ArentFox Schiff Secures Win for Life Settlement Investor in Arizona Supreme Court

Like virtually all life insurance policies, it included statutorily-required language providing that the carrier could not contest its validity after it had been in force for two years. In 2020, after both insureds passed away and a claim for its benefit was filed, the insurer filed suit, arguing that the policy was void as a so-called stranger-originated life insurance policy (STOLI) that lacked insurable interest at inception. In addition to seeking a declaration that the policy was void, the insurer argued that it was entitled to keep all of the premiums paid during the seventeen years the policy was in force.

The trial court asked the Arizona Supreme Court whether Arizona law allows an insurer to challenge the validity of a life insurance policy based on a lack of insurable interest after the expiration of the statutory two-year contestability period. The Arizona Supreme Court considered Arizona's insurance laws, which require life insurance policies to be supported by insurable interest at inception and which create a cause of action for estates to pursue the proceeds of policies that are not supported by such an interest (A.R.S. §§ 20-1104, 20-1217). Arizona law also requires all life insurance policies to include an incontestability provision limiting challenges to the policy's validity to two years, with the only exception being nonpayment of premiums (A.R.S. § 20-1204).

On July 27, 2023, the Arizona Supreme Court held that Arizona’s incontestability statute prohibits insurers from challenging policies based on lack of insurable interest after the contestability period has passed. The opinion can be accessed here.

Takeaways

The result is an important victory for owners of life insurance policies. Incontestability statutes have been ubiquitous in the United States for a hundred years, but remain a frequent subject of litigation – particularly in recent years, as insurers have argued for an “insurable interest exception” that would permit them to challenge even policies that have been in force for decades. The Arizona Supreme Court has definitively rejected these arguments, and made clear that Arizona’s incontestability statute prohibits insurers from challenging policies for lack of insurable interest after the contestability period has passed. In doing so, the Court agreed with the conclusions of other courts – including those of New York, Michigan, Florida – that “the ‘better and more enlightened view’ [is] that an incontestability provision ‘trumps the absence of an insurable interest’.”

The ArentFox Schiff team that secured this victory was led by litigation partner Jule Rousseau and included associates David J. Ward and Andrew Dykens, with assistance from Steve Sparks and Vincent Miner of Sanders & Park, P.C.