Columbus Life Insurance v. Wilmington Trust Na ( 2023 )


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  •                                         IN THE
    SUPREME COURT OF THE STATE OF ARIZONA
    ____________________________________________
    COLUMBUS LIFE INSURANCE COMPANY,
    Plaintiff,
    v.
    WILMINGTON TRUST, N.A.,
    Defendant.
    ______________________________________________
    No. CV-22-0202-CQ
    Filed July 27, 2023
    ______________________________________________
    Certified Question from the United States District Court of Arizona
    The Honorable Diane J. Humetewa, Judge
    No. CV-21-00734-PHX-DJH
    QUESTION ANSWERED
    _________________
    COUNSEL:
    Nancy R. Giles, Laura C. Martinez, Giles Law, PLLC, Phoenix; Brian D.
    Burack (argued), Michael J. Miller, Ilya Schwartzburg, Cozen O’Connor,
    Philadelphia, PA, Attorneys for Columbus Life Insurance Company
    J. Steven Sparks, Vincent R. Miner, Sanders & Parks, P.C., Phoenix; Julius
    A. Rousseau, III (argued), Arentfox Schiff LLP, New York, NY, Attorneys
    for Wilmington Trust, N.A.
    Jimmie W. Pursell, Alexander J. Egbert, Jennings, Strouss & Salmon, P.L.C.,
    Phoenix; Andrew C. Smith, Adam Marcu, Pillsbury Winthrop Shaw
    Pittman LLP, New York, NY, Attorneys for Amicus Curiae Institutional
    Longevity Markets Association
    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    Taylor Young, Taylor Young Appeals PLLC, Phoenix; Stephen C. Baker,
    John B. Dempsey, Brian J. Levy, Myers, Brier & Kelly, LLP, Scranton, PA,
    Attorneys for Amicus Curiae American Council of Life Insurers
    ____________________
    JUSTICE BOLICK authored the Opinion of the Court, in which
    CHIEF JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and
    JUSTICES LOPEZ, BEENE, MONTGOMERY, and KING joined.
    ____________________
    JUSTICE BOLICK, Opinion of the Court:
    ¶1            Before us is the following certified question: “Does Arizona
    law permit an insurer to challenge the validity of a life insurance policy
    based on a lack of insurable interest after the expiration of the two-year
    contestability period required by A.R.S. § 20-1204?” For the reasons
    explained below, we answer the question no.
    BACKGROUND
    ¶2             In late 2003, Columbus Life Insurance Company
    (“Columbus”) received an application for a “second to die” life insurance
    policy on the lives of Howard and Eunice Peterson. Shortly thereafter,
    Columbus issued the $2.5 million dollar policy (the “Policy”), listing the
    H & E Peterson Family Partnership LLLP as the beneficiary and owner. The
    Policy contained a provision stating that the Insurer would “not contest this
    policy to the extent of the Specified Amount [of $2.5 million] after it has
    been in effect during both Insureds’ lifetimes for two years from the Policy
    Date.” The LLLP paid the premiums consistently while it owned the Policy.
    Soon after the two-year incontestability period had run, the Policy was sold
    and the beneficiary designations were changed. Through a series of
    subsequent assignments, Wilmington Trust N.A. was designated as the
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    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    owner of the Policy and has acted as Securities Intermediary for a
    third-party investor since 2013.
    ¶3            Howard Peterson died in January 2018. Eunice Peterson died
    in May 2020. After both insureds passed away, Wilmington submitted a
    claim for the death benefits under the Policy, which Columbus refused to
    pay. In April 2021, Columbus filed a lawsuit in the United States District
    Court for the District of Arizona seeking a declaratory judgment that the
    Policy is unenforceable and seeking to retain the premiums.
    ¶4             In its complaint, Columbus argued that the Policy was
    acquired as part of a Stranger Originated Life Insurance (“STOLI”) scheme.
    STOLI schemes typically involve inducing senior citizens to procure life
    insurance policies on their own lives with the intent to assign those policies
    to third parties in exchange for a payment in advance. Columbus argued
    that “STOLI policies violate insurable interest and anti-wagering laws, take
    advantage of senior citizens, and operate to convert legitimate life
    insurance products—which are designed to provide actual protection to
    families and others with an interest in the continued life of the insureds—
    into cash machines whereby strangers to the insureds are more interested
    in seeing the insureds dead than alive.” Columbus claimed that the lack of
    an insurable interest and violation of anti-wagering laws made the Policy
    void ab initio, and thus the contract and its contestability period never
    existed.
    ¶5             Wilmington responded to Columbus’s Complaint and filed a
    Motion for Judgment on the Pleadings. Wilmington argued that the Policy
    and Arizona law preclude challenges to a policy’s validity once the
    incontestability period has run out. The Policy’s incontestability provision
    was required by § 20-1204, which directs that a life insurance policy must
    contain a provision stating that the policy “shall be incontestable, except for
    nonpayment of premiums, after it has been in force during the lifetime of
    the insured for a period of two years from its date of issue.” Wilmington
    contended that “the Policy’s incontestability clause and the straightforward
    application of A.R.S. §§ 20-1217 and 20-1204 preclude Plaintiff’s challenge
    to the Policy’s validity.”
    3
    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    ¶6            The district court certified to this Court the question of
    whether Columbus could challenge the validity of the Policy in light of the
    incontestability provision in the Policy and § 20-1204. Because no Arizona
    precedent exists determining whether a lack of insurable interest can be
    challenged after the contestability period, we agreed to resolve the certified
    question pursuant to article 6, section 5(6) of the Arizona Constitution and
    A.R.S. § 12-1861.
    DISCUSSION
    ¶7             Columbus asserts two propositions that are well-established
    as a matter of Arizona law. First, under both common law and statute,
    insurance policies taken on the lives of others by third parties who lack an
    insurable interest are contrary to public policy, as such contracts are
    considered wagers on the lives of others. See, e.g., Gristy v. Hudgens, 
    23 Ariz. 339
    , 347 (1922). Thus, A.R.S. § 20-1104(A) makes it unlawful to “procure”
    such policies.
    ¶8             Second, contracts that contravene public policy are generally
    void ab initio. See, e.g., Clark v. Tinnin, 
    81 Ariz. 259
    , 263 (1956); Red Rover
    Copper v. Indus. Comm’n, 
    58 Ariz. 203
    , 214 (1941). “A void contract is one
    which never had any legal existence or effect, and it cannot in any manner
    have life breathed into it.” Nat’l Union Indemn. Co. v. Bruce Bros., Inc.,
    
