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A Matter of Trusts

The case involved a man named Harald Giesinger, who set up a trust in 1995 naming himself and friend Vera Chawla as trustees. In 2000, Giesinger and Chawla, according to the judge's opinion, first sought to buy a $1 million life insurance policy on Giesinger from Transamerica Occidental Life Insurance Co., naming Chawla as the policy's owner and beneficiary. But the company refused to issue the policy, saying that Chawla did not have an insurable interest in Giesinger.

So the application was changed to make Giesinger's trust the owner and beneficiary, and Transamerica issued the policy. Later that year, the policy value was increased to $2.45 million.

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However, the court found, Giesinger misrepresented his health condition in both the original application and the application for the increase. His applications failed to mention that he had undergone surgery for a brain tumor and treatment for chronic alcoholism, the court said.

Giesinger died in September 2001. Transamerica refused to pay the trust's claim, and Chawla as trustee sued. Although Chawla was a Maryland resident, the case was brought in federal court in Virginia because the policy was sold in that state. However, Hilton based his decision on Maryland law because the policy documents were delivered to Chawla in that state and the first premium was paid there.

Hilton found for Transamerica on the issue of misrepresentation, but continued, ". . . Even absent a material misrepresentation, plaintiff's claim necessarily fails as a matter of law because the trust maintained no insurable interest in the life of the decedent thus rendering the policy void."

In general, someone has an insurable interest in someone else if he or she would suffer a loss -- financial or certain other kinds -- upon the other person's death. Relatives are generally regarded as having insurable interests in one another. In business, life insurance can be written on key employees, executives or owners whose death would damage the enterprise.

The purpose of the requirement is to prevent people from, in effect, speculating on the lives of others.

Insurable interest became an issue a few years ago with the discovery that some big companies were buying insurance on all their employees with the company as beneficiary and, in some cases, turning it into a tax shelter. The Internal Revenue Service successfully challenged some of the shelters, and regulators in some states have ruled that companies don't have an insurable interest in low-level workers.

Judge Hilton found that an insurable interest may exist under Maryland law "where one has 'a lawful and substantial economic interest in the continuation of the life health and bodily safety of the individual.' "

"This section contains the caveat, however, that 'an interest that arises only by, or would be enhanced in value by, the death, disablement or injury of the individual is not an insurable interest,' " Hilton added.

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