Page 1
NO. 12-20784
________________
IN THE
UNITED STATES COURT OF APPEALS
FOR THE FOURTEENTH CIRCUIT
________________
FRANK KIPP, as trustee for
THE HICKS IRREVOCABLE
LIFE INSURANCE TRUST,
and
PRESIDENTIAL HOLDINGS, LLC,
Appellants,
— against —
GUARANTY LIFE INSURANCE COMPANY,
Appellee.
________________
Appeal from the
United States District Court
for the District of New Tejas
Case No. 28-cv-9563
________________
BRIEF FOR APPELLANTS
________________
TEAM 90
Attorneys for Appellants
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QUESTIONS PRESENTED
I. Whether the intent to sell a life insurance policy in the future deprives an
insured of an insurable interest in his own life or that of his family member so
as to allow an insurer to challenge a policy as void ab initio after the expiration
of the two-year incontestability period?
II. May an insurer retain the premiums paid on a rescinded insurance policy
without proving that the current owner of the policy participated in fraud
during the application process?
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TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ........................................................................................... i
TABLE OF AUTHORITIES .......................................................................................... v
OPINIONS BELOW ...................................................................................................... 1
STATEMENT OF JURISDICTION .............................................................................. 1
CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED ....................... 1
STATEMENT OF THE CASE ....................................................................................... 2
SUMMARY OF THE ARGUMENT .............................................................................. 5
ARGUMENT AND AUTHORITIES ............................................................................. 9
I. THE DISTRICT COURT ERRED IN GRANTING SUMMARY JUDGMENT FOR
GUARANTY LIFE BASED ON THE LACK OF AN INSURABLE INTEREST ................. 10
A. The Trust Was Entitled to Summary Judgment Because the
Incontestability Provisions Bar Guaranty Life’s Counterclaim
Based on Alleged Misrepresentations by Others in the
Application Process ................................................................................... 13
1. The policy is not void ab initio because an insurable interest
existed at the time the Policy was issued ........................................... 16
a. New Tejas law only requires an insurable interest when
the policy goes into effect, which Mr. Hicks and Sydney
Hicks had ........................................................................................ 16
b. New Tejas law expressly permits the assignment of a
policy to someone without an insurable interest ............................ 18
c. The intent to sell a policy in the future is legally irrelevant
to whether an insurable interest existed when the Policy
took effect ........................................................................................ 19
i. New Tejas law does not have an intent-not-to-sell
requirement ............................................................................. 19
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(1) The Insurance Code does not state or imply that
the intent to sell a policy in the future is relevant
to whether one has an insurable interest ........................ 20
(2) The 2009 Amendments to section 1409, which
incorporate a prohibition on intending to sell a
policy in the future, do not apply to a policy issued
in 2007 ............................................................................... 20
(A) The Legislature specifically provided that
the 2009 Amendments ―are not to be applied
retroactively‖ ............................................................. 21
(B) Retroactive application of the 2009 Amend-
ments would violate the Due Process Clause .......... 21
ii. Guaranty Life’s summary judgment evidence does not
establish an agreement to sell the Policy before it
became effective ....................................................................... 23
2. Guaranty Life’s counterclaim is untimely under the
incontestability clause because it was not filed within two
years of the February 16, 2007 policy date ......................................... 24
a. The relation-back principles in Federal Rule of Civil
Procedure 15(c) do not apply because the incontestability
clause is a statute of repose that substantively extinguishes
claims not brought within the statutory contestability
period .............................................................................................. 24
b. An incontestability clause is not subject to equitable tolling ........ 27
B. Alternatively, Genuine Issues of Material Fact Preclude
Summary Judgment for Guaranty Life ................................................... 27
II. THE DISTRICT COURT PROPERLY ORDERED GUARANTY LIFE TO
RETURN PREMIUMS PAID ON A RESCINDED LIFE INSURANCE POLICY .............. 29
A. An Insurer That Rescinds a Life Insurance Policy Is Not
Entitled to Retain Unearned Premiums Because the Insurer
Has Not Been Exposed to Any Risk of Loss ............................................. 30
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B. The Procured-by-Fraud Exception Allowing for the Retention of
Rescinded Life Insurance Premiums Has No Application to a
Third Party That Did Not Participate in the Underlying Fraud ............ 32
1. Nothing in the record establishes that the Trust or
Presidential Holdings participated in the alleged fraud in
procuring the Policy ............................................................................. 33
2. The record contains no evidence that Guaranty Life suffered
any special damages so that returning the premiums would
not restore the parties to their former positions ................................ 34
3. Alternatively, genuine issues of material fact preclude
summary judgment on Guaranty Life’s claim that it be
permitted to retain the premiums ...................................................... 34
C. Equitable Principles Independently Favor the Return of the
Premiums .................................................................................................. 35
CONCLUSION ............................................................................................................. 36
APPENDICES:
APPENDIX ―A‖: New Tejas § 1407.............................................................. A-1
APPENDIX ―B‖: New Tejas § 1408.............................................................. B-1
APPENDIX ―C‖: New Tejas § 1409.............................................................. C-1
APPENDIX ―D‖: New Tejas § 1409 (Amended August 28, 2009) ............... D-1
APPENDIX ―E‖: Federal Rule of Civil Procedure 15(c) .............................. E-1
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TABLE OF AUTHORITIES
Page(s)
CASES:
Am. Gen. Life Ins. Co. v. Ellman Sav. Irrevocable
Trust,
No. 08-5364, 2010 WL 5253611
(D.N.J. Dec. 17, 2010) ....................................................................................... 10
Am. Gen. Life Ins. Co. v. Goldstein,
741 F. Supp. 2d 604 (D. Del. 2010) ................................................................... 11
Am. Nat’l Prop. & Cas. Co. v. Lindgren,
736 F. Supp 275 (N.D. Ga. 1990) ...................................................................... 31
Amoco Prod. Co. v. Newton Sheep Co.,
85 F.3d 1464 (10th Cir. 1996) ........................................................................... 27
Anderson v. Liberty Lobby, Inc.,
477 U.S. 242 (1986) ....................................................................................... 9, 29
Ashkenazi v. AXA Equitable Life Ins. Co.,
937 N.Y.S.2d 215 (App. Div. 2012) ................................................................... 11
Ashkenazi v. Lincoln Nat’l Life Ins. Co.,
No. 08 CV 3235(ENV), 2009 WL 1346394
(E.D.N.Y. May 13, 2009) ................................................................................... 11
AXA Equitable Life Ins. Co. v. Infinity Fin.
Grp., LLC,
608 F. Supp. 2d 1349 (S.D. Fla. 2009) .............................................................. 11
Berkshire Settlements, Inc. v. Ashkenazi,
No. 09-CV-0006 (FB)(JO), 2011 WL 5974633
(E.D.N.Y. Nov. 29, 2011) ................................................................................... 10
Bernstein v. Principal Life Ins. Co.,
No. 09 Civ. 4925 (CM)(HBP),
2010 WL 4922093 (S.D.N.Y. Dec. 2, 2010) ....................................................... 10
Blue Cross & Blue Shield of Ga., Inc. v. Sheehan,
450 S.E.2d 228 (Ga. Ct. App. 1994) .................................................................. 27
Page 7
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Bogacki v. Great-W. Life Assur. Co.,
234 N.W. 865 (Mich. 1931)................................................................................ 16
Bouie v. City of Columbia,
378 U.S. 347 (1964) ........................................................................................... 22
Carton v. B&B Equities Grp.,
827 F. Supp. 2d 1235 (D. Nev. 2011) ................................................................ 11
Celotex Corp. v. Catrett,
477 U.S. 317 (1986) ....................................................................................... 9, 10
City of Chicago v. Morales,
527 U.S. 41 (1999) ....................................................................................... 21, 22
Connally v. Gen. Constr. Co.,
269 U.S. 385 (1926) ........................................................................................... 23
Equitable Life Assur. Soc’y of U.S. v. Bell,
27 F.3d 1274 (7th Cir. 1994) ............................................................................. 14
Foremost Guar. Corp. v. Meritor Sav. Bank,
910 F.2d 118 (4th Cir. 1990) ............................................................................. 32
Gentile v. State Bar,
501 U.S. 1030 (1991) ......................................................................................... 22
Gonzalez v. Eagle Ins. Co.,
948 So. 2d 1 (Fla. Dist. Ct. App. 2006) ............................................................. 35
Grayned v. City of Rockford,
408 U.S. 104 (1972) ........................................................................................... 22
Grigsby v. Russell,
222 U.S. 149 (1911) ..................................................................................... 18, 19
Halberstam v. U.S. Life Ins. Co. in N.Y.C.,
945 N.Y.S.2d 513 (App. Div. 2012) ................................................................... 11
Hartford Life & Annuity Ins. Co. v. Doris Barnes
Family 2008 Irrevocable Trust,
No. CV 10-7560 PSG (DTBx),
2012 WL 688817 (C.D. Cal. Feb. 3, 2012) .................................................. 10, 30
Page 8
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Hilliard v. Jacobs,
874 N.E.2d 1060 (Ind. Ct. App. 2007) .............................................................. 17
In re Estate of D’Agosto,
139 P.3d 1125 (Wash. Ct. App. 2006) ............................................................... 18
In re Tex. Ass’n of Sch. Bds., Inc.,
