For years, advisors have gone blissfully along in their planning for families and business owners, devising wonderfully helpful trusts and solving liquidity needs with the use of life insurance. Often these techniques are combined, especially in the context of irrevocable life insurance trusts (ILITs.) Because these transactions are almost always between “related” (by blood, marriage or business) parties, one of whom is the insured in those situations involving the purchase of life insurance, nary a thought was given to the requirement that the original owner of the life insurance have an insurable interest in the insured for the policy to be valid. The owners of these policies have been the insured, a person related to the insured, or the trustee of a trust for the benefit of some related person. The policies were applied for, issued by the insurance companies, and problem solved.

Then the U.S. District Court for the Eastern District of Virginia handed down its decision on Feb. 5, 2005, in Chawla v. Transamerica Occidental Life Insurance Company1 declaring that, under Maryland law, the trustee of a trust must have an insurable interest in the insured, regardless of the insured's relationship to the trust beneficiaries. The U.S. Court of Appeals for the Fourth Circuit affirmed the decision.

Suddenly, doubt was cast on ILITs around the nation. Advisors were dismayed. State legislatures rushed to shore up their laws. At least seven states have adopted statutes to more specifically define insurable interests and other states, including Florida and Ohio, are considering doing so. Practitioners started asking insurance companies for contracts with language asserting that their policy owners have an insurance interest. Two years later, Chawla remains an anomaly. But it is far from certain that it will remain so.


This tempest was started by a case that again proves the adage that “bad facts make bad law.” Actually, this case's facts are so bad, they make for interesting reading.

In 2000, Harald Geisinger applied to Transamerica for a 10-year term life insurance policy on his life. Geisinger was divorced and had no children. His application named Vera Chawla as the owner and beneficiary of his policy. Chawla was not related to Geisinger by blood or marriage. Geisinger apparently lived from time to time with Chawla and her husband, who was also Geisinger's doctor.

When Transamerica received Geisinger's initial application for the life insurance policy, it refused to issue the policy on the grounds that Chawla did not have an insurable interest in Geisinger. So Chawla and Geisinger resubmitted the application for the insurance policy, listing The Harald Geisinger Special Trust, an irrevocable inter vivos trust (which Geisinger had created previously and which owned his personal residence) as the owner and beneficiary of the policy. Geisinger was the grantor of the trust; Geisinger and Chawla were the co-trustees. The trust agreement provided that, in the event that Geisinger was no longer able to serve as co-trustee, Chawla would become the sole trustee. The trust agreement did not specifically give the trustees the authority to procure life insurance on Geisinger's life, although this was not a material fact in the court's decision. The trust provided that Geisinger had the right to all the income during his life and the right to occupy the residence. At his death, all property was to be distributed to Chawla.

As part of Geisinger's application for life insurance, he completed a medical history questionnaire, on which he undisputedly made numerous false statements and failed to disclose significant negative material medical facts. For one, he answered in the negative questions regarding (1) his past treatment at a clinic, hospital or sanitarium, (2) any past surgeries, and (3) whether he had been treated for alcoholism or drug addiction. He did disclose that he'd visited Dr. Chawla for a physical in February of 2000. (The doctor later confirmed the visit and attested to Geisinger's good health.) Geisinger also failed to mention that he'd undergone brain tumor surgery, spinal taps and at least one collection of cerebrospinal fluid in his head in Austria in 1999. The Austrian doctors diagnosed Geisinger with chronic alcohol abuse (which he also failed to disclose.) Also missing from his application for life insurance: when Geisinger returned to the United States, he underwent additional surgery in Washington, D.C. to insert a shunt into his head to drain the fluid that had accumulated after his brain tumor surgery. In 2000, Geisinger was hospitalized for alcohol abuse. Later in that same year, he was again hospitalized for complications associated with alcohol abuse, namely episodes of unconsciousness.

In July 2000, Transamerica issued the life insurance policy. Several months later, Geisinger applied to increase the policy's death benefit, and Transamerica issued a new policy. Chawla paid the premiums by check, drawn on a joint bank account that she shared with her husband.

Geisinger died about one year later, leaving Chawla as the sole trustee of The Harald Geisinger Special Trust. Upon application for the death benefits, which was within two years of the policy's issue date, Transamerica investigated the matter and informed Chawla that it was rescinding the policy and denying the death benefit claim because of Geisinger's material misstatements and omissions on the application. The insurer returned the premiums that Chawla had paid. Chawla sued Transamerica for breach of contract. Transamerica answered, asserting two main defenses: fraud in the application; and lack of insurable interest by the trustee in Geisinger's life.

It is this latter defense that sent up red flags throughout the estate-planning community.

