Cases—Unlawful contracts—Insurance policy runs afoul of securities regulation

An insurance company that refused to permit the owners of “variable premium” “flexible benefit” life insurance policies to day trade the mutual funds in which they were invested—in violation of a specific policy provision—was nevertheless entitled to summary judgment in its favor on a breach of contract claim because the policies were illegal, according to a Pennsylvania federal court.

Plaintiffs had bought seven different policies from the defendant insurer, and for more than five years had daily switched assets among mutual funds in furtherance of their “market timing” strategy.  Their policy specifically permitted them to trade up to once a day.  The company, however, finally prohibited them from further trading by telephone, Internet, or fax, and the plaintiffs sued for breach of contract.

The contract was clear enough, said Judge Herbert A. Hutton, applying Pennsylvania law, but the problem was that the contracts were illegal.  They permitted the plaintiffs to trade up to 4:00 p.m. Central Time, and to get the current day’s prices. But federal law makes it illegal to allow trading after 4:00 p.m. Eastern Time.  The contracts therefore would permit trading in violation of federal regulations, and were therefore illegal and unenforceable.  The company was entitled to summary judgment.  Prusky v. Reliastar Life Ins. Co., 2004 U.S. Dist. LEXIS 24802 (E.D. Pa. Dec. 7, 2004).