169 S.W.3d 653 (Tex. 2005) .............................................................................. 31
John Hancock Mut. Life Ins. Co. v. Greer,
71 Cal. Rptr. 2d 48 (Ct. App. 1998) ............................................................ 14, 15
Johnson v. Riddle,
443 F.3d 723 (10th Cir. 2006) ........................................................................... 28
Johnson & Johnson Med. v. Sanchez,
924 S.W.2d 925 (Tex. 1996) .............................................................................. 28
Kaiser Aluminum & Chem. Corp. v. Bonjorno,
494 U.S. 827 (1990) ........................................................................................... 21
Ky. Cent. Life Ins. Co. v. McNabb,
825 F. Supp. 269 (D. Kan. 1993) ....................................................................... 17
Kirby v. Dean,
199 N.W. 174 (Minn. 1924) ............................................................................... 31
Kramer v. Phoenix Life Ins. Co.,
940 N.E.2d 535 (N.Y. 2010) .............................................................................. 11
Landgraf v. USI Film Prods.,
511 U.S. 244 (1994) ........................................................................................... 21
Liberte Capital Grp. v. Capwill,
854 F. Supp. 2d 478 (N.D. Ohio 2012) .............................................................. 10
Lincoln Life & Annuity Co. of N.Y. v. Berck,
No. 37-2008-00083905, 2011 WL 1878855
(Cal. Ct. App. May 17, 2011) ............................................................................. 11
Lincoln Nat’l Life Ins. Co. v. Joseph Schlanger 2006
Ins. Trust,
28 A.3d 436 (Del. 2011) ..................................................................................... 11
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Lincoln Nat’l Life Ins. Co. v. Schwarz,
No. 09-03361 (FLW), 2010 WL 3283550
(D.N.J. Aug. 18, 2010) ....................................................................................... 17
Lincoln Nat’l Life Ins. Co. v. Snyder,
722 F. Supp. 2d 546 (D. Del. 2010) ............................................................. 32, 35
Lowe v. Rennert,
869 S.W.2d 199 (Mo. Ct. App. 1993) ................................................................. 18
Methodist Healthcare Sys. of San Antonio, Ltd.,
L.L.P. v. Rankin,
307 S.W.3d 283 (Tex. 2010) .............................................................................. 25
Minn. Mut. Life Ins. Co. v. Ricciardello,
No. 3:96CV2387(AHN), 1997 WL 631027
(D. Conn. Sept. 17, 1997) .................................................................................. 26
New Eng. Mut. Life Ins. Co. v. Caruso,
535 N.E.2d 270 (N.Y. 1989) .............................................................................. 16
New Eng. Mut. Life Ins. Co. v. Doe,
710 N.E.2d 1060 (N.Y. 1999) ...................................................................... 14, 25
N.Y. Life Ins. Co. v. Waterman,
104 F.2d 990 (9th Cir. 1939) ............................................................................. 25
Nw. Mut. Life Ins. Co. v. Johnson,
254 U.S. 96 (1920) ............................................................................................. 14
Oglesby v. Penn Mut. Life Ins. Co.,
889 F. Supp. 770 (D. Del. 1995) ........................................................................ 15
Ohio Nat’l Life Assur. Corp. v. Davis,
No. 10 C 2386, 2011 WL 2680500
(N.D. Ill. July 6, 2011)....................................................................................... 11
P. Stolz Family P’ship L.P. v. Daum,
355 F.3d 92 (2d Cir. 2004) ................................................................................ 25
Penn Mut. Life Ins. Co. v. GreatBanc Trust Co.,
No. 09-6129, 2012 WL 2074789
(N.D. Ill. June 8, 2012) ...................................................................................... 11
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Penn Mut. Life Ins. Co. v. Greatbanc Trust Co.,
No. 09-C-06129, 2012 WL 3437161
(N.D. Ill. Aug. 15, 2012) .............................................................................. 29, 30
Penn Mut. Life Ins. Co. v. Rodney Reed 2006 Ins.
Trust,
Civ. No. 09-CV-663, 2010 WL 1994675
(D. Del. May 18, 2010) ...................................................................................... 11
Penn Mut. Life Ins. Co. v. Wolk,
739 F. Supp. 2d 387 (S.D.N.Y. 2010) ................................................................ 11
Peterson v. Equitable Life Assur. Soc’y of the U.S.,
57 F. Supp. 2d 692 (W.D. Wis. 1999) ................................................................ 25
PHL Variable Ins. Co. v. Abrams,
No. 10cv521 BTM(NLS), 2012 WL 10686
(S.D. Cal. Jan. 3, 2012) ..................................................................................... 11
PHL Variable Ins. Co. v. Charter Oak Trust,
No. HHDCV106012621S, 2012 WL 2044416
(Conn. Super. Ct. May 4, 2012) ........................................................................ 11
PHL Variable Ins. Co. v. Jolly,
800 F. Supp. 2d 1205 (N.D. Ga. 2011) .............................................................. 30
PHL Variable Ins. Co. v. Lucille E. Morello 2007
Irrevocable Trust,
645 F.3d 965 (8th Cir. 2011) ....................................................................... 11, 32
PHL Variable Ins. Co. v. Price Dawe 2006 Ins.
Trust,
28 A.3d 1059 (Del. 2011) ................................................................................... 11
PHL Variable Ins. Co. v. Robert Gelb Irrevocable
Trust,
No. 10 C 957, 2010 WL 4363377
(N.D. Ill Oct. 27, 2010) ...................................................................................... 11
PHL Variable Ins. Co. v. Sidney Nachowitz 2007
Irrevocable Trust,
No. 09-1923, 2010 WL 3893623
(D. Minn. Sept. 30, 2010) .................................................................................. 11
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Principal Life Ins. Co. v. DeRose,
No. 1:08–CV–2294, 2011 WL 4738114
(M.D. Pa. Oct. 5, 2011) ...................................................................................... 12
Principal Life Ins. Co. v. Erno Altman Ins. Trust,
No. 10-CV-1936 (DLI), 2011 WL 7498936
(E.D.N.Y. Sept. 20, 2011) .................................................................................. 10
Principal Life Ins. Co. v. Lawrence Rucker 2007
Ins. Trust,
774 F. Supp. 2d 674 (D. Del. 2011) ............................................................. 11, 34
Protective Life Ins. Co. v. Sullivan,
682 N.E.2d 624 (Mass. 1997) ............................................................................ 26
Principal Life Ins. Co. v. Wells Fargo Bank, N.A.,
No. CV 09-03143 DDP (RZx),
2011 WL 768058 (C.D. Cal. Jan. 18, 2011) ...................................................... 11
Pruco Life Ins. Co. v. Brasner,
No. 10-80804-CIV, 2011 WL 134056
(S.D. Fla. Jan. 7, 2011) ..................................................................................... 11
Resolution Trust Corp. v. Olson,
768 F. Supp. 283 (D. Ariz. 1991) ...................................................................... 26
SEC v. Private Equity Mgmt. Grp., LLC,
No. CV 09-2901 PSG (Ex.), 2010 WL 4794701
(C.D. Cal. Nov. 18, 2010) ............................................................................ 10, 11
Settlement Funding LLC, v. AXA Equitable Life
Ins. Co.,
No. 06 CV 5743(HB), 2010 WL 3825735
(S.D.N.Y. Sept. 30, 2010) .................................................................................. 11
Stan Koch & Sons Trucking, Inc. v. Great W.
Cas. Co.,
517 F.3d 1032 (8th Cir. 2008) ........................................................................... 31
Sullivan v. Iantosca,
569 N.E.2d 822 (Mass. 1991) ............................................................................ 27
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TTSI Irrevocable Trust v. Reliastar Life Ins. Co.,
60 So. 3d 1148 (Fla. Dist. Ct. App. 2011) ................................................... 32, 33
United States v. Diebold, Inc.,
369 U.S. 654 (1962) ........................................................................................... 10
United States v. Heth,
7 U.S. (3 Cranch) 399 (1806) ............................................................................. 21
Unity Life Ins. Co. v. Moses,
621 F. Supp. 13 (E.D. Pa. 1985) ........................................................................ 13
CONSTITUTIONAL PROVISIONS:
U.S. Const. amend. V ................................................................................................... 22
U.S. Const. amend. XIV ........................................................................................... 1, 22
STATUTES & RULES:
Fed. R. Civ. P. 15(c) ..................................................................................................... 24
Fed. R. Civ. P. 56(c) ....................................................................................................... 9
N.Y. Ins. Law § 7815 (McKinney 2010) ...................................................................... 11
Rules Enabling Act,
28 U.S.C. § 2072 (2006) ..................................................................................... 26
28 U.S.C. § 1291 (2006) ................................................................................................. 1
28 U.S.C. § 1332 (2006) ................................................................................................. 1
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LEGISLATIVE MATERIALS:
H.B. 660, 2009 Sess. (N.H. 2010) ................................................................................ 11
S.B. 513, 2009–2010 Leg. (Wis. 2009) ......................................................................... 12
LEGAL PERIODICALS:
Douglas R. Richmond,
Investing with the Grim Reaper: Insurable
Interest and Assignment in Life Insurance,
47 Tort Trial & Ins. Prac. L.J. 657 (2012) ........................................................ 13
OTHER SOURCES:
1 Couch on Insurance 3d (2010) .................................................................................. 31
2 Couch on Insurance 3d (2010) .................................................................................. 31
Letter from Jennifer Floyd, Clerk, Fourteenth
Circuit Court of Appeals, to 2013 Judicial
Panel No. 35 (Oct. 8, 2012) ............................................................................... 16
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TO THE HONORABLE UNITED STATES COURT OF APPEALS FOR THE
FOURTEENTH CIRCUIT:
Appellants, Frank Kipp, as trustee of The Hicks Irrevocable Life Insurance
Trust and Presidential Holdings, L.L.C.—the defendants in the United States
District Court for the District of New Tejas—respectfully submit this brief-on-the
merits in support of their request that this Court reverse-in-part and affirm-in-part
the district court’s judgment.
OPINIONS BELOW
The opinion of the United States District Court for the District of New Tejas is
unreported but appears in the record at pages 1–15.
STATEMENT OF JURISDICTION
The judgment of the United States District Court for the District of New Tejas
was entered on December 14, 2011. R. at 15. This Court has appellate jurisdiction
under 28 U.S.C. § 1291 (2006). The district court had subject-matter jurisdiction
under 28 U.S.C. § 1332 (2006).
CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED
This case involves the Fourteenth Amendment’s Due Process Clause, which
provides in pertinent part that no State shall ―deprive any person of life, liberty, or
property, without due process of law.‖ U.S. Const. amend. XIV. This case also
involves the interpretation of three New Tejas statutes, § 1407, § 1408 and
§ 1409(c). See Appendices ―A‖–‖C.‖
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STATEMENT OF THE CASE
This case involves a life insurance policy purchased on the life of Don Juan W.
Hicks (―Mr. Hicks‖). R. at 2, 7. When the owner sold the policy and submitted
transfer documentation to Guaranty Life Insurance Company (―Guaranty Life‖), the
insurance company threatened to rescind the policy and, more than two years after
issuing the policy, filed a counterclaim to do precisely that based on alleged
misrepresentations made by the original purchasers in the application process. R.
at 9, 12.
The Policy. On January 4, 2007, Sydney Hicks met with Reggie Hightower, a
life insurance agent for Top Gun–Executive Insurance Agency, to discuss life
insurance options for his elderly father, Mr. Hicks. R. at 10. Several days later, Mr.
Hicks agreed to purchase a life insurance policy, and Sydney agreed to pay the
premiums. R. at 10. The same day, Sydney Hicks e-mailed the executed
application and statement of client intent form to Reggie Hightower. R. at 10.
Mr. Hicks created the Hicks Irrevocable Life Insurance Trust (the ―Trust‖) on
February 5, 2007, naming his son as the sole beneficiary and attorney Bryan Jones
as the trustee. R. at 7. The following day, the trust submitted an application for a
$20 million policy. R. at 10. After Mr. Hicks underwent a medical exam, the
application was submitted to Guaranty Life’s underwriting department. R. at 7.
Following an independent underwriting process, Guaranty Life offered Policy No.
UT8675309 (the ―Policy‖) with a planned first year premium of $955,826, a policy
issue date of February 16, 2007, and a face amount of $20,000,000. R. at 7.
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Guaranty Life delivered this form to the Trust on March 5, 2007. R. at 8. That
same day, Sydney Hicks forwarded Guaranty Life the first 3-month premium
payment of $238,956.75. R. at 8.
The Sale to Presidential Holdings. Two days later on March 7, 2007,
Sydney Hicks sold his beneficial interest in the policy. The Beneficial Interest
Transfer Agreement (―BITA‖) contained the following statement from Sydney Hicks:
I hereby affirm and represent that (1) at no time prior to the issuance of
the Policy to the Trust did Presidential solicit me, directly or indirectly, to
obtain the Policy for the specified purpose of transferring the Beneficial
Interest in the Trust to Presidential, and Presidential did not participate
in any way with the decision to obtain the Policy or the procurement of the
Policy by the Trust, (2) I did not become aware of Presidential through
any sort of general advertisement or marketing, (3) prior to issuance of
the Policy to the Trust, I did not communicate (directly or indirectly) with
Presidential or its employees or agents, and the identity of the Purchaser
and its activities was unknown to me, and (4) I did not receive any form of
inducement or consideration from Presidential or its agents in connection
with the issuance of the Policy to the Trust, nor was I provided any
documents in connection with the sale of the Beneficial Interest to the
Purchaser prior to issuance.
R. at 8. In exchange, Presidential Holdings, L.L.C. (―Presidential Holdings‖)
provided Sydney Hicks with a payment of $838,956.75, which is equivalent to the
first three months’ premiums and three percent of the policy’s face value. R. at 9.
That same day, Trustee Bryan Jones resigned and appointed Frank Kipp as the
successor Trustee. R. at 9.
The Designation of Owner and Designation of Beneficiary Form.
Presidential Holdings sent Guaranty Life the necessary forms to transfer ownership
of the policy on October 21, 2008. R. at 9. Rather than processing the request,
Guaranty Life sent the Trust a letter requesting production of documentation
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purporting to ―confirm the accuracy‖ of representations made to Guaranty Life
during the underwriting process and threatening rescission of the Policy. R. at 9.
The District Court Proceedings. On January 3, 2009, the Trust and
Presidential Holdings initiated this lawsuit. R. at 13. The Trust sued Guaranty
Life for breach of contract, conversion, breach of the covenant of good faith and fair
dealing and fraud. R. at 13. Presidential Holdings sued Guaranty Life for fraud,
intentional and negligent interference with contract and prospective economic
advantage. R. at 13.
Five months later on June 6, 2009, Guaranty Life filed a counterclaim seeking
a declaration that the Policy is void for lack of an insurable interest. The insurance
company also asked the court to allow it to retain the premiums paid under the
Policy, which were deposited in the court registry. R. at 13. Guaranty Life’s
position was based on actions taken during the application process by Sydney Hicks
and Reggie Hightower, who asserted his Fifth Amendment right when questioned
about the events. R. at 10 n.8. In the discovery process, Guaranty Life had learned
that (1) Mr. Hicks did not have the net worth and income shown on the application,
R. at 11; (2) two Guaranty Life underwriters questioned Mr. Hicks’ net worth and
income before the policy was issued, R. at 11; and (3) Reggie Hightower had
discussed the policy with a Presidential Holdings executive before the policy was
issued, R. at 11.
All parties moved for summary judgment. R. at 13, 14. The Trust and
Presidential Holdings sought summary judgment on its claims for breach of
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contract and monetary damages resulting from the loss of the Policy value in the
secondary market. R. at 13. The same day, Guaranty Life also moved for summary
judgment for rescission and to keep the premiums paid on the Policy to date. R. at
14. The district court granted Guaranty Life’s summary judgment motion on the
rescission claim, but denied Guaranty Life’s request to keep the premiums paid to
the policy to date. R. at 14. The district court denied the summary judgment
motions filed by the Trust and Presidential Holdings. R. at 14.
SUMMARY OF THE ARGUMENT
I.
The district court improperly granted summary judgment for Guaranty Life on
the basis that the policy lacked an insurable interest. The issue does not turn on
the fact that the Policy in this case may have been the product of
misrepresentations involving the grantor’s financial position. The insurance
company could have chosen to investigate the statements in the application before
the Policy was issued or even during the two-year contestability period. But it did
not.
By waiting until after the statutory and contractual incontestability period
expired, Guaranty Life may only assert that no insurable interest existed and the
Policy is void ab initio. And that argument is unavailing here because, under New
Tejas law, the insurable interest need only exist at the time the Policy was issued.
An insurable interest existed here because the Trust obtained the Policy on Mr.
Hicks’ behalf based on his own interest in his life and because the beneficiary was
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his family member, Sydney Hicks. Either basis supports the statutory requirement
of having an insurable interest.
The district court improperly determined that an insurable interest was
lacking because of an alleged pre-arranged deal to transfer ownership and the
beneficial interest in the Policy to others without an insurable interest. Even if
conclusive proof of these facts existed (which it did not), that conclusion does not
support relief for Guaranty Life because the fact is legally irrelevant under current
New Tejas law. While the New Tejas legislature amended section 1407 in 2009 to
create an intent-not-to-transfer requirement in life and disability insurance
contracts, those amendments specifically state that they do not apply retroactively.
By judicially imposing the prospective amendments to a life insurance policy issued
in 2007, the district court ignored the plain statutory language and violated the
settled rights of the Trust and Presidential Holdings.
Moreover, Guaranty Life is not entitled to rely on the provisions in Federal
Rule of Civil Procedure 15(c) that allow a pleading amendment to relate back to the
time the lawsuit was initially filed so as to make the counterclaim fall within the
two-year contestability period. Section 1407 is not a procedural rule or a statute of
limitations that would fit within the scope of Rule 15(c). Instead, section 1407
operates as a statute of repose that extinguishes the right to challenge a policy
altogether after two years. When the New Tejas Legislature determined that two
years was an appropriate time limit for an insurance company to investigate claims
associated with the application and underwriting process, it created the substantive
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right not to have to defend against that type of claim. Once the two years has
passed and the right vested in the Trust and Presidential Holdings, the district
court may not take that right away by allowing Guaranty Life to resurrect its
untimely challenge to the policy.
If anything, the record supports summary judgment for the Trust and
Presidential Holdings because the facts that were part of the application and
underwriting process have no bearing on the insurable interest question. But even
if they do, at a minimum, the record raises a genuine issue of material fact that
precludes summary judgment for Guaranty Life. The insurance company has not
conclusively established that an agreement to transfer the policy existed when the
Policy was issued. None of the communications are sufficient to meet Guaranty
Life’s burden to conclusively establish its right to obtain summary judgment on its
affirmative counterclaim.
This Court should reverse the district court’s judgment by holding that the
Policy was supported by an insurable interest when it was issued and, for that
reason, was not void ab initio.
II.
The district court correctly denied Guaranty Life’s request to recover the
money in the court registry. Guaranty Life cannot, as a matter of law, seek to
rescind the Policy—or have it declared void ab initio—while seeking to retain the
$4,779,135 in premiums paid on the Policy. Even if this Court determines that the
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Policy is void ab initio (which it should not), the insurance company was not entitled
to retain the premiums paid on a rescinded policy.
The two remedies—rescission of the insurance contract and retention of the
premiums—are fundamentally inconsistent. When a party chooses to rescind a
contract, the normal course of action is to return the parties to the position each
held before the parties entered into the contract. But Guaranty Life wants to have
their cake and eat it too. They ask to treat the insurance policy as a nullity and
then keep the money received for the non-existent coverage. In this circumstance,
the insurer bears no risk and suffered no identifiable damages. Nothing justifies
departing from the normal practice of returning the parties to their pre-contract
position.
The punishment of not returning the premiums is particularly inappropriate
where, as here, the underlying fraud the insurer complains about was committed by
others. Guaranty Life has not alleged that the current owner of the Policy or the
beneficial interest in it—the Trust and Presidential Holdings—committed any of
the acts forming the basis of their counterclaim. To allow the insurer to retain the
premiums under these circumstances—particularly when Guaranty Life offered no
evidence of specific damages it suffered—would provide a windfall and improperly
punish those who legitimately purchased a policy on the open market. The balance
of the equities necessarily favors returning the premiums to the Trust and
Presidential Holdings.
