Columbus Life Insurance v. Wilmington Trust Na

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.”
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COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
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¶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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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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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.
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COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
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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
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COLUMBUS LIFE INSURANCE V. WILMINGTON TRUST, N.A.
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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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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.
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