Close up of a paper contract

In AEI Life LLC v. Lincoln Benefit Life Co., No. 17-224, 2018 U.S. App. LEXIS 15485 (2d Cir. Jun. 8, 2018), a Trust purchased a $6.5 million life insurance policy on an individual.  On the application, it claimed that the named individual had a net worth of $87 million and an annual income of $1.5 million.  It would later prove that this simply wasn’t true.  But in the meantime, a stranger to the policy deposited money into the Trust, which was used to pay the $205,000 in yearly premiums.

Roughly three years later, the Trust sold the policy to another entity, who had no knowledge of the fraud.  The new policy owner eventually sued the insurer, seeking a declaration that the insurer was barred from challenging the validity of the policy under New York’s two-year contestability statute.  The district court granted the policy owner’s motion for summary judgment and the Second Circuit Court of Appeals affirmed.

This case presented a number of issues, including whether a policy obtained by fraud was void ab initio or merely voidable.  But before getting to that question, the court had to decide whether New York or New Jersey law applied, because each state applied its two-year contestability statute differently.  In New Jersey, a policy obtained by fraudulent means is void, meaning that it can be challenged at any time.  But in New York, such policies are voidable, meaning that they are not subject to challenge after the two-year contestability period has closed.

The insurer argued that New Jersey law applied because the application said that it was signed there, and the policy’s “conformity with state law” provision stated that the certificate was “subject to the laws of the state where the application was signed.”  The Court of Appeals rejected the insurer’s argument that the conformity clause was a choice-of-law provision.  It noted that that ordinarily a conformity clause has the effect of excising a provision in policy that conflicts with state law.  And although it would not foreclose the possibility that a clause could be both a conformity clause and a choice-of-law provision, here the provision did not identify itself as a choice-of-law provision; nor did it identify a specific state.  The court applied New York’s center of gravity test and determined that New York law applied.  As a result the court held that the policy was voidable.  Because the insurer had collected premiums for more than two years, the policy’s legitimacy was no longer subject to challenge.