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In the event this Court finds that the insurance contract is void ab initio, then
this Court should affirm the district court’s ruling that the premiums paid on the
rescinded insurance policy must be returned to the Trust and Presidential Holdings.
Alternatively, even if this Court determines that the issue cannot be resolved on
summary judgment in favor of the Trust and Presidential Holdings, genuine issues
of material fact would preclude summary judgment for Guaranty Life. The
insurance company’s summary judgment evidence does not conclusively prove
anything. At most, it raises fact questions, and the case should be remanded for
further consideration of the issues.
ARGUMENT AND AUTHORITIES
The district court resolved this case by granting one of two competing
summary judgment motions. R. at 13. A reviewing court considers the granting of
a summary judgment motion de novo, applying the same standard as the district
court. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Summary judgment is
only appropriate if the evidence, viewed in the light most favorable to the non-
moving party, demonstrates no genuine issue of material fact exists and the moving
party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c). A genuine
issue of material fact will exist if a fair-minded jury could return a verdict for the
non-moving party on the evidence presented. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 252 (1986). Summary judgment is not proper if a genuine issue about a
material fact exists. Id. at 248. The moving party has the burden of proof with
regard to showing that no genuine issue of material fact exists and that she is
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10
entitled to a judgment as a matter of law. Celotex, 477 U.S. at 323. The non-
moving party must identify a genuine issue of material fact to defeat a summary
judgment motion. Id. at 324. A summary judgment motion should only be granted
when the moving party’s right to relief is clear and free from doubt. Id. All fact
inferences must be viewed in a light most favorable to the non-moving party.
United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
I. THE DISTRICT COURT ERRED IN GRANTING SUMMARY JUDGMENT FOR
GUARANTY LIFE BASED ON THE LACK OF AN INSURABLE INTEREST.
Guaranty Life brought a counterclaim in this lawsuit to avoid honoring the life
insurance policy it had issued on the life of Mr. Hicks and with the Trust as
beneficiary. The insurance company did so after receiving notice that the policy had
been sold by the original owner. R. at 12. Guaranty Life alleges it was defrauded
by an unlawful stranger-originated life insurance scheme that eventually resulted
in the assignment of a policy to those without an insurable interest in the life of Mr.
Hicks, the insured. R. at 12.
Stranger-owned life insurance—commonly known by the acronym STOLI—has
been an emerging area for litigation in the insurance industry.1 STOLI generally
1 The following cases have found that STOLI policies are permissible. See Liberte
Capital Grp. v. Capwill, 854 F. Supp. 2d 478, 485 (N.D. Ohio 2012); Berkshire
Settlements, Inc. v. Ashkenazi, No. 09-CV-0006 (FB)(JO), 2011 WL 5974633, at *6
(E.D.N.Y. Nov. 29, 2011); Principal Life Ins. Co. v. Erno Altman Ins. Trust, No. 10-
CV-1936 (DLI), 2011 WL 7498936, at *12 (E.D.N.Y. Sept. 20, 2011); Hartford Life &
Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust, No. CV 10-7560
(DTBx), 2011 WL 759554, at *5 (C.D. Cal. Feb. 22, 2011); Am. Gen. Life Ins. Co. v.
Ellman Sav. Irrevocable Trust, No. 08-5364, 2010 WL 5253611, at *7 (D.N.J. Dec.
17, 2010); Bernstein v. Principal Life Ins. Co., No. 09 Civ. 4925 (CM)(HBP), 2010
WL 4922093, at *4 (S.D.N.Y. Dec. 2, 2010); SEC v. Private Equity Mgmt. Grp., LLC,
Page 24
11
describes the purchase of life insurance by an insured with the intent of assigning
ownership of the policy along with its death benefits to investors without an
insurable interest in the insured’s life. Some states have passed legislation to
restrict this type of transaction. See, e.g., N.Y. Ins. Law § 7815 (McKinney 2010)
(banning STOLI transactions); H.B. 660, 2009 Sess. (N.H. 2010) (banning the use of
third-parties to apply for life insurance and increasing the contestability period to
No. CV 09-2901 PSG (Ex.), 2010 WL 4794701, at *4 (C.D. Cal. Nov. 18, 2010);
Kramer v. Phoenix Life Ins. Co., 940 N.E.2d 535, 546 (N.Y. 2010); Halberstam v.
U.S. Life Ins. Co. in N.Y.C., 945 N.Y.S.2d 513, 517–18 (App. Div. 2012). The
following cases have found that STOLI policies are impermissible. PHL Variable
Ins. Co. v. Lucille E. Morello 2007 Irrevocable Trust, 645 F.3d 965, 970 (8th Cir.
2011); Penn Mut. Life Ins. Co. v. GreatBanc Trust Co., No. 09-6129, 2012 WL
2074789, at *5 (N.D. Ill. June 8, 2012); PHL Variable Ins. Co. v. Abrams, No.
10cv521 BTM(NLS), 2012 WL 10686, at *7 (S.D. Cal. Jan. 3, 2012); Ohio Nat’l Life
Assur. Corp. v. Davis, No. 10 C 2386, 2011 WL 2680500, at *8 (N.D. Ill. July 6,
2011); Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 774 F. Supp. 2d
674, 683 (D. Del. 2011); Principal Life Ins. Co. v. Wells Fargo Bank, N.A., No. CV
09-03143 DDP (RZx), 2011 WL 768058, at *4 (C.D. Cal. Jan. 18, 2011); Pruco Life
Ins. Co. v. Brasner, No. 10-80804-CIV, 2011 WL 134056, at *8 (S.D. Fla. Jan. 7,
2011); Carton v. B&B Equities Grp., 827 F. Supp. 2d 1235, 1250–51 (D. Nev. 2011);
PHL Variable Ins. Co. v. Robert Gelb Irrevocable Trust, No. 10 C 957, 2010 WL
4363377, at *4 (N.D. Ill Oct. 27, 2010); Settlement Funding LLC, v. AXA Equitable
Life Ins. Co., No. 06 CV 5743(HB), 2010 WL 3825735, at *14 (S.D.N.Y. Sept. 30,
2010); Am. Gen. Life Ins. Co. v. Goldstein, 741 F. Supp. 2d 604, 617 (D. Del. 2010);
PHL Variable Ins. Co. v. Sidney Nachowitz 2007 Irrevocable Trust, No. 09-1923,
2010 WL 3893623, at *4 (D. Minn. Sept. 30, 2010); Penn Mut. Life Ins. Co. v. Wolk,
739 F. Supp. 2d 387, 395 (S.D.N.Y. 2010); Penn Mut. Life Ins. Co. v. Rodney Reed
2006 Ins. Trust, Civ. No. 09-CV-663, 2010 WL 1994675, at *2 (D. Del. May 18,
2010); Ashkenazi v. Lincoln Nat’l Life Ins. Co., No. 08 CV 3235(ENV), 2009 WL
1346394, at *6 (E.D.N.Y. May 13, 2009); AXA Equitable Life Ins. Co. v. Infinity Fin.
Grp., LLC, 608 F. Supp. 2d 1349, 1358 (S.D. Fla. 2009); PHL Variable Ins. Co. v.
Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1079 (Del. 2011); Lincoln Nat’l Life Ins.
Co. v. Joseph Schlanger 2006 Ins. Trust, 28 A.3d 436, 441–42 (Del. 2011); Ashkenazi
v. AXA Equitable Life Ins. Co., 937 N.Y.S.2d 215, 216 (App. Div. 2012); PHL
Variable Ins. Co. v. Charter Oak Trust, No. HHDCV106012621S, 2012 WL 2044416,
at *6 (Conn. Super. Ct. May 4, 2012); Lincoln Life & Annuity Co. of N.Y. v. Berck,
No. 37-2008-00083905, 2011 WL 1878855, at *15 (Cal. Ct. App. May 17, 2011).
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12
five years); S.B. 513, 2009–2010 Leg. (Wis. 2009) (increasing the contestability
period to five years and instituting other controls on their sale). Some insurers
have incorporated language into policies that prohibit the practice. See, e.g.,
Principal Life Ins. Co. v. DeRose, No. 1:08–CV–2294, 2011 WL 4738114, at *1 (M.D.
Pa. Oct. 5, 2011) (upholding policy that expressly prohibited any form of STOLI
transaction, ―including non-recourse premium financing . . . as these are almost
always tied directly or indirectly to a sale to an investor group‖).
But nothing about the assignment of the ownership of beneficial interest ran
afoul of the law or the Policy. When this Policy was issued, the State of New Tejas
did not prohibit STOLI transactions. And, while Guaranty Life asked about the
intent to transfer the policy during the application process, the insurer chose not to
prohibit the practice in the Policy language. R. at USCA 20, 22. Thus, apart from a
claim for fraud in the application process—which under the Policy’s plain language
could only be brought within two years of issuance—the insurance company cannot
unilaterally rescind the insurance contract or otherwise deny coverage to an insured
who chooses to exercise his legal right to sell the policy benefits to another.
Ignoring what the Policy actually says and what New Tejas law permits,
Guaranty Life seeks to impose a general prohibition against purchasing a life
insurance policy with the future intent to sell it. Though the district court was
charged with the responsibility of interpreting New Tejas law as written and the
insurance contract as agreed by the parties, it instead chose to impose a prohibition
not found in either. This was reversible error.
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A. The Trust Was Entitled to Summary Judgment Because the
Incontestability Provisions Bar Guaranty Life’s Counterclaim
Based on Alleged Misrepresentations by Others in the
Application Process.
