Kramer v. Phoenix Life Insurance

OPINION OF THE COURT

The United States Court of Appeals for the Second Circuit has certified the following question for our consideration:

“Does New York Insurance Law §§ 3205 (b)(1) and (b)(2) prohibit an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured’s life, if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured’s life?”

We now answer in the negative and hold that New York law permits a person to procure an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose.

This litigation involves several insurance policies obtained by decedent Arthur Kramer, a prominent New York attorney, on his own life, allegedly with the intent of immediately assigning the beneficial interests to investors who lacked an insurable interest in his life. In May 2008, Arthur’s widow, plaintiff Alice Kramer, as personal representative of her husband’s estate, filed an amended complaint in the United States District Court for the Southern District of New York seeking to have the death benefits from these insurance policies paid to her. She alleges that these policies, which collectively provide some $56,200,000 in coverage, violate New York’s insurable interest rule because her husband obtained them without the intent of providing insurance for himself or anyone with an insurable interest in his life.

As alleged in the plaintiffs complaint, defendant Steven Lockwood, the principal of Lockwood Pension Services, Inc.

The “starting point” for discerning statutory meaning is, of course, the language of the statute itself (see Roberts v Tishman Speyer Props., L.P., 13 NY3d 270 , 286 [2009]). “[W]here the language of a statute is clear and unambiguous, courts must give effect to its plain meaning” (Matter of Crucible Materials Corp. v New York Power Auth., 13 NY3d 223 , 229 [2009] [internal quotation marks omitted]).

Here, section 3205 (b) (1) clearly provides that, so long as the insured is “of lawful age” and acts “on his own initiative,” he can “procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation.” This language is unambiguous and not limited by the statutory text. It thus codifies the common-law rule that an insured has total discretion in naming a policy beneficiary (see Olmsted v Keyes, 85 NY 593 [1881]). Our lower courts have long held that, under section 3205 (b), “[w]here the deceased effects the insurance upon her own life, it is well-established law that she can designate any beneficiary she desires without regard to relationship or consanguinity” (Corder v Prudential Ins. Co., 42 Misc 2d 423 , 424 [Sup Ct, Erie County 1964]; see also Gibson v Travelers Ins. Co., 183 Misc 678 [Sup Ct, NY County 1944]).

It is equally plain that a contract “so procured or effectuated” may be “immediately] transfer [red] or assign[ed]” (Insurance Law § 3205 [b] [1]). The provision does not require the

There is simply no support in the statute for plaintiff and the insurers’ argument that a policy obtained by the insured with the intent of immediate assignment to a stranger is invalid. The statutory text contains no intent requirement; it does not attempt to prescribe the insured’s motivations. To the contrary, it explicitly allows for “immediate transfer or assignment” (Insurance Law § 3205 [b] [1]). This phrase evidently anticipates that an insured might obtain a policy with the intent of assigning it, since one who “immediately” assigns a policy likely intends to assign it at the time of procurement.

The statutory mandate that a policy must be obtained on an insured’s “own initiative” requires that the decision to obtain life insurance be knowing, voluntary, and actually initiated by the insured. In common parlance, to act on “one’s own initiative” means to act “at one’s own discretion: independently of outside influence or control” (Merriam-Webster’s Collegiate Dictionary 602 [10th ed 1996]). The key point is that the policy must be obtained at the insured’s discretion. As the dissent acknowledges, common sense dictates that some outside influence is acceptable—advice from a broker or pension planner, for example. The notion of obtaining insurance and the details of the insurance contract need not spring exclusively from the mind of the insured. Rather, the insured’s decision must be free from nefarious influence or coercion.

In light of the overwhelming textual and historical evidence that the Legislature intended to allow the immediate assignment of a policy by an insured to one lacking an insurable interest, we are not persuaded by plaintiff and the insurers’ argument that section 3205 (b) is limited by the common-law requirement that an insured cannot obtain a life insurance policy with the intent of circumventing the insurable interest rule by immediately assigning it to a third party (see Steinback v Diepenbrock, 158 NY 24 , 30-31 [1899]). To the extent that there is any conflict, the common law has been modified by unambiguous statutory language. We note further that if our Legislature had intended to impose such a limitation, it could easily have done so. The Legislature has been very active in this area, most recently in its redrafting of article 78 of the Insurance Law.

