Life settlement asset managers pay significant sums of money to keep a life insurance policy in force until the insured dies. These sums can, and very often do, stretch to millions of dollars from when they assume ownership of a policy to when it matures.
But what happens if a policy they own is declared void ab initio because of a lack of insurable interest?
Under Delaware law in the US, when the present owner acquires an insurance policy, they typically also acquire all right, title, and interest in the policy – including the right to recovery of prior premiums paid, even when those premiums were paid by a completely different entity.
So, in the event of a policy being declared void ab initio, is the current owner entitled to a return of the premiums they have paid themselves, either in full or in part? What about those paid by the prior owner? Or is it simply a case of ‘tough luck’?
These questions were at issue in Brighthouse Life Insurance Company v Geronta Funding, a quite remarkable saga that came to a frustrating conclusion for the life settlement industry in May.
Back in the summer of 2007, a life insurance policy was issued for a certain Mansour Seck by Brighthouse. The policy value was $5m, and it eventually found its way to the secondary and then tertiary life settlement market.
Except that Mansour Seck didn’t exist. This was a classic case of fraud, and the perpetrator, Pape Michael Seck, went to prison in 2011.
But the saga didn’t end there. The policy in question became the subject of extensive litigation; the tertiary buyer, Geronta Funding, sought to recover the premiums that both it and EEA, the secondary market buyer, paid to Brighthouse.
Following a bench trial, the Delaware Superior Court in August 2021 held that Geronta was only able to recover the premiums that it had paid after April 2017, when it notified Brighthouse that it suspected that Mansour Seck was a fictitious individual.
Geronta appealed, and the case then went to the Delaware Supreme Court, which overruled the original Superior Court’s opinion in August 2022 and established a fault-based approach to determine which party is entitled to the premiums paid on an insurance policy that is found void ab initio for lack of insurable interest.
Following remand to the Superior Court, Geronta Funding was awarded all of the premiums that it paid to Brighthouse on the policy, plus interest, not only those it paid after April 2017. However, Geronta was not awarded the premiums paid by the Seck policy’s previous owner, EEA. Another appeal to the Delaware Supreme Court followed and in May of 2024, the Delaware Supreme Court affirmed the Superior Court’s ruling.
“The takeaway is that the framework from the 2022 Delaware Supreme Court Seck decision remains the same, and subject to the Delaware Supreme Court’s 2023 decision known as DeBourbon and Frankel, an owner may be able to obtain return of premiums paid by prior owners of the policy if the party seeking return of premium can show that those prior owner(s) are less at fault than the insurance carrier,” said Lee A. Pepper, Partner at ArentFox Schiff.
For the life settlement industry, however, the waters remain somewhat muddy, and it is difficult for an investor to discern what premiums that it or prior owners paid for the policy would be subject to return if a policy is declared void ab initio under Delaware law, as return of premium is a fact-specific inquiry.
Leadenhall Capital declined to comment; representatives from Brighthouse and EEA had not responded to an offer to provide comment by press time.