Under New Tejas law, a challenge to the validity of an insurance contract may
not be filed more than two years after the date the policy issues. The applicable
New Tejas statute provides as follows:
All life insurance policies, delivered or issued for delivery in this state,
shall contain in substance a provision stating that the policy shall be
incontestable after being in force during the life of the insured for a period
of two years from its date of issue, and that, if a policy provides that the
death benefit provided by the policy may be increased, or other policy
provisions changed, upon the application of the policyholder and the
production of evidence of insurability, the policy with respect to each such
increase or change shall be incontestable after two years from the effective
date of such increase or change, except in each case for nonpayment of
premiums or violation of policy conditions relating to service in the armed
forces.
R. at 5.
This statutory requirement is common and grew out of a concern for the
imbalance that was historically recognized to exist between insurance companies
and insureds. See Douglas R. Richmond, Investing with the Grim Reaper: Insurable
Interest and Assignment in Life Insurance, 47 Tort Trial & Ins. Prac. L.J. 657, 678–
79 (2012). For example, litigation years after a policy was issued is not only
expensive but, quite often, the contest is made after the named insured has died,
robbing the beneficiaries of their most potent witness. Unity Life Ins. Co. v. Moses,
621 F. Supp. 13, 15–16 (E.D. Pa. 1985). This puts beneficiaries in the untenable
position of having to battle powerful insurance carriers without favorable evidence
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that might only be known by the deceased. Equitable Life Assur. Soc’y of U.S. v.
Bell, 27 F.3d 1274, 1278–79 (7th Cir. 1994).
As the New York Court of Appeals recognized,
The incontestability concept was first introduced in the middle of the
nineteenth century in life insurance policies issued by English life
insurance companies to assuage concerns by the public that the
companies were unjustly avoiding payment on claims. There was
widespread belief, and accompanying insecurity on the part of the public,
that insurance companies resisted liability stubbornly on the basis of
some misstatement made by the insured at the time of applying for the
policy, as to which they carefully refrained from comment until the
insured had died and was unable to testify in his own behalf. The remedy
was the advent of the incontestability clause, which is something akin to a
contractual statute of repose. It limits the period of time that the carrier
has to investigate the veracity of the policyholder’s statements, after
which it may not contest the policy except on certain stated grounds,
usually nonpayment of premiums.
New Eng. Mut. Life Ins. Co. v. Doe, 710 N.E.2d 1060, 1061–62 (N.Y. 1999).
Justice Holmes extolled the virtues of incontestability when he wrote: ―[t]he
object of the clause is plain and laudable—to create an absolute assurance of the
benefit, as free as may be from any dispute of fact except the fact of death, as soon
as it reasonably can be done.‖ Nw. Mut. Life Ins. Co. v. Johnson, 254 U.S. 96, 102
(1920). The California Supreme Court echoed his sentiment almost eighty years
later when it reasoned:
Incontestability clauses are given broad effect and are strictly enforced . . .
even in the face of gross fraud in procuring the policy. The view is that
even though dishonest people are given advantages under incontestability
clauses which any right-minded man is loath to see them get, still the
sense of security given to the great majority of honest policyholders by the
presence of the clause in their policies makes it worth the cost. The time
allowed to the insurance company after issuance of the policy to
investigate the case and uncover any fraud is deemed a fair check against
trickery or deception by the insured.
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John Hancock Mut. Life Ins. Co. v. Greer, 71 Cal. Rptr. 2d 48, 50–51 (Ct. App. 1998)
(internal citations and quotations omitted); see also Oglesby v. Penn Mut. Life Ins.
Co., 889 F. Supp. 770, 774 (D. Del. 1995) (recognizing incontestability statutes arose
―as a reaction to the early greed and ruthlessness of the insurers, . . . who were apt
to deny benefits years after the policy had issued based on technicalities or
preexisting conditions.‖).
In compliance with New Tejas’ statutory requirement that all life insurance
policies contain an incontestability clause, Guaranty Life included the following
provision in the Policy the Trust purchased: ―This policy shall be incontestable
after it has been in force during the Insured’s lifetime for two years from the Issue
Date, except for nonpayment of premiums or violation of policy conditions relating
to service in the armed forces.‖ R. at USCA 20. This incontestability period
provides a finite window for Guaranty Life to investigate and determine whether
the policy it issued—based on information provided in the application by Mr. Hicks,
Sydney Hicks, the Trust and Reggie Hightower—is the policy Guaranty Life
intended to issue. The window is a two-year period—a time the legislature
determined was sufficient for any investigation to take place.
Guaranty Life issued the policy on February 16, 2007. R. at 8. Therefore, the
New Tejas statute and the incontestability clause in the policy statutorily bar any
challenges to the validity of the Policy initiated after February 16, 2009—when the
two-year contestability period expired. Guaranty Life first filed its counterclaim on
June 6, 2009—three months after the two-year contestability period had expired.
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Thus, the proffered evidence established as a matter of law that the Trust—not
Guaranty Life—was entitled to summary judgment.
1. The policy is not void ab initio because an insurable
interest existed at the time the Policy was issued.
Guaranty Life argues that it may challenge the policy despite the
incontestability clause as the policy was void ab initio for lack of an insurable
interest.2 R. at 12. In its view, if a policy is proven to be void ab initio, then it
never existed, and, the incontestability clause also never existed. In that scenario,
the insurer would be free to rescind the policy. Unfortunately, the district court
agreed with this reasoning, holding that, ―as a matter of law, the Policy failed for
lack of insurable interest at its inception due to the pre-arranged deal of the
investors to procure ownership and beneficial interest in the Policy.‖ R. at 14. But
neither New Tejas law nor the record supports the district court’s conclusions.
a. New Tejas law only requires an insurable interest
when the policy goes into effect, which Mr. Hicks
and Sydney Hicks had.
Section 1409 of the New Tejas statutes mandates that the owner of a life
insurance policy must have ―an insurable interest . . . at the time the contract of life
2 Some courts have held that an incontestability clause forecloses all challenges to a
policy, including one based on the lack of an insurable interest. See, e.g., New Eng.
Mut. Life Ins. Co. v. Caruso, 535 N.E.2d 270, 272–75 (N.Y. 1989) (concluding that
incontestability clause bars insurers from asserting lack of insurable interest as a
defense to payment); Bogacki v. Great-W. Life Assur. Co., 234 N.W. 865, 867 (Mich.
1931) (same). In this case, however, the parties do not dispute that Guaranty Life,
―after the contestability period, may contest the validity of the subject policy.‖
Letter from Jennifer Floyd, Clerk, Fourteenth Circuit Court of Appeals, to 2013
Judicial Panel No. 35 (Oct. 8, 2012).
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17
or disability insurance becomes effective, but [that insurable interest] need not exist
at the time the loss occurs.‖ R. at 5 (emphasis added). An insurable interest is
defined as ―an interest based upon a reasonable expectation of pecuniary advantage
through the continued life, health, or bodily safety of another person and
consequent loss by reason of that person’s death or disability or a substantial
interest engendered by love and affection in the case of individuals closely related
by blood or law.‖ R. at 5.
Two individuals were connected to the Policy Guaranty Life issued—Mr. Hicks,
as applicant for the Policy and Sydney Hicks, as beneficiary of the Trust and
ultimate beneficiary of the Policy. Both had an insurable interest within the
meaning of New Tejas law. Mr. Hicks had ―an unlimited insurable interest in his
. . . own life.‖ R. at 5. Likewise, Sydney Hicks is ―closely related by blood or law‖ to
his father. R. at 5.
This conclusion is consistent with how most other states interpret insurable
interest statutes. See, e.g., Lincoln Nat’l Life Ins. Co. v. Schwarz, No. 09-03361
(FLW), 2010 WL 3283550, at *6 (D.N.J. Aug. 18, 2010) (holding that an ―insurable
interest exists at the time a life insurance policy is issued, as long as it is obtained
for a pecuniary advantage‖); Ky. Cent. Life Ins. Co. v. McNabb, 825 F. Supp. 269,
272 (D. Kan. 1993) (―A person who insures the life of anther must have an insurable
interest therein, or the policy is deemed void ab initio.‖); Hilliard v. Jacobs, 874
N.E.2d 1060, 1064–65 (Ind. Ct. App. 2007) (―As a general rule, the authorities
affirm that a policy of life insurance or the appointment or designation of a
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beneficiary, which is valid in its inception, continues and remains valid, although
the insurable interest or relationship of the beneficiary has ceased or terminated.‖);
Lowe v. Rennert, 869 S.W.2d 199, 202 (Mo. Ct. App. 1993) (finding that ―wagering
contract‖ are unenforceable because they are not founded upon the relations of the
parties to each other); In re Estate of D’Agosto, 139 P.3d 1125, 1128 (Wash. Ct. App.
2006) (stating that an insurable interest exists as long as the parties are either
related closely by blood or a pecuniary interest exists).
b. New Tejas law expressly permits the assignment of a
policy to someone without an insurable interest.
New Tejas law permits assignment of a life insurance policy. The operative
version of section 1409 specifically states an insurable interest ―need not exist at
the time the loss occurs.‖ R. at 5. Subsection (b) further provides that an individual
may ―have the policy made payable to whomsoever he or she pleases, regardless of
whether the beneficiary designated has an insurable interest.‖ R. at 5. This
necessarily allows precisely what occurred in this case—a person with an insurable
interest buying a policy and then transferring it to someone without an insurable
interest. Of course, Guaranty Life or any other insurer could prohibit transfer to
someone without an insurable interest as a contractual matter. But unless a policy
expressly provides otherwise (which this one did not), the policy is freely assignable
at any time to any person.
The fact that New Tejas law permits assignment of a life insurance policy is
consistent with what the United States Supreme Court said more than a century
ago. As the court explained in Grigsby v. Russell,
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life insurance has become in our days one of the best recognized forms of
investment and self-compelled saving. . . . [I]t is desirable to give to life
policies the ordinary characteristics of property. . . . To deny the right to
sell except to persons [with an insurable interest] is to diminish
appreciably the value of the contract in the owner’s hands.
