Ameritas Life Insurance Corp. sued Wilmington Trust, N.A. in the Central District of California seeking a declaratory judgment that a permanent life insurance policy Ameritas issued to Wilmington in 2024 was void. The policy covered the life of Amir Moghadam. Ameritas alleged that Wilmington lacked an insurable interest in Moghadam's life at the time the 2024 policy was issued. The dispute arose from a 2004 term life insurance policy that Ameritas had issued to Moghadam, which included a conversion privilege allowing the policyholder to convert the term policy into a permanent one without evidence of insurability. Wilmington, having purchased the term policy, exercised this conversion option in 2024. The district court dismissed Ameritas's complaint as a matter of law, treating the 2024 permanent policy as a continuation of the 2004 term policy, which would have preserved the insurable interest Moghadam had in 2004. Ameritas appealed, arguing the policies were separate contracts and the new policy was void ab initio due to the lack of insurable interest at its inception.
The Ninth Circuit analyzed the dispute under California contract law, which governs the interpretation of insurance policies in diversity actions. The court rejected the district court's view that the permanent policy was a continuation of the term policy. Instead, the majority found that the plain language of the policies and the parties' application indicated they were distinct contracts. The conversion provision in the 2004 term policy explicitly stated that conversion would create a 'new single life policy' with a new policy date. Furthermore, the permanent policy bore a new policy number, a new issue date of February 15, 2024, and contained an integration clause defining it as the entire contract, excluding prior agreements. The court noted that while the permanent policy was issued pursuant to the conversion privilege, this did not make it a continuation of the original contract. The court distinguished the Supreme Court's decision in Aetna Life Ins. Co. v. Dunken, noting that it represents federal common law which does not survive Erie Railroad Co. v. Tompkins in diversity cases, and that the facts in Dunken were distinguishable due to the absence of integration clauses and specific state statutory requirements in that case. Having established that the policies were separate, the court turned to the validity of the permanent policy. Under both California and Delaware law, a life insurance policy is void if the policyholder lacks an insurable interest when the policy takes effect. The court found that Wilmington admitted it lacked an insurable interest in Moghadam's life in 2024. Consequently, the permanent policy was an illegal wager and void ab initio.
The Ninth Circuit's decision reverses the dismissal, meaning the case will proceed in the district court. The ruling clarifies that in California, the conversion of a term policy to a permanent policy creates a new contract subject to insurable interest requirements at the time of conversion, not at the time of the original term policy. This limits the ability of third-party purchasers to rely on the original insurable interest of the insured when converting a policy. The court did not resolve the choice-of-law issue between California and Delaware, noting the outcome is the same under both, but the decision reinforces the application of state contract interpretation rules over federal common law in such diversity cases.