## Facts

- PHL Variable Insurance Company issued a $9 million life insurance policy on Price Dawe’s life on March 8, 2007.
- The Price Dawe 2006 Insurance Trust, a Delaware statutory trust, was named both the policy owner and beneficiary, acting through its trustee.
- The policy contained a two-year incontestability clause, with an exception for fraud.
- Dawe died on March 3, 2010, and the trust submitted a claim for the death benefit in June 2010.
- In November 2010, PHL sued in federal district court seeking a declaration that the policy was void as an illegal STOLI/wagering contract because it allegedly lacked an insurable interest at inception.
- The federal court certified questions to the Delaware Supreme Court about (i) incontestability under 18 Del. C. § 2908, (ii) insurable interest under 18 Del. C. § 2704 where the insured intends to transfer the policy to investors, and (iii) whether a trustee/trust has an insurable interest when a trust is formed with an intent to sell beneficial interests to investors.

## Issues

1. Whether Delaware’s two-year incontestability requirement (18 Del. C. § 2908) bars an insurer, after two years, from challenging a policy as void for lack of insurable interest.
2. Whether 18 Del. C. § 2704 is violated when an insured procures a policy on his own life with the intent to immediately transfer it to a third party lacking insurable interest.
3. Whether a Delaware trust/trustee has an insurable interest under 18 Del. C. § 2704(c) when the insured creates and initially funds the trust but intends to sell beneficial interests to investors lacking insurable interest.

## Decision

- The court answered Question 1: Yes—an insurer may challenge a policy for lack of insurable interest even after the two-year period because such a policy is void ab initio.
- The court answered Question 2: No—an insured’s intent to transfer a validly procured policy to a person without insurable interest, by itself, does not violate § 2704.
- The court answered Question 3: Yes—a trustee/trust may have an insurable interest if the insured created and initially funded the trust and statutory conditions are met, even if the insured intended to sell beneficial interests to investors.

## Legal Principles

- A life insurance policy procured without an insurable interest is an illegal wagering contract and is void ab initio; it is treated as never having come into legal existence.
- An incontestability clause and 18 Del. C. § 2908 presuppose a valid contract and do not bar a later challenge asserting the policy is void for lack of insurable interest.
- Delaware requires an insurable interest at inception; after a valid policy is issued to a party with an insurable interest, assignment to a party lacking insurable interest is generally permitted.
- An insured’s intent to assign or sell a policy does not alone defeat insurable interest at inception; the critical inquiry is who, in substance, procured and funded the policy at issuance.
- Trust-based ownership can satisfy insurable-interest requirements under 18 Del. C. § 2704(c) when the insured creates and initially funds the trust and the statutory relationship requirements are met.
- STOLI arrangements remain prohibited where investors without insurable interest effectively initiate and finance the policy using a nominal trust or insured as a conduit, rendering the policy a wagering contract.

## Conclusion

The Delaware Supreme Court held that a lack of insurable interest renders a life policy void from inception and therefore subject to challenge even after the statutory incontestability period, while preserving the general permissibility of assigning validly issued policies and recognizing insurable interest for properly formed and funded trusts, without validating investor-procured STOLI schemes.


PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr., 28 A.3d 1059 (Del. 2011)