Western Reserve Life Assurance Co. of Ohio
ADM Associates, LLC
This came case before the Supreme Court pursuant to a question certified by the United States Court of Appeals for the First Circuit in accordance with Article 1, Rule 6 of the Supreme Court Rules of Appellate Procedure.
For Plaintiff: Michael J. Daly, Esq.
For Defendant: Robert F. Weber, Esq.
Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ. Robinson, J., with whom Indeglia, J., joins, concurring in part and dissenting in part.
Suttell, Chief Justice
A rapacious investment scheme exploiting the complexities of certain variable annuity policies provides the context for two questions certified to this Court by the United States Court of Appeals for the First Circuit (First Circuit) pursuant to Article I, Rule 6 of the Supreme Court Rules of Appellate Procedure. The first question asks whether an " annuity [is] infirm for want of an insurable interest" when " the owner and beneficiary of an annuity with a death benefit is a stranger to the annuitant * * *?" The second question inquires whether " a clause in an annuity that purports to make the annuity incontestable fro the date of its issuance preclude[s] the maintenance of an action based on the lack of an insurable interest?" For the reasons set forth herein, we answer the first question in the negative and the second question in the affirmative.
Facts and Procedural History
Although we have only been asked to consider two general questions of law, a brief summary of the underlying civil action will help provide the factual predicate for these intriguing legal issues. The facts set forth below are drawn from the opinions published by the First Circuit and the United States District Court for the District of Rhode Island (District Court). See Western Reserve Life Assurance Co. of Ohio v. ADM Associates, LLC, 737 F.3d 135, 136-39 (1st Cir. 2013); Western Reserve Life Assurance Co. of Ohio v. Conreal LLC, 715 F.Supp.2d 270, 273-75 (D.R.I. 2010) on reconsideration in part sub nom., Western Reserve Life Assurance Co. of Ohio v. Caramadre, 847 F.Supp.2d 329 (D.R.I. 2012).
Joseph Caramadre was an attorney who specialized in finding loopholes in insurance and annuity products that would be personally lucrative to him. One of his investment ideas involved taking advantage of both the application process and structure of variable annuity policies designed and sold by Western Reserve Life Assurance Company of Ohio (plaintiff or Western Reserve). Under plaintiff's " Freedom Premier III" annuity policy, the investor (also known as the policy's " owner" ) pays the premiums for the policy, directs how the premiums are to be invested, and chooses to whom the periodic annuity payments are to be made. The measuring tool for the policy is the life of the annuitant, who is also selected by the investor. In addition, the investor can elect to purchase the " Double Enhanced Death Benefit." This death benefit guarantees that, upon the annuitant's death, the beneficiary will receive the greater of (1) the highest market value of the policy at a specified anniversary date or (2) a return of all of the premiums paid into the policy plus five percent per annum interest.
Caramadre seized upon the features of plaintiff's variable annuity policy and contrived to mine its vast investment potential. By purchasing the death benefit rider, an investor was virtually assured of a risk-free investment. The investor could direct that his premiums be invested in speculative securities, name himself as
beneficiary, and thus be assured that he would receive no less than the total premiums invested, plus five percent annual interest, upon the death of the annuitant. On the other hand, such risky investments also held the possibility of very substantial profits. Moreover, as Caramadre apparently realized, the shorter the life of the annuitant, the greater the potential for profits.
The macabre sine qua non of the investment strategy, therefore, was the recruitment of terminally ill individuals as annuitants. To implement the scheme, Caramadre and his associates circulated flyers to hospice patients and churches, describing a " Program for the Terminally Ill" wherein hospice patients would receive a cash payment in exchange for their willingness to be designated as the annuitant. Charles Buckman served as the annuitant on the policy that is the subject of the case currently pending in the First Circuit (Buckman policy); a role for which he was paid a total of $5,000. The defendant, ADM Associates, LLC (ADM), " a Caramadre nominee," was designated as the owner and beneficiary of the annuity. No relationship existed between Buckman and ADM prior to the application for the Buckman policy. The defendant initially invested $250,000 as a premium to initiate the Buckman policy, and it specifically requested the Double Enhanced Death Benefit. Soon thereafter, it invested $750,000 as an additional premium payment. The plaintiff issued the policy, which included a clause that the policy would be " incontestable from the Policy Date." Caramadre repeated this process many times over several years using plaintiff's variable annuity policies and a variety of terminally ill individuals, brokerage companies, and their agents. The plaintiff attempted to rescind the Buckman policy one year subsequent to its issuance, after learning that this policy was likely one of the many orchestrated by Caramadre.
