Court: No Recovery Allowed Under Life Insurance Policy Used For ‘Wagering’

By Don R. Sampen, published, Chicago Daily Law Bulletin, September 6, 2022

The 7th U.S. Circuit Court of Appeals, applying Illinois law, recently held that a life insurance arrangement in which the insured purchased the policy through non-recourse loans and eventually assigned the policy benefits to others, constituted an unlawful wager — making the policy void ab initio.

The case is Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., 2022 U.S. App. Lexis 22813 (7th Cir., Aug. 17). The insurer, Sun Life, was represented by Cozen O’Connor of Chicago. Reed Smith LLP of Chicago and ArentFox Schiff LLP of New York represented the ultimate assignee of record, Wells Fargo.

The insured, Robert Corwell, purchased the $5 million life insurance policy on his own life at age 78. The premium was about $300,000 per year, which exceeded his adjusted gross income.

Corwell paid the initial premium in 2006, but unbeknownst to Sun Life, he was promptly reimbursed by a non-recourse loan secured only by the policy itself, so was not personally liable for the borrowed money. The loan was arranged by Coventry Capital I LLC, which administered the loan on behalf of LaSalle Bank.

The loan had a 30-month term, and when it came due, Coventry notified Corwell that he could either pay off the loan balance of more than $560,000, or he could relinquish his interest in the policy to LaSalle Bank. As everyone expected, he relinquished the policy.

An affiliate of Coventry in the business of purchasing life insurance policies then procured the Corwell policy pursuant to an agreement it had with AIG Life Settlements LLC, and transferred the policy to AIG. Wells Fargo subsequently became the owner of record, and it made premium payments on behalf of AIG and other beneficial owners, including Vida Longevity Fund, L.P., the beneficial owner of the policy at Corwell’s death in 2017.

Following Wells Fargo’s submission of the death claim, Sun Life brought the instant declaratory action seeking a determination that the policy was void because it constituted an illegal wagering contract. The parties filed cross-motions for summary judgment, and the district court found in favor of Sun Life.

Among its other determinations, the court held Wells Fargo could not recover the $1.8 million in premiums paid for the policy, with the exception of an amount of about $13,000 Wells Fargo paid on behalf of Vida Longevity. Wells Fargo appealed, and Sun Life cross-appealed the $13,000 premium ruling as to Vida.

General Principles

In an opinion by Judge David Hamilton, the 7th Circuit affirmed, except for the Vida premium ruling. He began by observing generally that Illinois law prohibits the initial sale of a life insurance policy to someone who has no insurable interest in the life of the insured.

An insurable interest is present when the policyholder is interested in having the life of the insured continue.

On the other hand, even if the initial policyholder has an insurable interest, no prohibition exists for selling or giving the policy to someone who lacks an interest in the life of the insured.

The tension between these two principles has tempted people who want to wager on the lives of strangers to try to structure their transactions to create the appearance of a legitimate insurable interest, when the intent all along is to facilitate a wagering-type arrangement. Courts therefore, wrote Hamilton, must focus on the substance of the transactions in light of all facts available.

Hamilton found such an approach to be consistent with prior 7th Circuit interpretation of Illinois law, such as in Ohio National Life Assurance Corp. v. Davis, 803 F.3d 904 (7th Cir. 2015). It was also consistent with Illinois statutory law codified in 2009 (215 ILCS 159/50(a)), which, although not applicable in the instant case, defines stranger-originated life insurance to include policies that are paid for by persons who could not lawfully initiate the policy.

Application To The Present Case

In this case Hamilton acknowledged that Corwell had an insurable interest in his own life, and he had the option to pay off the premiums with his own funds. Nonetheless, the undisputed facts showed that the policy was part of a broader scheme to secure the policy for the Coventry entities, that Corwell could not afford the policy, and that the financing of the policy had been concealed from Sun Life.

Under these circumstances, a finding that Corwell’s policy was a stranger’s wager, according to Hamilton, was in line with decisions by other courts in cases addressing Coventry’s program.

As for the premiums paid, Hamilton observed that Illinois law typically leaves parties to a void contract where they have placed themselves with no recovery of money paid for illegal services.

Wells Fargo itself, moreover, could not recover premiums because, while it was the record owner of the policy since 2009, beneficial ownership had been transferred among various entities, and Wells Fargo never used its own money to pay the premiums. In addition, the beneficial owners were not parties to the case, and Wells Fargo did not attempt to assert a right to recover the premiums on their behalf.

Such reasoning applied in particular to the $13,000 paid on behalf of Vida, the beneficial owner at the time of Corwell’s death. Hamilton further found that Vida was not a naïve innocent in the scheme, but was actually a multibillion-dollar company in the business of purchasing life insurance policies. No justification therefore existed for the return of its payment, and Sun Life would retain all the premiums.

As a result, the court affirmed the judgment in favor of Sun Life with respect to the finding of an illegal wager, and reversed in favor of Sun Life concerning the Vida premium payment.

Key Points

A life insurance arrangement pursuant to which the insured initially purchases the policy through loaned funds and then is expected to, and does, transfer the policy to others who lack an insurable interest, may be regarded as an illegal wager that is void ab initio. Parties to a void contract typically may not recover money paid for illegal services.