Chawla Update

Today, the Fourth Circuit handed down the opinion in Chawla v. Tranasamerica Occidental Life Insurance Co. (I commented previously on Chawla here, here, and here.)

The Court affirmed the district court's decision on the basis that material misrepresentations made by the decedent on the life insurance applications entitled Transamerica to rescind the policy. However, the Court vacated that portion of the lower court's ruling that held that because a trustee under an insurance trust lacks an insurable interest in the life of the trust's settlor, the trust cannot hold a life insurance on the life of the settlor. The Court reasoned:

Because the district court correctly awarded summary judgment to Transamerica on the misrepresentation issue, its alternative ruling appears to have unnecessarily addressed an important and novel question of Maryland law. And, as a general proposition, courts should avoid deciding more than is necessary to resolve a specific case. This important aspect of the doctrine of judicial restraint has particular application when a federal court is seemingly faced with a state-law issue of first impression. Cf. Kaiser Steel Corp. v. W.S. Ranch Co., 391 U.S. 593, 594 (1968) (observing that, in certain circumstances, federal courts should abstain from ruling on "novel" state-law issue of "vital concern"). In these circumstances, we vacate as unnecessary the district court’s alternative ruling that the Trust lacked any insurable interest in [the settlor's] life.

The opinion in no way obviates the need for a legislative fix in this area. So long as the statute is unclear, there will continue to exist an open invitation for insurance companies to challenge a claim for life insurance benefits where a trust holds the policy.

Hat Tip to Daryl Sidle.