Federal Court: Egregious Facts May Permit Life Policy Rescission After Expiration of Incontestability Period


The U.S. District Court for the Southern District of New York recently ruled on the parties’ motions for summary judgment in Settlement Funding, LLC v. AXA Equitable Life Ins. Co., No. 09 CV 8685 (HB) (S.D.N.Y. Sept. 29, 2010), holding that egregious facts may permit an insurer’s rescission of a life policy after expiration of the policy’s two-year incontestability period. Plaintiff Settlement Funding, the assignee of a $5 million insurance policy on the life of Esther Adler, sought summary judgment on its claim for recovery of insurance proceeds following Ms. Adler’s death, while Defendant AXA requested summary judgment on its equitable counterclaim for a declaration that the insurance policy was void ab intio due to infirmities in creation. Judge Harold Baer concluded that disputed issues of fact that remained concerning whether the policy’s incontestability clause should be enforced precluded granting the parties’ summary judgment motions. (Please click here for the opinion.)

On May 11, 2007, Defendant approved and issued a $5 million policy, insuring the life of Ms. Adler, to the “Esther Adler Trust.” The trust beneficiaries included Ms. Adler’s two daughters and her son-in-law. According to Defendant, the policy was obtained through fraud. There was evidence to suggest that the signatures of Ms. Adler and a notarizing attorney appearing on the Esther Adler Trust Agreement were forged. Though Ms. Adler had assets of less than $100,000, the policy application stated that she had a net worth in excess of $12 million, a misstatement confirmed during the underwriting process by an unidentified man, falsely claiming to be Ms. Adler’s accountant. And, while the insurance application represented that the policy would not be transferred for settlement or on a secondary market, the policy was nonetheless transferred to a life settlement corporation by the Trustee less than two years after issuance. Following a series of subsequent transfers and the death of Ms. Adler on June 6, 2009, Plaintiff filed suit in the Southern District of New York on October 13, 2009, seeking payment of the policy’s death benefit.

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