A 'Real' New York Housewife battles for life insurance payout

By Steve Thomas on September 4th, 2010

Compelling legal cases are always a blend of drama, legal theory and personalities and a good one is gearing up in the New York Court of Appeals.

The case is an intriguing mix of legal issues, a squabble over money--a lot of it; investors; and the family of a prominent attorney Arthur Kramer, whose brother is the playwright Larry Kramer.

The life insurance controversy

The issue, which has hit major papers including The Wall Street Journal, centers on the purchase of seven life insurance policies totaling $56.2 million, which in turn was sold to investors. The widow of Arthur Kramer, Alice, and the family are arguing that the investors have no insurable interest in Kramer's death and that the death benefit, the amount received when an individual on whom a life insurance policy is taken out dies, belongs to the family.

Alice Kramer is hanging her hat on a fundamental insurance principle called "insurable interest." The principle is based on the idea that in order for there to be a reason for the issuance of a policy, there has to be a family or business relationship in which the beneficiaries would suffer if the insured person dies.

The investors beg to differ, saying that Kramer made a deal that needs to be honored.

The period to file briefs starts this week on June 29 and runs through mid-August. If the case proceeds, the hearing will be sometime in the fall. It focuses on a narrow legal issue: whether New York law prohibits the immediate transfer of a policy to someone who does not have an insurable interest on a life if the one who the policy is taken out on did not purchase the policy to provide protection.

STOLI and other terms

This is a good time to bring up a couple of terms that may help put the case into context. Stranger-originated life insurance, STOLI for short, is when someone buys a policy and then turns around and sells it to an investor. It is condemned by just about everyone--life insurers, life settlement companies, regulators, legislators and probably a few other groups that are not coming to mind at the moment.

Life settlements, on the other hand, are legitimate transactions if the circumstances of the owner of the policy are right and the transaction is done properly. If an owner has held a policy for a long enough time and either needs the money, does not need the policy or both, then selling the policy to a licensed life settlement company can make sense. Depending on the state, a policy has to be owned two years or five years before it can be settled.

Kramer may have been a good candidate for a life settlement because it seems that he had other means to provide for his family. But the question before the Appeals Court doesn't deal with life settlements but rather, STOLI. Under a new law in New York STOLI is not permitted. But prior to that, while frowned upon, the law did not specifically prevent it. So, timing may well be an issue.

Whether the widow wins, is up for debate. The Wall Street Journal is reporting that the family was paid to allow the transactions to proceed. That is one hurdle that would have to be cleared. The second is to determine whether the life insurance companies involved, Phoenix Life Insurance Co. and Lincoln Life & Annuity Co. of New York will argue that the policies are not valid. And the third point depends on how the Appeals Court decides on the question at hand. If the court decides that the answer is 'no', then Alice Kramer may be afforded the financial cushion that life insurance was initially intended to provide to those who lose a loved one.

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