Finally, we recognize the importance of the insurable interest doctrine in differentiating between insurance policies and mere wagers (see Caruso, 73 NY2d at 77-78 ), and that there is some tension between the law’s distaste for wager policies and its sanctioning an insured’s procurement of a policy on his or her own life for the purpose of selling it. It is not our role, however, to engraft an intent or good faith requirement onto a statute that so manifestly permits an insured to immediately and freely assign such a policy.

Accordingly, the certified question should be answered in the negative.

I would answer the certified question with a qualified yes: My view of New York law is that where, as in this case, an insured purchases a policy on his own life for no other purpose than to facilitate a wager by someone with no insurable interest, the transaction is unlawful.

In 1872, a young man named Henry Grosser took out a policy on his own life. On the same day, Grosser entered a contract with something called the Scioto Trust Association, in which Grosser agreed to assign the policy to Scioto, and Scioto agreed to pay the premiums on it. It was agreed that at Crosser’s death, Scioto would get 90% of the insurance proceeds. When Grosser died the following year, his administrator sued Scioto, claiming all the proceeds, and the United States Supreme Court, applying pre-Erie federal common law (see Erie R. Co. v Tompkins, 304 US 64 [1938]), held the Crosser-Scioto contract invalid. The Court said that what it called “wager policies” were “independently of any statute on the subject, condemned, as being against public policy” (Warnock v Davis, 104 US 775 , 779 [1882]).

Warnock also stated a broader rule: “The assignment of a policy to a party not having an insurable interest is as objectionable as the taking out of a policy in his name” ( 104 US at 779 ). That rule was too broad. New York, as the Warnock court recognized, had already rejected it (see id. at 781-782 , citing Saint John v American Mut. Life Ins. Co., 13 NY 31 [1855]), and a few decades later the United States Supreme Court rejected it also (Grigsby v Russell, 222 US 149 [1911]). In Grigsby, Justice Holmes explained that a contract taken out by a third party with no insurable interest in the insured’s life is generally more problematic than an assignment by the insured to such a person:

“A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end. . . .

“But when the question arises upon an assignment, it is assumed that the objection to the insurance as a wager is out of the case. . . . The danger that might arise from a general license to all to insure whom they like does not exist. Obviously it is a very different thing from granting such a general license,

to allow the holder of a valid insurance upon his own life to transfer it to one whom he, the party most concerned, is not afraid to trust” ( 222 US at 154-155 ).

Grigsby thus established the general rule, consistent with the New York common law of that day and with our current statutory law (Insurance Law § 3205 [b]), that while a third party without an insurable interest may not purchase a life insurance policy, an insured may do so and assign it to the third party, whether the third party has an insurable interest or not. That is the rule the majority applies here.

But this rule of free assignability has always had an exception—an exception for cases like Warnock, and like this case, where the insured, at the moment he acquires the policy, is in substance acting for a third party who wants to bet on the insured’s death. Justice Holmes explained the exception in Grigsby, and thus distinguished Warnock, but did not overrule its narrow holding:

“[C]ases in which a person having an interest lends himself to one without any, as a cloak to what is, in its inception, a wager, have no similarity to those where an honest contract is sold in good faith . . .

“(Warnock v Davis] was one of the type just referred to, the policy having been taken out for the purpose of allowing a stranger association to pay the premiums and receive the greater part of the benefit, and having been assigned to it at once.” ( 222 US at 156 .)

There are good reasons why the common law, as reflected in both Warnock and Grigsby, invalidated stranger-originated life insurance. Even if we ignore the possibility that the owner of the policy will be tempted to murder the insured, this kind of “insurance” has nothing to be said for it. It exists only to enable a bettor with superior knowledge of the insured’s health to pick an insurance company’s pocket.

In a sense, of course, all insurance is a bet, but for most of us who buy life insurance it is a bet we are happy to lose. We recognize that the insurance company is more likely than not to make a profit on the policy, receiving more in premiums than it will ever pay out in proceeds, and that is the result we hope for; we pay the premiums in order to protect against the risk that we will die sooner than expected. But stranger-originated life insurance does not protect against a risk; it does not make sense

When Grigsby was decided, New York common law had anticipated the federal common law, adopting not only the rule of Grigsby—that life insurance policies are, in general, freely assignable—but also the exception recognized in Grigsby—that the assignment cannot be used as a “cloak to what is, in its inception, a wager.” In Steinback v Diepenbrock ( 158 NY 24 , 31 [1899]), answering an objection to the rule of free assignability, we observed:

“[I]t is said that if the payee of a policy be allowed to assign it, a safe and convenient method is provided by which a wagering contract can be safely made. The insured, instead of taking out a policy payable to a person having no insurable interest in his life, can take it out to himself and at once assign it to such person. But such an attempt would not prove successful, for a policy issued and assigned, under such circumstances, would be none the less a wagering policy because of the form of it. The intention of the parties procuring the policy would determine its character, which the courts would unhesitatingly declare in accordance with the facts, reading the policy and the assignment together, as forming part of one transaction.”

