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Turning Tables – Stranger-originated Controversy Takes a Turn (part 3)

Mon Oct 18th, 2010 on     Insurance Claims,    

This is the last of a series of three posts about a wealthy woman, her death, her companion, her family, and a $15 million life insurance policy. The policy listed the beneficiary as the woman’s companion, who was the last to see the woman alive. The companion claims the policy was taken out to protect his business, explaining that the woman was his partner in the venture. The insurance company argues that no one is entitled to the proceeds of the policy, because it was purchased fraudulently as a “stranger-originated” policy. The family has also entered the fray.

A stranger to a policy is someone who has no insurable interest (see our last post for an explanation). Stranger-originated policies have caused controversy in the insurance industry for years. It works, they say, like this: The stranger, perhaps someone like an insurance agent, convinces an elderly person to purchase a high-premium, high-payout insurance policy that names the stranger as beneficiary. The stranger then purchases the policy from the insured and either pays the premiums himself or sells the policy to investors. The elderly insured gets the cash, while the stranger pays the premiums and gets the payout. Hedge funds have often been accused of investing in stranger-originated policies.

Insurers object to these policies on the grounds that they violate the principle of insurable interest. Courts defend the concept of insurable interest, but they have not found the practice illegal. In this case, the court believes there are enough unanswered questions to warrant a trial.

The Family’s Claim. The family agrees with the insurance company, up to a point. In an unusual twist, the family argued that while the companion and others may have obtained the policy fraudulently, the insurance company approved the sale and collected the premiums. They claim the AIG subsidiary issued the policy in contravention of sound underwriting practices and that the company did so for its own gain and in order to reap a large profit.

The insurer, then, should pay the benefit to the estate, because it was ultimately the estate that was the victim of the fraud.

It’s hard to say what the effect of a ruling in favor of the family could be on stranger-originated policies. If the insurance company comes out on top, families will likely have a harder time challenging the legitimacy of these policies. If the companion comes out on top? From reports, many heads will be shaking.

Resources: “‘Convoluted’ $15M Life Insurance Dispute Involving AIG May Go to Trial” 10/6/10

Wall Street Journal “Life, Death and Insurance: Indiana’s $15M Mystery” 4/12/10

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