In awarding summary judgment in favor of Transamerica, the district court held that the omissions and misstatements in the application were material misrepresentations, allowing Transamerica to rescind the policy. However, the court did not stop there. The court also noted that Chawla's claim would necessarily fail as a matter of law because the trustee had no insurable interest in Geisinger's life. After finding that Maryland common law required an insurable interest to validate a life insurance policy, the court applied the Maryland substantive law on insurable interests, which stated that: “a person may not procure or cause to be procured an insurance contract on the life of another individual unless the benefits under the insurance contract are payable to: (i) the individual insured; (ii) the individual's insured's personal representative; or (iii) a person with an insurable interest in the individual insured at the time the insurance contract was made.”2

The court, in construing the Maryland statute, focused on the third permissible recipient of the death benefit (“a person with an insurable interest in the individual-insured at the time the insurance contract was made”) and noted that Maryland law defines “person” as “an individual, receiver, trustee, guardian, personal representative, fiduciary, representative of any kind, partnership, firm, association, corporation, or entity.”3 Thus, the court reasoned, the trustee of a trust, according to Maryland's definition of “person,” is required to have an insurable interest in the insured. Whether the beneficiaries of the trust had an insurable interest was obviously not relevant in Maryland, as the insured was the primary beneficiary of the trust.

The court found that none of the permissible recipients of death benefits included trustees or trusts; that the trustee had no economic interest in Geisinger's continuing to live. In fact, the trustee would only benefit by Geisinger's death.4 Thus, the court concluded that The Harald Geisinger Special Trust, with Chawla as its trustee, could not have an insurable interest in Geisinger's life.

Chawla appealed the decision to the Fourth Circuit. Estate planners were hopeful that the appellate court would rule (read: overrule) on the question of insurable interest, leaving intact our assumption that an insurable interest would always exist in a trust situation where the insured was a grantor.

To everyone's dismay, the appellate court merely affirmed the lower court's holding without comment.5


A lack of insurable interest typically renders the insurance policy either void ab initio or voidable, depending upon the state law (which is often based on case law.)

When a policy is void ab initio, the consequences among the states include: the insurance company not paying the death benefits and returning the premiums to the payor (or the payor's estate); paying the death benefits to the policy owner's estate; the estate having the right to recover the proceeds paid to the beneficiary; paying the death benefits to a third party favored by the state law; and paying the proceeds to the named insured as a contract right. In some states, the doctrines of estoppel or waiver can be asserted against the insurance company to compel it to pay the death benefits. In other states, however, these doctrines have been found ineffective based on a strong public policy that calls for voiding the insurance contract for lack of insurable interest.6 In most states, it's unclear what the consequences are.

Even if the policy is considered voidable instead of void ab initio, the result rarely changes.

Aside from the problem of the policy proceeds not being paid as expected, there is the worrisome consequence that the potential voiding of the policy may turn the policy's proceeds from tax-free life insurance proceeds into taxable contract payments.


Chawla sparked a great hue and cry. Considering the proliferation of ILITs, this opinion would have disastrous effects if it were the law across the country. In states that view the trustee/trust as a legal entity, separate and distinct from its beneficiaries, it looks like the trustee must have an insurable interest in the insured. In these states, Chawla would be very troubling absent a specific statute conferring an insurable interest in the trustee. In states that view the trust as a collection of its beneficiaries, it appears that only some or all of the trust beneficiaries must have an insurable interest in the insured. In these states, Chawla is probably a bit less troubling. The problem is that most states, including many with a statute addressing the general issue of insurable interest (of which there are 39 with widely differing provisions), do not make it sufficiently clear which type they are.

Since Chawla, Delaware, Georgia, Maine, Maryland, South Dakota, Virginia and Washington adopted statutes that establish (or attempt to codify existing case law with respect to) an insurable interest on the part of a trustee of a trust created by an insured for the benefit of related parties.7 Several other states, including Florida and Ohio, are studying whether they should adopt similar legislation. The insurance industry (which created this problem in the first instance by raising the defense in Chawla) has been either neutral or downright unsupportive with respect to these legislative entreaties. This can be a significant hurdle, or even a roadblock, to desired legislative changes if the insurance lobby is powerful in a particular state.

Two general approaches have emerged in state legislative responses to Chawla. The first — typified by Delaware and Maryland — provides that a trustee has an insurable interest in the life of any individual in whom a beneficiary of the trust has an insurable interest, but only to the extent that such beneficiary's trust share will receive the death benefits of such policy.8 The second — typified by Georgia, Maine and Virginia — automatically provides the trustee with an insurable interest in the life of the grantor/settlor of the trust.9 Each state statute, however, has its own unique quirks.


First and foremost, we must take solace in the fact that Chawla, thus far, is an anomaly. It is the only known case of its kind. Whatever the law is in every state other than Maryland, this issue simply has not come up in the context of trusts. One could argue that many states are scrambling to fix something that is not broken. Insurance industry representatives have certainly expressed this opinion, which is bolstered by the fact that in no other reported case has an insurance company attempted to assert a trustee's lack of insurable interest in the typical estate-planning context.