Under New York common law, therefore, the purchasers of stranger-originated life insurance could not prevail in a case like this: the law would look through the form of the transaction, and “[t]he intention of the parties procuring the policy would determine its character.” It hardly seems open to doubt, on the facts before us, that the intention of the purchasers here was to bet on Arthur Kramer’s death, and that Kramer’s intention was to be compensated for helping them do so.

While statutes relating to the insurable interest requirement in New York date at least to 1892 (L 1892, ch 690, adding Insurance Law § 55), it is enough for present purposes to go back to 1984, when Insurance Law § 3205 (very similar to a predecessor statute, Insurance Law § 146) was enacted, containing the following language:

“(b) (1) Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation.

“(2) No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured.”

Thus the 1984 version of the statute protected the insured’s right to buy a policy and name any beneficiaiy he or she liked, but otherwise prohibited life insurance where the beneficiary had no insurable interest. It did not specifically address the question of an assignment by the insured to a person lacking an insurable interest; it did not restate the long-standing common-law rule that, in general, life insurance contracts were freely assignable, even to such assignees.

This omission became a problem in 1991, when the United States Internal Revenue Service ruled that a plan to procure a policy on one’s life with the intent to transfer the policy immediately to a charity would violate section 3205 (b) (2), so that any such assignment could not be treated as a charitable gift for tax purposes (see IRS Private Letter Ruling [PLR] 9110016 [Mar. 8, 1991]). The Legislature acted promptly to correct this “erroneous interpretation” of the New York Insurance Law (Mem of Assemblyman Lasher in Support of NY Assembly Bill A8586, Bill Jacket, L 1991, ch 334, at 6, reprinted in 1991 NY

“Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.”

The 1991 amendment gave statutory form to the long-established New York rule that life insurance contracts may be freely assigned, even to someone without an insurable interest. But there was also, as I have explained, a long-established exception to the rule: Assignability could not be used to cloak a third-party wagering transaction. I see no reason to think that the Legislature, in codifying the general rule, meant to abolish the exception. The majority opinion offers neither any reason for the Legislature to consider abolishing it, nor any evidence that the Legislature thought it was doing so. Indeed, nothing in the history of the statute suggests that the Legislature intended to alter the common law of insurable interest in any way: the sponsor’s memorandum says its purpose was to “restate and clarify” it (id.).

As I read the 1991 amendment, it codified not only the free assignability rule, but also the anti-wagering exception to it— although I admit it could have expressed the exception much more clearly. The new second sentence of Insurance Law § 3205 (b) (1) refers, in the words “so procured or effectuated,” to the words of the first sentence, which says that a person “may on his own initiative procure or effect a contract of insurance.” “On his own initiative” is a rather mysterious phrase, which can hardly be taken literally. Life insurance does not become invalid because its purchase was initiated (in the sense of being proposed or suggested) by the insured’s spouse or an insurance agent. Rather, I see in the words “on his own initiative” an echo of the rule recognized in Steinback and Grigsby—that an insured may not, in procuring a policy, act as an agent for a third-party gambler without an insurable interest. So read, Insurance Law § 3205 (b) (1) is completely consistent with the preexisting common law of New York, and with the wise public policy underlying the common law.

The majority today rejects this analysis, and holds in substance that Insurance Law § 3205 (b) enacts the general rule

The majority’s negative answer to the Second Circuit’s question, though I think it is wrong, may be of limited importance. Any harm done may have already been repaired by the 2009 enactment of a statutory prohibition on stranger-originated life insurance (see majority op at 549 n 5). The new statute may create its own problems; insurable interest rules, as our opinions in this case surely demonstrate, are tricky to handle. But I view the new statute as an attempt to implement what I think has always been the public policy of New York to condemn wagers on the early death of an insured.

Chief Judge Lippman and Judges Graffeo, Read and Jones concur with Judge Ciparick; Judge Smith dissents in a separate opinion in which Judge Pigott concurs.

Following certification of a question by the United States Court of Appeals for the Second Circuit and acceptance of the question by this Court pursuant to section 500.27 of the Rules of Practice of the New York State Court of Appeals (22 NYCRR 500.27), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question answered in the negative.