?
While it seems incongruous that a legal dispute over annuities could be notorious, this is no ordinary annuity situation. Rhode Island lawyer Joseph Caramadre is presently awaiting his sentence in federal district court for his role in concocting the scheme. Several high profile politicians have suffered bad publicity because they benefited from it, directly or indirectly.
Without getting into the specific details of the scheme, Caramadre exploited the perceived loopholes in various insurers’ annuity programs to create what appeared to be a high return, low risk scheme based on the lifespans of terminally-ill people. Caramadre would recruit and apparently pay terminally-ill people to be the subject (“annuitant”) of annuities with a double-death benefit. (The bases of the criminal prosecution were allegations that the annuitants were fraudulently induced into supplying their identities for the scheme). The investors, complete strangers to the annuitant, would put up the money to purchase the annuities and be named the beneficiaries. The annuities contained provisions stating they would be “incontestable from the policy date.”
One of the annuity companies learned of the scheme. It informed the annuitant and the beneficiary that the annuity was rescinded. It filed suit in federal district court seeking recession and a declaration that the policy was either void ab initio or properly rescinded. It alleged essentially that the presence of the death benefit transformed the annuity into a life insurance policy and that the policy lacked an insurable interest because of the relationship, or lack thereof, between the annuitant and the beneficiary. It set forth claims based on fraud, civil liability for crimes and civil conspiracy. The beneficiary moved to dismiss the complaint. The district court held the presence of the death benefit did not transform the annuity into a life insurance policy; hence, the lack of an insurable interest did not void the policy. The district court held the “incontestability” provision barred the tort claims.
The First Circuit surveyed existing Rhode Island law applicable to the dispute. The Rhode Island Supreme Court has held that a “‘purely speculative contract on the life of another’ procured by one without an insurable interest is contrary to public policy and ‘may properly be held to be void.'” The General Assembly has required that beneficiaries of a life insurance contract either be relatives who have “a substantial interest” in an insured’s life “engendered by love and affection” or be others who have “a lawful and substantial economic interest in having the life, health or bodily safety of the individual insured continue.” The defendant had conceded it did not have an “insurable interest” in the annuity, however, it argued the requirement did not apply because the annuity was not a life insurance policy.
Rhode Island courts have occasionally looked beyond the name of a contract to find it a life insurance policy. The First Circuit said this annuity might be the functional equivalent of a life insurance policy in which case the requirement of an insurable interest would apply. On the other hand, the plaintiff did not investigate whether the defendant had an insurable interest as it might have done with a traditional life insurance policy. The court said the historical reason for requiring an insurable interest was to prevent gambling on the lives of people. It is unclear whether these annuities could be characterized that way.
The First Circuit said it was also unclear whether Rhode Island public policy would prohibit an incontestability provision like the one in the annuity. The cases in Rhode Island and elsewhere are mixed on the topic. The issue is particularly pertinent if the lack of an insurable interest renders the annuity void ab initio. However, some courts have said the lack of an insurable interest does not trump an incontestability clause. Accordingly, because Rhode Island law and public policy on these issues is unclear, the First Circuit asks the state Supreme Court to clarify them.
Western Reserve Life Assurance Co. of Ohio v. ADM Associates, LLC, No. 12-2208, 2013 WL 649868 (1st Cir. Dec. 11, 2013)
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