    44 Ariz. 454
    , 464 (1934). Columbus argues that because this is allegedly a
    STOLI contract, it was void ab initio, so that the Policy and its
    incontestability clause can have no legal effect. That would be true even
    though Columbus collected premiums on the Policy for sixteen years and
    did not challenge it until after the proceeds were due, because no waiver,
    ratification, or consent can revive a void contract. See 
    id.
     at 466–67; accord
    United Bank & Trust Co. v. Joyner, 
    40 Ariz. 229
    , 238 (1932).
    ¶9            Were the common law in Arizona unchanged, Columbus
    would be correct. But so long as it acts within its constitutional boundaries,
    the legislature may modify or abrogate court-made common law. See, e.g.,
    Young v. Beck, 
    227 Ariz. 1
    , 7–8 ¶ 26 (2011); see also A.R.S. § 1-201 (adopting
    common law unless “inconsistent with . . . the laws of this state”). This
    Court has established that “if the common law is to be changed,
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    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    supplemented, or abrogated by statute, it must be done expressly or by
    necessary implication.” Wyatt v. Wehmueller, 
    167 Ariz. 281
    , 284 (1991).
    ¶10           The legislature has not abrogated the common law principles
    stated above. However, Wilmington argues that the legislature has
    adopted a comprehensive regulatory scheme that modifies those principles
    and establishes exclusive remedies in the context of insurance contracts
    purchased by third parties who lack an insurable interest. Columbus
    counters that the statutes do not alter the common law rule.
    ¶11           Our statutory interpretation jurisprudence requires us to
    determine the plain meaning of the words the legislature chose to use,
    viewed in their broader statutory context. S. Ariz. Home Builders Ass’n v.
    Town of Marana, 
    522 P.3d 671
    , 676–77 ¶ 31 (Ariz. 2023). We seek “to
    harmonize statutory provisions and avoid interpretations that result in
    contradictory provisions.”     Lagerman v. Ariz. State Retirement Sys.,
    
    248 Ariz. 504
    , 511 ¶ 35 (2020) (quoting Premier Physicians Grp., PLLC v.
    Navarro, 
    240 Ariz. 193
    , 195 ¶ 9 (2016)). Thus, we view “the statute as a
    whole” to “give meaningful operation to all of its provisions.” Wyatt,
    