The plaintiff filed five separate suits in the District Court against an array of defendants, including Caramadre and one of his associates, the annuity brokerage companies that sold plaintiff's annuity policies, individual agents of these brokerage firms, individual annuitants, and the individual or corporate policy-investors/owners/beneficiaries. Relevant to the appeal currently pending in the First Circuit, plaintiff sought several forms of relief against ADM, including rescission of the annuity policy or a declaratory judgment that the policy was void because ADM lacked an insurable interest in Buckman, as well as monetary damages for fraud, civil liability for crimes and offenses, and civil conspiracy.
All defendants moved to dismiss the complaints for failure to state claims upon which relief could be granted. Two of the central arguments in support of these motions--that the insurable interest requirement for life insurance policies was not applicable to annuities and that the incontestability clauses in the annuity policies precluded plaintiff from litigating any of its claims--form the basis of the certified questions of law now before this Court. The District Court dismissed plaintiff's claims against ADM, concluding that insurance and annuities are separate, distinct financial investment vehicles and that the lack of an insurable interest by ADM in Buckman did not render the Buckman policy void pursuant to Rhode Island law. The District Court also concluded that the incontestability clause in the policy--that the policy '" shall be incontestable from the Policy Date'" --was not in contravention of public policy and " serve[d] to deflect claims to rescind the annuities or have them declared void because of fraud." Conreal LLC, 715 F.Supp.2d at 279, 280.
The plaintiff appealed the District Court's dismissal of its amended complaint
to the First Circuit. A panel from the First Circuit determined that " [t]he outcome of th[e] appeal [was] controlled by important questions of Rhode Island law and public policy as to which [they had] found no dispositive precedent." ADM Associates, LLC, 737 F.3d at 136. Consequently, the First Circuit certified two questions of law to this Court, and we accepted these questions pursuant to the discretionary authority provided to us in Rule 6(a).
Standard of Review
" Rule 6 authorizes this Court to answer questions of law certified to it by any federal court * * *." In re Tetreault, 11 A.3d 635, 638-39 (R.I. 2011). Rule 6(a) provides, in pertinent part, that:
" This Court may answer questions of law certified to it by * * * a Court of Appeals of the United States * * * when requested by the certifying court if there are involved in any proceeding before it questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of this Court."
After we decide to accept questions of law certified to us by one of the courts identified in Rule 6(a), we review these questions de novo. In re Tetreault, 11 A.3d at 639.
The questions presently certified require us to consider both long-standing common law as well as more recently enacted statutory authority. " This Court reviews questions of statutory construction and interpretation de novo." Hough v. McKiernan, 108 A.3d 1030, 1035 (R.I. 2015) (quoting National Refrigeration, Inc. v. Capital Properties, Inc., 88 A.3d 1150, 1156 (R.I. 2014)). " It is well settled that, '[w]hen the statutory language is clear and unambiguous, we give the words their plain and ordinary meaning.'" Id. (quoting
National Refrigeration, Inc., 88 A.3d at 1156). " The plain meaning approach, however, is not the equivalent of myopic literalism, and it is entirely proper for us to look to the sense and meaning fairly deducible from the context." National Refrigeration, Inc., 88 A.3d at 1156 (quoting Peloquin v. Haven Health Center of Greenville, LLC, 61 A.3d 419, 425 (R.I. 2013)). " Therefore we must consider the entire statute as a whole; individual sections must be considered in the context of the entire statutory scheme, not as if each section were independent of all other sections." Id. (quoting
Peloquin, 61 A.3d at 425). However, " under no circumstances will this Court construe a statute to reach an absurd result." Id. (quoting Peloquin,
61 A.3d at 425).
" If the owner and beneficiary of an annuity with a death benefit is a stranger to the annuitant, is the annuity infirm for want of an ...