On June 4, 2019, the New Jersey Supreme Court handed down a 6 to 0 opinion that represents a major setback for stranger originated life insurance (STOLI). The opinion is "on certification of questions of law from the U.S. Court of Appeals for the Third Circuit," and draws on facts from the opinions of the Third Circuit and the U.S. District Court for the District of New Jersey. Chief Justice Stuart Rabner wrote the opinion. Justices Jaynee LaVecchia, Anne M. Patterson, Faustino J. Fernandez-Vina, Lee A. Solomon, and Walter F. Timpone joined in the opinion. Justice Barry T. Albin did not participate. The "syllabus" and the full opinion are in the complimentary package offered at the end of this post. (See Sun Life of Canada v. Wells Fargo Bank, Supreme Court of New Jersey, A-49 September Term 2017, 080669.)
Facts of the Case
The facts of the case resemble those of many cases issued during the heyday of STOLI. The application was for a $5 million policy. The application vastly overstated the insured's income and assets, and a phony inspection report verified the false information. Also, the application substantially understated the amount of life insurance already in force on the insured's life. The application named a trust as the sole owner and beneficiary of the policy. The insured's grandson signed the application as trustee. Sun Life issued the policy in July 2007. Five weeks later, the grandson resigned as trustee and appointed certain "investors," or what I call "speculators in human life," as successor co-trustees. The trust agreement was amended so that most of the benefits would go to the investors, who were also empowered to sell the policy. More than two years later, after expiration of the two-year period of contestability, the trust sold the policy. The investors received nearly all the proceeds from the sale. Wells Fargo Bank eventually acquired the policy in a bankruptcy settlement and continued to pay the premiums.
The insured died in 2014. Wells Fargo sought to collect the death benefit. Sun Life investigated, discovered the fraud, refused to pay, and sought a declaratory judgment that the policy was void ab initio (from the beginning). Wells Fargo counterclaimed for breach of contract and, if the court voided the policy, sought a refund of the premiums it had paid.
Federal District Court Ruling
The federal district court in New Jersey found that New Jersey law applied, that it was a STOLI transaction lacking insurable interest in violation of the state's public policy, and declared the policy void ab initio. The court also granted Wells Fargo a refund of the premiums it had paid, reasoning that Wells Fargo was not to blame for the fraud, and that allowing Sun Life to retain the premiums would provide a windfall to Sun Life.
Third Circuit Ruling
Both parties appealed to the federal Third Circuit. Finding no dispositive New Jersey case law, the Third Circuit certified two questions of law to the New Jersey Supreme Court. Here are the questions:
- Does a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate the public policy of New Jersey, and if so, is that policy void ab initio?
- If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?
New Jersey Supreme Court Ruling
The New Jersey Supreme Court answered yes to both parts of the first certified question. In other words, a life insurance policy procured with the intent to benefit persons who do not have an insurable interest in the life of the insured violates the public policy of New Jersey, and such a policy is void ab initio.
On the second certified question, the court ruled that a party may be entitled to a refund of premiums it paid on the policy, "depending on the circumstances." To decide the appropriate remedy, the court ruled that trial courts should develop a record and balance the relevant equitable factors, such as a party's level of culpability, its participation in or knowledge of the fraud, and its failure to notice red flags. A party may be entitled to a refund of premiums it paid, particularly a later purchaser who was not involved in the fraudulent conduct. The court noted that the district court had considered equitable principles and had fashioned a compromise award, but had not commented on the award.
Earlier STOLI Cases
My first article about the secondary market for life insurance was in the March 1989 issue of The Insurance Forum. My second article was in the March 1999 issue of the Forum, and was prompted by my first evidence of what later became known as STOLI. The articles are in the complimentary package offered at the end of this post.
I have also written extensively about STOLI on my blog. Four such posts, in chronological order, are No. 131 (12/9/15), No. 166 (6/15/16), No. 167 (6/20/16), and No. 228 (8/1/17).
General Observations
I think major life insurance companies have instituted sufficient safeguards to prevent significant amounts of new STOLI business from being initiated. The problem now is the handling of the huge volume of STOLI business that was initiated during the heyday of STOLI and is now moving around among a shrinking number of investors. I think the STOLI business will continue to generate litigation for many years.
Available Material
I am offering a complimentary 69-page PDF consisting of the syllabus and full New Jersey Supreme Court opinion (53 pages), and the articles about the secondary market in the March 1989 and March 1999 issues of the Forum (16 pages). Email jmbelth@gmail.com and ask for the June 2019 package about STOLI.
On the second certified question, the court ruled that a party may be entitled to a refund of premiums it paid on the policy, "depending on the circumstances." To decide the appropriate remedy, the court ruled that trial courts should develop a record and balance the relevant equitable factors, such as a party's level of culpability, its participation in or knowledge of the fraud, and its failure to notice red flags. A party may be entitled to a refund of premiums it paid, particularly a later purchaser who was not involved in the fraudulent conduct. The court noted that the district court had considered equitable principles and had fashioned a compromise award, but had not commented on the award.
Earlier STOLI Cases
My first article about the secondary market for life insurance was in the March 1989 issue of The Insurance Forum. My second article was in the March 1999 issue of the Forum, and was prompted by my first evidence of what later became known as STOLI. The articles are in the complimentary package offered at the end of this post.
I have also written extensively about STOLI on my blog. Four such posts, in chronological order, are No. 131 (12/9/15), No. 166 (6/15/16), No. 167 (6/20/16), and No. 228 (8/1/17).
General Observations
I think major life insurance companies have instituted sufficient safeguards to prevent significant amounts of new STOLI business from being initiated. The problem now is the handling of the huge volume of STOLI business that was initiated during the heyday of STOLI and is now moving around among a shrinking number of investors. I think the STOLI business will continue to generate litigation for many years.
Available Material
I am offering a complimentary 69-page PDF consisting of the syllabus and full New Jersey Supreme Court opinion (53 pages), and the articles about the secondary market in the March 1989 and March 1999 issues of the Forum (16 pages). Email jmbelth@gmail.com and ask for the June 2019 package about STOLI.
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Email: jmbelth@gmail.com
Blog: www.josephmbelth.com