The Delaware General Assembly is considering new legislation to address a contentious issue in the life settlement industry. A new law proposed in May 2012, Delaware Senate Bill No. 220 (the Senate Bill), would require a life insurance company that rescinds an insurance policy on the grounds that the policy holder lacked an insurable interest to refund the premiums that the insurer has collected from the owner of the rescinded life insurance policy. If enacted, the Senate Bill would codify the Delaware common law with the stated goal of protecting investors in the secondary market for life insurance in Delaware. This Dechert On-Point discusses the Senate Bill’s content and intended effect.

The Senate Bill has its origins in an issue that, in the last decade, has faced the life settlement industry not only in Delaware, but in a number of U.S. jurisdictions. Courts across the United States have been confronted with a significant amount of litigation between life insurance companies and policy owners in which the point in dispute is whether an insurance policy should be deemed void on the grounds that the insurance policy lacked an “insurable interest.” Related to this question is whether, in the event the life insurance company obtains a favorable decision in the dispute over the insurable interest, the life insurance company should be permitted to keep the premiums paid by the policy owner. According to the sponsors of the Senate Bill, insurance companies continue to file pleadings in Delaware courts seeking to withhold the premiums paid by the policy owners, despite the “well settled” common law rule that “an insurer must return the premiums it has collected on the policy.”