Bad Policy for Good Policies: Article 9’s Insurance Exclusion

Abstract

Article 9 of the Uniform Commercial Code excludes from its scope any transfer of an interest in a life insurance policy. Thus, any lender whose security is a life insurance policy may not look to the UCC to determine her rights. This Article argues that the exclusion should be eliminated because it leaves insurance governed by antiquated and problematic law. Three specific problems are considered: non-UCC law does not have a satisfactory alternative to UCC perfection; non-UCC law is insufficient to prevent lenders from abusively taking more than their share of value from defaulted policies; and non-UCC law allows insurance companies to hinder securitization through the “reservation problem.” The result is that Americans borrow $121 billion worth of policy loans, almost all of which comes without serious competition. Eliminating the life insurance exclusion will rationalize the law of lending in this area, and improve prospects for a secondary market.

Keywords: Life Insurance, Insurance, Article 9, Uniform Commercial Code, UCC, Securitization, Policies, Perfection, Reform, Secured Transactions, Collateral, Pledge, Security Interest