Second, because the insured always has an insurable interest in himself, it seems elementary that if the insured is the original owner of the insurance policy, he could procure the policy, then transfer ownership to a trust of which the insured is the grantor for the benefit of any set of beneficiaries, thus avoiding concern about the insurable interest requirement. This seems especially likely to be true when some or all of the beneficiaries have an insurable interest in the insured.

However, when abuses have been perceived, like in the state of New York with respect to investor-owned life insurance,10 a type of “step transaction” theory has been applied to void policies for lack of insurable interest when the “real” party in interest acquiring the policy was someone other than the insured who did not have an insurable interest in the insured. Successfully applying this theory in the context of typical family estate-planning situations, however, seems unlikely.

In the typical ILIT, the three-year rule generally seriously impairs the idea of having the insured initially acquire the policy and transfer it to the trust.11 Nevertheless, the odds of most insureds dying in the first three years are relatively quite low, and many insurance companies offer a three-year “double death benefit” term rider at a fairly nominal cost to offset this problem.

Third, because typically only the insurance company can raise the defense of lack of insurable interest, it might be helpful to get a waiver from the insurance company that it will not raise such a defense, which they have been willing to give in at least several instances. However, in some states, the public policy against issuing polices without the existence of an insurable interest is so strong that such a waiver will be legally ineffectual.12 Regardless, in such situations, perhaps the insurance company may feel bound to pay the death claim absent a third-party action (which in most cases would be nonexistent.) In Ohio, the insurance industry is considering adopting a “statement of best practices” whereby companies would acknowledge the issue and, upon issuing a policy to a trustee/trust, affirmatively state their opinion that an insurable interest exists. Some states will recognize this statement as grounds for an effective estoppel argument (while others will not.)13

When drafting a typical ILIT for the benefit of the insured's spouse and/or issue, wherein the insured is the grantor but not the trustee, the trust agreement should specifically authorize the trustee to procure life insurance on the grantor's life payable to the trust. This authorization will satisfy a state like Ohio, where the insured's consent is one way to establish an insurable interest. In such states, with older ILITs lacking such specific authorization, a letter from the insured that he was aware of the application for the insurance and that he participated in procuring such coverage should be sufficient.

Short of new state legislation, it appears the only viable way to calm the fears created by Chawla will have to come through either favorable new court decisions or, more likely, a return to the pre-Chawla era where, in the everyday family ILIT situation, neither the insurance industry, the Internal Revenue Service nor litigants raise the issue of lack of an insurable interest, because, Chawla notwithstanding, that interest has been there all along!


  1. Chawla v. Transamerica Occidental Life Ins. Co., No. CIV.A. 03-CV-1215, 2005 WL 405405 (E.D. Va. Feb. 3, 2005); see also Mary Ann Mancini, “The Chawla Case, Insurance Trusts and the Insurable Interest Rule: ‘Houston, We Have a Problem,’” 31 ACTEC J. 125 (2005).
  2. Md. Code Ann., Ins. Section 12-201 (2006).
  3. Md. Code Ann., Ins. Section 12-101(dd) (2006).
  4. The “economic interest” test is a frequent bellwether of insurable interests. See, for example, Rakestraw v. Cincinnati, 69 Ohio App. 504, 511 (Hamilton County Ct. App. 1942) (citing 29 Am. Jur. Sections 309, 353).
  5. Chawla v. Transamerica Occidental Life Ins. Co., 440 F.3d 639 (4th Cir. 2006).
  6. See Mary Ann Mancini and Howard M. Zaritsky, “Insurable Interests: Apres Chawla, le Deluge?” 32 ACTEC J. 194, 217 (2006).
  7. Ibid., at p. 198.
  8. 18 Del. Code Section 2704(c)(5); Md. Ins. Code Section 12-201(b)(6).
  9. Ga. Code Section 33-24-3(c); Va. Code Section 38.2-301(B)(5); 24-A Me. Rev. Stat. Section 2402(3)(E).
  10. See State of New York Insurance Department ruling, Dec. 19, 2005.
  11. Internal Revenue Code Section 2035 provides that, for estate tax purposes, the decedent's gross estate will include the proceeds of any life insurances policies, the ownership of which were transferred for less than adequate and full consideration by the decedent/insured within three years prior to death. For suggestions on how to handle the three-year rule problem, see Lawrence I. Richman, “Sidestepping 2035,” Trusts & Estates, April 2007, at p. 32.
  12. See, for example, Beard v. The Amer. Agency Life Ins. Co., 314 Md. 235, 256-57 (Md. Ct. App. 1988); see also Holmes v. Nationwide Mut. Ins. Co., 43 N.Y.S.2d 148, 151 (Sup. Ct. N.Y. 1963).
  13. See Beard and Holmes, supra note 12.