222 U.S. 149, 156 (1911).
c. The intent to sell a policy in the future is legally
irrelevant to whether an insurable interest existed
when the Policy took effect.
Guaranty Life and the district court make much of the allegation that a pre-
arranged deal to transfer the Policy’s ownership and beneficial interest existed. In
their view, the intent to sell the policy extinguishes any insurable interest that the
grantor or beneficial interest owner may have. But these alleged
misrepresentations have nothing to do with an insurable interest under current
New Tejas law.
i. New Tejas law does not have an intent-not-to-
sell requirement.
The prohibition the district court imposed in this case is not found in the
operative version of section 1409. Guaranty Life may not avoid its obligations
under the Policy merely because Sydney Hicks or the Trust intended to exercise the
right to transfer them at some point in the future. The intent to transfer the Policy
is legally irrelevant.
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(1) The Insurance Code does not state or
imply that the intent to sell a policy in
the future is relevant to whether one has
an insurable interest.
The intent to sell a policy in the future is not mentioned in the version of
Section 1409 in force when the Policy was issued. Thus, the prohibition imposed by
the district court has no statutory basis.
(2) The 2009 Amendments to section 1409,
which incorporate a prohibition on
intending to sell a policy in the future, do
not apply to a policy issued in 2007.
The New Tejas legislature has recently incorporated the prohibitions Guaranty
Life sought and the district court imposed. In amendments to Section 1409, the
following sections were added:
(d) Trusts and special purpose entities that are used to apply for and
initiate the issuance of policies of insurance for investors, where one
or more beneficiaries of those trusts or special purpose entities do not
have an insurable interest in the life of the insured, violate the
insurable interest laws and the prohibition against wagering on life.
(e) Any device, scheme, or artifice designed to give the appearance of an
insurable interest where there is no legitimate insurable interest
violates the insurable interest laws.
(f) This section shall not be interpreted to define all instances in which
an insurable interest exists.
There is no doubt that Guaranty Life and the district court would be correct if these
provisions applied to this lawsuit. But they do not.
The amendment was passed after the policy had been issued and had no
applicability to the present dispute because statutes that retroactively alter the
legal consequences of completed acts are greatly disfavored. ―The principle that the
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legal effect of conduct should ordinarily be assessed under the law that existed
when the conduct took place has timeless and universal human appeal. . . . It has
long been a solid foundation of American law.‖ Kaiser Aluminum & Chem. Corp. v.
Bonjorno, 494 U.S. 827, 855 (1990) (Scalia, J., concurring). For this reason, courts
have historically applied a strong presumption that statutes altering the
consequences of completed acts should apply only to events that occur after their
enactment. United States v. Heth, 7 U.S. (3 Cranch) 399, 413 (1806) (―Words in a
statute ought not to have a retrospective operation, unless they are so clear, strong,
and imperative, that no other meaning can be annexed to them.‖).
(A) The Legislature specifically provided
that the 2009 Amendments “are not
to be applied retroactively.”
The New Tejas Legislature directed that the ―2009 Amendments are not to be
applied retroactively.‖ R. at 6. This is a clear and direct command that the
provisions do not apply to this dispute. Because the New Tejas legislature clearly
articulated its intention not to apply the 2009 Amendments retroactively, this Court
should defer to that legislative decision. Landgraf v. USI Film Prods., 511 U.S. 244,
280 (1994).
(B) Retroactive application of the 2009
Amendments would violate the Due
Process Clause.
The district court’s judgment violates due process. The Due Process Clause
may render a law unconstitutionally void for vagueness for one of two independent
reasons. See City of Chicago v. Morales, 527 U.S. 41, 56 (1999). First, a court may
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invalidate a law on vagueness grounds when it does not ―give the person of ordinary
intelligence a reasonable opportunity to know what is prohibited.‖ Grayned v. City
of Rockford, 408 U.S. 104, 108 (1972). Second, the Constitution will invalidate a
law if it authorizes or encourages arbitrary or discriminatory enforcement, Morales,
527 U.S. at 56, or the threat thereof, Gentile v. State Bar, 501 U.S. 1030, 1051
(1991). The prohibition on vague laws applies to all regulations. U.S. Const.
amend. V, XIV.
The district court’s interpretation of section 1409 violates due process in both
ways. In the district court’s view, section 1409 imposes a retroactive obligation, not
merely in the absence of clear legislative intent to do so, but, in fact, in the face of
an express statutory direction to the contrary. No person of ordinary intelligence
would or could have understood section 1409 to prohibit the intent to transfer an
insurance policy to someone without an insurable interest until the district court
created that requirement. Nor is there anything the Trust or Presidential Holdings
could have done to comply with the law until the regulations were promulgated four
years later. That is exactly the kind of ―unforeseeable and retroactive judicial
expansion of narrow and precise statutory language‖ that the Due Process Clause
forbids. Bouie v. City of Columbia, 378 U.S. 347, 352 (1964).
Adding an intent-not-to-sell element to section 1409 under these circumstances
would necessarily violate the due process requirement that a person of ordinary
intelligence should be able to discern from reading a statute whether his or her
conduct complies with the statute’s requirements without being forced to guess at
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23
the statute’s meaning. Connally v. Gen. Constr. Co., 269 U.S. 385, 391 (1926). An
ordinary person reading the New Tejas statute would not know a life insurance
policy could not be procured or effected with the intent to transfer it. To the
contrary, the clear and unambiguous language would cause the reader to believe
the opposite—that it is permissible to obtain a policy with the intent to transfer it.
ii. Guaranty Life’s summary judgment evidence
does not establish an agreement to sell the
Policy before it became effective.
Even if the Court considered Guaranty Life’s misrepresentation claims, the
insurance company cannot prove these claims against the Trust or Presidential
Holdings. Nothing in the record establishes an agreement to sell the Policy when it
was issued.
Reggie Hightower exchanged an e-mail with a Presidential Holdings executive,
stating ―Talked to Sidney Hicks, and we should be able to flip his old man’s policy
for 3% of the face value of the policy. Confirmed $20 million for the face value.‖ R.
at 10. This is not an agreement. Bryan Jones and Sydney Hicks—the owner and
beneficial interest owner at the time—were not even copied on the e-mail. R. at 10.
The e-mail specifically provides that ―we should be able to flip‖—language
indicating that an agreement has not been reached. Moreover, this communication
has no indication that anyone at Presidential Holdings knew or participated in any
misrepresentations at all. This does not establish that an agreement existed.
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2. Guaranty Life’s counterclaim is untimely under the
incontestability clause because it was not filed within
two years of the February 16, 2007 policy date.
Guaranty Life first asserted its counterclaim to rescind the policy two years
and three months after the insurer issued the policy. R. at 12. The counterclaim
was filed in an ongoing lawsuit, initiated by the Trust and Presidential. R. at 13.
Because Guaranty Life did not contest the policy within two years of the policy
being issued, it missed an absolute, finite and substantive deadline that may not be
altered by procedural rules or equitable principles.
a. The relation-back principles in Federal Rule of
Civil Procedure 15(c) do not apply because the
incontestability clause is a statute of repose that
substantively extinguishes claims not brought
within the statutory contestability period.
The late-filed challenge to the policy does not somehow become timely because
of the nature of Guaranty Life’s allegations or the fact the lawsuit was on file within
the two-year contestability period. Guaranty Life’s counterclaim to rescind the
policy cannot ―relate back‖ to the filing of the lawsuit.
The relation back principle is found in Federal Rule of Civil Procedure 15(c),
which allows an amended pleading to relate back to the time—for a statute of
limitations—when the original complaint was filed. Fed. R. Civ. P. 15(c). But the
two-year incontestability period under section 1407, however, is not a statute of
limitations. It is a substantive restriction on Guaranty Life’s ability to challenge a
policy that operates as a statute of repose based on the legislative conclusion that a
point in time arrives beyond which an insurer should not be able to deny coverage.
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25
Each court considering the question has regarded an incontestability clause as a
substantive right.
The distinction between a statute of limitations and a statute of repose is
significant. A statute of limitations is a procedural device operating as a defense to
limit the remedy available from an existing cause of action; a statute of repose
creates a substantive right to be free from liability after a legislatively determined
period. See P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 102 (2d Cir. 2004); see
also Rules Enabling Act, 28 U.S.C. § 2072 (2006) (recognizing that Federal Rules of
Civil Procedure ―shall not abridge, enlarge, or modify any substantive right‖).
While statutes of limitations operate to bar enforcement of a right, a statute of
repose takes away the right altogether. Methodist Healthcare Sys. of San Antonio,
Ltd., L.L.P. v. Rankin, 307 S.W.3d 283, 291 (Tex. 2010). The period set under a
statute of repose is independent of the claim’s accrual or discovery and may cut off
rights of action even before they accrue.
Courts interpreting incontestability clauses have characterized them either as
statutes of repose or as substantive rules of law—not as statutes of limitations or
procedural rules. See, e.g., N.Y. Life Ins. Co. v. Waterman, 104 F.2d 990, 992 (9th
Cir. 1939) (holding that an incontestability provision is not analogous to a statute of
limitations); Peterson v. Equitable Life Assur. Soc’y of the U.S., 57 F. Supp. 2d 692,
699 (W.D. Wis. 1999) (stating that incontestability clauses are in the nature of a
statute of repose); New Eng. Mut. Life Ins. Co. v. Doe, 710 N.E.2d at 1062 (noting
that an incontestability clause is ―something akin to a contractual statute of
Page 39
26
repose‖); Protective Life Ins. Co. v. Sullivan, 682 N.E.2d 624, 631 (Mass. 1997)
(providing that an incontestability statute ―is more in the nature of a statute of
repose than a statute of limitations‖); Minn. Mut. Life Ins. Co. v. Ricciardello, No.
