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(Article from Insurance Law Alert, October 2016)

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Notwithstanding a common law prohibition on stranger-originated life insurance policies, the Seventh Circuit ruled that Sun Life Assurance acted in bad faith by refusing to pay the proceeds of a life insurance policy to a stranger-beneficiary.  Sun Life Assurance Co. of Canada v. U.S. Bank Nat’l Assoc., 2016 WL 5929825 (7^th Cir. Oct. 12, 2016).

Charles Margolin purchased a $6 million life insurance policy from Sun Life.  Four years after policy issuance, Margolin notified Sun Life that it was transferring ownership and beneficiary status of the policy to U.S. Bank.  When Margolin passed away, U.S. Bank sought to recover the policy’s proceeds.  Although it did not officially deny the claim, Sun Life initiated an investigation of the claim based on its belief that it constituted an “illegal wagering” contract.  U.S. Bank filed suit, alleging breach of contract and bad faith.  A Wisconsin federal district court granted U.S. Bank’s motion for judgment on the pleadings on the breach of contract claim, ruling that it was entitled to policy proceeds plus statutory interest.  U.S. Bank National Assoc. v. Sun Life Assurance Co. of Canada, 2015 WL 3645700 (W.D. Wis. June 10, 2015).  The district court also ruled that Sun Life acted in bad faith because its claim investigation was not objectively reasonable.  U.S. Bank National Assoc. v. Sun Life Assurance Co. of Canada, 2015 WL 6554657 (W.D. Wis. Oct. 29, 2015).  The Seventh Circuit affirmed.

On appeal, Sun Life argued that its refusal to pay policy benefits was authorized (and in fact compelled) by Wisconsin statutory law voiding all gambling contracts.  See Wis. Stat. § 895.055.  The court rejected this argument, explaining that statutory insurance law preempts the general anti-gambling statute and expressly provides that insurance policies are not invalid “merely because the policyholder lacks insurable interest.”  Wis. Stat. § 631.07(4).  The court further explained that the appropriate remedy for claims based on stranger-oriented life insurance policies under Section 631.07(4) is payment to a different beneficiary, not invalidation of the policy.  Here, the court held that U.S. Bank was entitled to recover under the policy because “no one who is equitably entitled to the proceeds . . . has stepped forward to claim them.”  The Seventh Circuit also affirmed the bad faith ruling and imposition of statutory interest.