    167 Ariz. at 284
    .
    ¶12          We begin with § 20-1104(A), which provides that:
    [N]o person shall procure or cause to be procured any
    insurance contract on the life or body of another individual
    unless the benefits under such contract are payable to the
    individual insured or his personal representatives, or to a
    person having, at the time when the contract was made, an
    insurable interest in the individual insured.
    This statute encompasses the public policy against insurance contracts
    lacking an insurable interest and prohibits procuring them. Relatedly,
    A.R.S. § 13-3304(C) makes it a class 1 misdemeanor to knowingly benefit
    from gambling. See § 13-3304(C) (“Benefiting from gambling is a class 1
    misdemeanor.”).
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    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    ¶13           Section 20-1104(B) states, in relevant part, that:
    If the beneficiary, assignee or other payee under any contract
    made in violation of this section receives from the insurer any
    benefits thereunder accruing on the death . . . of the
    individual insured, the individual insured or his executor or
    administrator . . . may maintain an action to recover such
    benefits from the person so receiving them.
    This subsection creates a civil remedy for the insured after benefits are paid
    to a third party who lacks an insurable interest. McKee v. Penick (In re Al
    Zuni Trading, Inc.), 
    947 F.2d 1403
    , 1404 (9th Cir. 1991).
    ¶14            As noted above, § 20-1204 requires a provision in all life
    insurance contracts stating that the policy “shall be incontestable, except for
    nonpayment of premiums, after it has been in force during the lifetime of
    the insured for a period of two years from its date of issue.” Section 20-1217
    further instructs that “[a] clause in any policy of life insurance providing
    that the policy shall be incontestable after a specified period shall preclude
    only a contest of the validity of the policy,” and not defenses based on
    specific policy provisions. This case involves a contest of the validity of the
    Policy.
    ¶15           Reading these statutes in concert indicates a comprehensive
    statutory scheme governing the types of policies at issue here and
    establishing exclusive remedies. First, it is unlawful for someone lacking
    an insurable interest to procure such a contract. Second, doing so exposes
    the purchaser to a misdemeanor penalty. Third, life insurance policies must
    contain an incontestability provision limiting challenges to the policy’s
    validity to two years. Fourth, the only exception to the two-year limitation
    is nonpayment of premiums. Fifth, the civil remedy for an impermissible
    third-party insurance contract is recovery of proceeds from the beneficiary
    by the insured’s estate.
    ¶16           This reading gives effect to every statutory provision. By
    contrast, Columbus’s interpretation would drain the incontestability of a
    contract’s validity of its sole exception: nonpayment of premiums. The
    principle of expressio unius applies here. See City of Surprise v. Ariz. Corp.
    6
    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    Comm’n, 
    246 Ariz. 206
    , 211 ¶ 13 (2019) (“[T]he expression of one item
    implies the exclusion of others.”).
    ¶17            Even more fatal to Columbus’s assertion that the contract is
    void ab initio is that it would largely eviscerate the insured’s remedy
    provided by § 20-1104(B). See Nicaise v. Sundaram, 
    245 Ariz. 566
    , 568 ¶ 11
    (2019) (“A cardinal principle of statutory interpretation is to give meaning,
    if possible, to every word and provision so that no word or provision is
    rendered superfluous.”). By the statute’s own terms, its remedy applies
    only after benefits are paid, which would never occur if the contract was
    void ab initio. Columbus’s reading would allow an insurance company to
    collect premiums for an extended period of time—here for approximately
    sixteen years—challenge the policy’s validity long after the incontestability
    period, and decline to pay the proceeds, leaving the insured’s estate
    without so much as a refund of premiums. The statutes’ obvious dual
    purpose is both to deter procurement of policies that violate public policy
    and still furnish a remedy to the insured’s estate.               Columbus’s
    interpretation accomplishes the first but defeats the second.
    ¶18           Two legal terms of art are especially pertinent here—one is
    present in the statutory scheme while the other is meaningfully absent. The
    first is “contract,” which appears throughout the statutes, including in
    § 20-1104(B). Its presence, particularly in the context of what happens after
    the benefit is paid out, suggests that the statute contemplates that the
    contract is in effect. The second, which is missing from the statutory
    scheme, is “void.” The legislature has, in other contexts, deemed that
    certain contracts are void. See, e.g., A.R.S. § 20-1123; A.R.S. § 34-226(C). The
    use of “void” in these provisions demonstrates that the legislature knows
    how to deem a contract void when it so wishes and did not do so here.
    These terms underscore that § 20-1104 does not render the policy void ab
    initio but provides an after-the-fact remedy to the insured.
    ¶19            Both parties cite cases from Arizona and other jurisdictions to
    bolster their positions. Columbus relies heavily on Gristy, which set forth
    the general common law rule that life insurance policies may not be taken
    on the lives of others without an insurable interest because they violate
    public policy. 
    23 Ariz. at 347
    . But the Court did not opine on whether such
    contracts are void ab initio, because it did not have to: the contract before
    7
    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    it did not implicate the insurable interest rule. 
    Id. at 346
    . Moreover, Gristy
    was decided before the adoption of § 20-1204, which provided a two-year
    incontestability period with a solitary specified exemption.
    ¶20            More on point is National Life & Casualty Insurance Co. v.
    Blankenbiller, 
    89 Ariz. 253
     (1961), invoked by Wilmington. Like Gristy,
    Blankenbiller does not address whether contracts of the type before us are
    void ab initio. Rather, the Court held that a challenge to the validity of an
    insurance policy for reasons not provided for by statute could not survive
    an incontestability clause. 
    Id. at 256
    . The Court stated that “every exception
    to incontestability not expressed in the statute itself is specifically barred as
    a defense to the policy after the expiration of the incontestability period.”
    