3:96CV2387(AHN), 1997 WL 631027, at *2 (D. Conn. Sept. 17, 1997) (comparing a
incontestability clause to a statute of repose because ―[i]t gives the insurer a fixed
period of time to ascertain the truth of representations made by the applicant and
to take any necessary action to protect its rights‖).
A claim extinguished by operation of a statute of repose cannot ―relate back‖ to
the filing of an earlier pleading as it would in the case of a statute of limitation. See
Resolution Trust Corp. v. Olson, 768 F. Supp. 283, 285 (D. Ariz. 1991) (―Relation
back under Rule 15 does not apply when the statute at issue defines substantive
rights rather than merely limiting procedural remedies.‖). The incontestability
clause—mandated by New Tejas law and this particular policy—bars challenges
after two years of the date of issuance. It extinguishes the action—or terminates
any right to action—after this fixed time period has elapsed. By imposing an
absolute time limit within which an action must be brought, the incontestability
clause creates an outer boundary in time beyond which no cause of action may arise
for conduct that otherwise would have been actionable. Attempts to amend
pleadings in existing lawsuits cannot resurrect extinguished claims after the
statute of repose has expired.
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27
b. An incontestability clause is not subject to equitable
tolling.
Guaranty Life is not entitled to postpone the running of a statute of repose
through some sort of equitable tolling. In this circumstance, equitable tolling would
circumvent the incontestability statute, the very purpose of which is to compel a
timely investigation of the statements made in a policy application. See Amoco
Prod. Co. v. Newton Sheep Co., 85 F.3d 1464, 1472 (10th Cir. 1996) (―A statute of
repose represents an absolute time limit beyond which liability no longer exists and
is not tolled for any reason because to do so would upset the economic balance
struck by the legislative body.‖); Sullivan v. Iantosca, 569 N.E.2d 822, 823–24
(Mass. 1991) (recognizing equitable doctrines of fraudulent concealment and
discovery rule did not toll a statute of repose). While an insurer, like Guaranty Life,
may sit back and wait for claims to come in before it starts any investigation, if it
does wait, it runs the risk that it will not discover a fraud until it is too late to do
anything about it. See Blue Cross & Blue Shield of Ga., Inc. v. Sheehan, 450 S.E.2d
228, 230 (Ga. Ct. App. 1994). Equitable principles will not extend the deadline.
B. Alternatively, Genuine Issues of Material Fact Preclude
Summary Judgment for Guaranty Life.
Even if this Court disagrees that the record conclusively establishes that the
Trust and Presidential Holdings are entitled to judgment as a matter of law, this
Court should still reverse the district court because, at a minimum, a genuine issue
of material fact precludes judgment for Guaranty Life.
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28
Guaranty Life asserted the affirmative defense that the policy was void ab
initio for lack of an insurable interest. R. at 12. Where, as here, the defendant is
seeking summary judgment on the basis of an affirmative defense,
[t]he defendant . . . must demonstrate that no disputed material fact
exists regarding the affirmative defense asserted. If the defendant meets
this initial burden, the plaintiff must then demonstrate with specificity
the existence of a disputed material fact. If the plaintiff fails to make
such a showing, the affirmative defense bars his claim, and the defendant
is then entitled to summary judgment as a matter of law.
Johnson v. Riddle, 443 F.3d 723, 725 n.1 (10th Cir. 2006); Johnson & Johnson Med.
v. Sanchez, 924 S.W.2d 925, 927 (Tex. 1996) (recognizing defendant moving for
summary judgment on affirmative defense must conclusively prove each element of
defense as a matter of law). If the non-moving party can create a fact issue by
producing controverted evidence on one of the elements of the defendant’s
affirmative defense, summary judgment is improper. Johnson, 443 F.3d at 725 n.1.
The district court held that the intent to sell a policy in the future deprived a
person of having an insurable interest under New Tejas law. R. at 14. But
Guaranty Life did not conclusively prove this point, as was required to obtain an
order granting summary judgment. The summary judgment evidence in the record
raises a genuine issue of material fact on the following issues:
• Did Mr. Hicks intend to sell the policy at the moment it took effect?
• Did Sydney Hicks intend to sell the policy at the moment it took effect?
• Did the Trust and Presidential Holdings have an agreement in place to
purchase the Policy at the moment it took effect?
• Where did Sydney Hicks get the $238,956.75 to enable him to make the first
payment?
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• Were the Trust or Presidential Holdings aware of any misrepresentations
made on the application?
• Did Presidential Holdings’ Vice President, Timmy Chung, know that the
policy was not in effect at the time of the email communications between
himself and Reggie Hightower?
• Did Guaranty Life make any investigation of the transaction in light of a
series of email exchanges that demonstrated that they suspected that the
policy was being sought for illegitimate purposes?
These factual disputes dealing with the intent to transfer the policy and the
alleged misrepresentations in the underwriting and application process—though
not relevant unless the court imposes an intent-not-to-sell requirement—preclude
summary judgment for Guaranty Life. Each represents a fact that, if viewed in
favor of the Trust and Presidential Holdings, could persuade a fair-minded jury to
return a verdict for the Trust and Presidential Holdings. See Anderson, 477 U.S. at
255.
II. THE DISTRICT COURT PROPERLY ORDERED GUARANTY LIFE TO RETURN
PREMIUMS PAID ON A RESCINDED LIFE INSURANCE POLICY.
Another aspect of Guaranty Life’s summary judgment motion asked the
district court to allow the insurance company to retain the $4,779,135 in premiums
on the Policy. The insurance company did not claim specific damages resulting
from the issuance of the policy but, rather, the money it received as premiums on a
policy it claims never came into existence. Nothing in law or equity justifies
Guaranty Life’s position.
In some instances, a court declaring a policy as void ab initio will refuse to take
any further action by treating it as an ―illegal contract.‖ See, e.g., Penn Mut. Life
Page 43
30
Ins. Co. v. Greatbanc Trust Co., No. 09-C-06129, 2012 WL 3437161, at *8 (N.D. Ill.
Aug. 15, 2012) (―As Illinois law apparently requires the Court to drop like a hot
potato the parties to an illegal contract, the Court will not make any provision for
the premiums at this time.‖). In those situations, the insurance company simply
keeps the money. But that approach will not work here. As Guaranty Life has
deposited the premiums in the court registry, a court order will be required to
disburse those funds.
In the event this court affirms the district court’s decision that the Policy is
void ab initio, the district court made the correct decision on this issue. The Trust
and Presidential Holdings are entitled to the return of all premiums Guaranty Life
received.
A. An Insurer That Rescinds a Life Insurance Policy Is Not
Entitled to Retain Unearned Premiums Because the Insurer
Has Not Been Exposed to Any Risk of Loss.
Based on the district court’s holding that the insurance contract was void ab
initio, Guaranty Life never provided any coverage under the Policy. General
provisions of rescission require that all parties be returned to their respective
positions prior to the formation of the contract. Thus, the premiums must be
returned to those who paid them. Hartford Life & Annuity Ins. Co. v. Doris Barnes
Family 2008 Irrevocable Trust, No. CV 10-7560 PSG (DTBx), 2012 WL 688817, at *5
(C.D. Cal. Feb. 3, 2012); see also PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d
1205, 1216 (N.D. Ga. 2011) (―[T]he Court finds no factual, legal or equitable basis
Page 44
31
for permitting plaintiff to obtain policy premiums being held in the registry of the
court absent a judgment in plaintiff’s favor on [the fraud claims].‖).
An insurance contract depends on payment for ―the assumption of a risk of loss
and the undertaking to indemnify the insured against such loss.‖ 1 Couch on
Insurance 3d § 1:9 (2010); see also Stan Koch & Sons Trucking, Inc. v. Great W. Cas.
Co., 517 F.3d 1032, 1035 n.2 (8th Cir. 2008) (―[A]n insurance policy essentially
shifts the risk of loss from the insured to the insurer whereby the insurer assumes
the risk of loss and undertakes to indemnify the insured against such loss.‖). ―The
payment . . . [of] premiums is the consideration for which the insurer agrees to
assume the risk specified in the policy.‖ 2 Couch on Insurance 3d § 69:2 (2010); In
re Tex. Ass’n of Sch. Bds., Inc., 169 S.W.3d 653, 658 (Tex. 2005) (same).
Having elected the remedy of rescission, Guaranty Life cannot also seek
recovery of additional damages through the return of premiums. The two remedies
are fundamentally inconsistent. Rescission undoes the contract. As a general rule,
when a contract is rescinded, each party must restore to the other all consideration
received under the contract. In this instance, the insured is entitled to the return of
all unearned premiums paid on the policy. See Kirby v. Dean, 199 N.W. 174, 175
(Minn. 1924) (noting that one who rescinds a fraudulently procured contract ―is not
damaged at all by the other party’s wrong because he escaped that wrong by
rescinding and thereby avoiding the contract.‖); Am. Nat’l Prop. & Cas. Co. v.
Lindgren, 736 F. Supp 275, 276 (N.D. Ga. 1990) (holding an insurer could not retain
premiums and, at the same time, seek to void the policy). This settled principle is
Page 45
32
based on the premise that, if the contract is voided, the insurance company will not
be exposed to any loss and has not earned the premiums. Foremost Guar. Corp. v.
Meritor Sav. Bank, 910 F.2d 118, 129 (4th Cir. 1990) (recognizing that
―[f]undamental to any insurance contract is the proposition that the insurer cannot
bill for and collect premiums when it has no intention of paying claims‖). As one
court recognized, ―[i]f an insurance company could retain premiums while also
obtaining rescission of a policy, it would have the undesirable effect of incentivizing
insurance companies to bring rescission suits as late as possible, as they continue to
collect premiums at no actual risk.‖ Lincoln Nat'l Life Ins. Co. v. Snyder, 722 F.
Supp. 2d 546, 565 (D. Del. 2010).
B. The Procured-by-Fraud Exception Allowing for the Retention
of Rescinded Life Insurance Premiums Has No Application to
a Third Party That Did Not Participate in the Underlying
Fraud.
Some courts have allowed insurers to retain premiums paid on rescinded
policies because of fraud in the application process. See, e.g., PHL Variable Ins. Co.
v. Lucille E. Morello 2007 Irrevocable Trust, 645 F.3d 965, 970 (8th Cir. 2011)
(affirming insurer’s right to retain premiums on fraudulently procured policy); TTSI
Irrevocable Trust v. Reliastar Life Ins. Co., 60 So. 3d 1148, 1150 (Fla. Dist. Ct. App.
2011) (same). In those cases, however, the insurance company established that the
defendant actively participated in the underlying fraud. See, e.g., Lucille E. Morello
2007 Irrevocable Trust, 645 F.3d at 970 (―The record reflects that Morello, in
collaboration with Chiaro, Claus, and Mitan, purposefully falsified Morello’s
financial profile to dupe Phoenix into issuing an insurance policy for which she was
Page 46
33
not actually qualified.‖); TTSI Irrevocable Trust, 60 So. 3d at 1150 (recognizing the
person paying the premiums was ―the only party who engaged in deceptive and
misleading conduct at the time the contract was entered into‖). That reasoning is
inapplicable here because Guaranty Life has not alleged—much less proven as a
matter of law—that the Trust or Presidential Holdings had any involvement in the
specific misrepresentations in the application process.
1. Nothing in the record establishes that the Trust or
Presidential Holdings participated in the alleged fraud
in procuring the Policy.
Some of those involved in the application process provided testimony that is
shown in the summary judgment record. See R. at 10 (detailing testimony by
Sydney Hicks and Mr. Hicks). Others exercised their right not to incriminate
themselves. See R. at 10 n.8 (noting that Reggie Hightower pled his Fifth
Amendment right to each and every question raised during his two and one-half
hour deposition); see also R. at 8 n.4 (stating Reggie Hightower died). Nothing in
the record suggests that the original trustee, Bryan Jones, or the current trustee,
Frank Kipp, made any representations whatsoever. And, without any evidence of
complicity, they cannot be held responsible for misrepresentations made by others.
Likewise, the e-mail between Reggie Hightower and a Presidential Holdings
executive does not show participating in the underlying fraud. The statement—
―Talked to Sidney Hicks, and we should be able to flip his old man’s policy for 3% of
the face value of the policy. Confirmed $20 million for the face value.‖—is not an
agreement. Bryan Jones and Sydney Hicks—the owner and beneficial interest
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34
owner at the time—were not even copied on the e-mail. R. at 10. This
communication has no indication that anyone at Presidential Holdings knew or
participated in any misrepresentations at all.
2. The record contains no evidence that Guaranty Life
suffered any special damages so that returning the
premiums would not restore the parties to their former
positions.
If Guaranty Life suffered damages resulting from the procurement of the
Policy, it could be compensation for them. But Guaranty Life has not put on any
evidence that any of those involved in the procurement of this Policy caused any
specific, identifiable damage to the insurance company. And, for this reason, it is
not seeking compensatory damages. Rather, the insurance company merely seeks
to punish the Trust and Presidential Holdings because of the underlying fraudulent
conduct. The law does not permit courts to punish a party for fraudulent conduct by
awarding damages where none exists.
3. Alternatively, genuine issues of material fact preclude
summary judgment on Guaranty Life’s claim that it be
permitted to retain the premiums.
At a minimum, however, the issue of how to dispose of the premiums cannot be
resolved in Guaranty Life’s favor because it has not proved as a matter of law that
the Trust or Presidential Holdings participated in any wrongdoing. See Principal
Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 774 F. Supp. 2d 674, 681 (D. Del.
2001) (denying summary judgment motion to allow insurer to retain premiums after
a finding the policy was void ab initio because fraud had not been established
Page 48
35
against defendant insurance trust). The summary judgment standards require
more than what Guaranty Life has offered in this record.
C. Equitable Principles Independently Favor the Return of the
Premiums.
Guaranty Life cannot claim that it is entitled to retain the premiums as an
equitable remedy. The balance of equities tips decisively in favor of the Trust and
Presidential Holdings. They have paid $4,779,135 in Policy premiums for insurance
coverage that they never had. If Guaranty Life were permitted to keep these
premiums, it would be a windfall for the insurance company.
The principle of equitable remedies in this context is to prevent unjust
enrichment and disincentivize insurance fraud. Gonzalez v. Eagle Ins. Co., 948 So.
2d 1, 3 (Fla. Dist. Ct. App. 2006) (unjust enrichment); Snyder, 722 F. Supp. 2d at
565 (disincentivize insurance fraud). Those interests are not served by punishing
the Trust or Presidential Holdings in this circumstance. According to Guaranty
Life’s allegations, it was Sydney Hicks, Mr. Hicks and Reggie Hightower who
allegedly committed the fraud against Guaranty Life. It would be wholly
inequitable to punish the Trust or Presidential Holdings under these circumstances.
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36
CONCLUSION
This Court should affirm-in-part and reverse-in-part the district court’s final
judgment. Specifically, this Court should reverse the portion of the district court’s
judgment that holds the insurance policy is void ab initio for lack of an insurable
interest. This court should affirm the portion of the district court’s judgment that
orders the money in the court registry representing the amount paid in premiums
be returned to the Trust and Presidential Holdings.
Respectfully submitted,
______________________________
ATTORNEYS FOR APPELLANTS
Page 50
APPENDIX TABLE OF CONTENTS
Page
APPENDIX ―A‖: New Tejas § 1407 ........................................................................ A-1
APPENDIX ―B‖: New Tejas § 1408 ........................................................................ B-1
APPENDIX ―C‖: New Tejas § 1409 ........................................................................ C-1
APPENDIX ―D‖: New Tejas § 1409 (Amended August 28, 2009) ......................... D-1
APPENDIX ―E‖: Federal Rule of Civil Procedure 15(c) ........................................ E-1
Page 51
A-1
APPENDIX “A”
New Tejas Statute
§ 1407- Incontestability
All life insurance policies, delivered or issued for delivery in this state, shall
contain in substance a provision stating that the policy shall be incontestable
after being in force during the life of the insured for a period of two years
from its date of issue, and that, if a policy provides that the death benefit
provided by the policy may be increased, or other policy provisions changed,
upon the application of the policyholder and the production of evidence of
insurability, the policy with respect to each such increase or change shall be
incontestable after two years from the effective date of such increase or
change, except in each case for nonpayment of premiums or violation of policy
conditions relating to service in the armed forces.
Page 52
B-1
APPENDIX “B”
New Tejas Statute
§ 1408- Rescission
If a representation is false in a material point, whether affirmative or
promissory, the injured party is entitled to rescind the contract from the time
the representation becomes false.
Page 53
C-1
APPENDIX “C”
New Tejas Statute
§ 1409- Insurable Interest
(a) An insurable interest, with respect to life and disability insurance, is an
interest based upon a reasonable expectation of pecuniary advantage through
the continued life, health, or bodily safety of another person and consequent
loss by reason of that person’s death or disability or a substantial interest
engendered by love and affection in the case of individuals closely related by
blood or law.
(b) An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance on
his or her own life, health, or bodily safety and have the policy made payable
to whomsoever he or she pleases, regardless of whether the beneficiary
designated has an insurable interest.
(c) An insurable interest shall be required to exist at the time the contract of
life or disability insurance becomes effective, but need not exist at the time
the loss occurs.
Page 54
D-1
APPENDIX “D”
New Tejas Statute
§ 1409 (Amended August 28, 2009)
(a) An insurable interest, with reference to life and disability insurance, is
an interest based upon a reasonable expectation of pecuniary advantage
through the continued life, health, or bodily safety of another person and
consequent loss by reason of that person’s death or disability or a
substantial interest engendered by love and affection in the case of
individuals closely related by blood or law.
(b) An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance
on his or her own life, health, or bodily safety and have the policy made
payable to whomsoever he or she pleases, regardless of whether the
beneficiary designated has an insurable interest.
(c) An insurable interest shall be required to exist at the time the contract of
life or disability insurance becomes effective, but need not exist at the
time the loss occurs.
(d) Trusts and special purpose entities that are used to apply for an initiate
the issuance of policies of insurance for investors, where one or more
beneficiaries of those trusts or special purpose entities do not have an
insurable interest in the life of the insured, violate the insurable interest
laws and the prohibition against wagering on life.
(e) Any device, scheme, or artifice designed to give the appearance of an
insurable interest where there is no legitimate insurable interest violates
the insurable interest laws.
(f) This section shall not be interpreted to define all instances in which an
insurable interest exists.
(g) The 2009 Amendments are not to be applied retroactively.
Page 55
E-1
APPENDIX “E”
Federal Rule of Civil Procedure
Rule 15(c)
Relation Back of Amendments.
(1) When an Amendment Relates Back. An amendment to a pleading
relates back to the date of the original pleading when:
(A) the law that provides the applicable statute of limitations allows
relation back;
(B) the amendment asserts a claim or defense that arose out of the
conduct, transaction, or occurrence set out--or attempted to be
set out--in the original pleading; or
(C) the amendment changes the party or the naming of the party
against whom a claim is asserted, if Rule 15(c)(1)(B) is satisfied
and if, within the period provided by Rule 4(m) for serving the
summons and complaint, the party to be brought in by
amendment:
(i) received such notice of the action that it will not be
prejudiced in defending on the merits; and
(ii) knew or should have known that the action would have
been brought against it, but for a mistake concerning the
proper party's identity.
(2) Notice to the United States. When the United States or a United
States officer or agency is added as a defendant by amendment, the
notice requirements of Rule 15(c)(1)(C)(i) and (ii) are satisfied if,
during the stated period, process was delivered or mailed to the United
States attorney or the United States attorney's designee, to the
Attorney General of the United States, or to the officer or agency.