    Id.
     We read § 20-1204 to allow challenges to the validity of the policy after
    the incontestability period only for nonpayment of premiums.
    ¶21           Courts outside Arizona have construed similar statutes in
    divergent ways. In New England Mutual Life Insurance Co. v. Caruso,
    
    535 N.E.2d 270
    , 272 (N.Y. 1989), the New York Court of Appeals concluded
    that an incontestability statute like ours “rests on the legislative conviction
    that a policyholder should not indefinitely pay premiums to an insurer,
    under the belief that benefits are available, only to have it judicially
    determined after the death of the insured that the policy is void because of
    some defect existing at the time the policy was issued.” Based on this
    provision and the statutory scheme as a whole, the court concluded that a
    contract with a third party who lacked an insurable interest was enforceable
    after the incontestability period expired. Id. at 274.
    ¶22           By contrast, the Delaware Supreme Court rejected Caruso,
    applying the state’s common law to hold that “if a life insurance policy lacks
    an insurable interest at inception, it is void ab initio because it violates
    Delaware’s clear public policy against wagering. It follows, therefore, that
    if no insurance policy ever legally came into effect, then neither did any of
    its provisions, including the statutorily required incontestability clause.
    PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 
    28 A.3d 1059
    , 1067–68
    (Del. 2011).
    ¶23         We view Caruso and cases that follow it as the better approach
    because they give force to Arizona’s statutory scheme, including the
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    COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
    Opinion of the Court
    incontestability clause and the insured estate’s remedy. In Bogacki v. Great-
    West Life Assurance Co., 
    234 N.W. 865
     (Mich. 1931), the Michigan Supreme
    Court aptly described the incontestability statute as one that “condones no
    fraud; it merely operates in the nature of a statute of limitations. . . . The
    statute carries the only permissible exceptions to its bar, and its construction
    falls within the rule that the inclusion of an exception excludes everything
    else.” 
    Id.
     at 865–66; accord Wells Fargo Bank, N.A. v. Pruco Life Ins. Co.,
    
    200 So.3d 1202
    , 1206 (Fla. 2016) (holding that even though the “policies
    were procured in furtherance of STOLI schemes,” the incontestability
    statute “does not authorize a belated challenge to a policy”). As the Seventh
    Circuit explained in the context of Wisconsin’s statutory scheme, although
    policies that lack an insurable interest “are still forbidden,” the statute
    “changed only the remedy for violation, from invalidation of the policy to
    requiring the insurer to cough up the proceeds rather than . . . being
    allowed to keep all the premiums and pay nothing to the policy holder.”
    Sun Life Assurance Co. of Can. v. U.S. Bank Nat’l Ass’n, 
    839 F.3d 654
    , 657
    (7th Cir. 2016); accord PHL Variable Ins. Co. v. Bank of Utah, 
    780 F.3d 863
    , 871
    (8th Cir. 2015) (“To declare that a facially valid policy on which [the
    insurance company] collected substantial premiums for over four years was
    never ‘in force’ is simply a fiction.”). These opinions reflect the “better and
    more enlightened view” that an incontestability provision “trumps the
    absence of an insurable interest.” 7 Williston on Contracts § 17:5 (Richard A.
    Lord ed., 4th ed. 2022).
    ¶24            Wilmington argues that a decision in the negative will leave
    loopholes that unscrupulous death wagerers can exploit to the detriment of
    insurance companies. Possibly so; and indeed, we do not express any view
    on claims in this litigation that may remain after our decision. But once the
    legislature displaces common law, we shed our policy role and confine
    ourselves to statutory interpretation. Thus, such concerns must be directed
    to the legislature.
    CONCLUSION
    ¶25           For the foregoing reasons, our answer to the certified question
    is no.
    9