Monday, November 2, 2020

No. 396: Stranger Originated Life Insurance Is Now Illegal in New Jersey

On October 28, 2020, the law firm of Cozen O'Connor issued a three-page press release entitled "New Jersey Enacts Anti-STOLI Legislation." The press release announced that recent legislation enacted in New Jersey has rendered stranger-originated life insurance (STOLI) illegal in the state. The press release, written by Cozen attorneys Charles J. Vinicombe and Michael J. Miller, is in the complimentary November 2020 package offered at the end of this post.

The new legislation (Assembly Bill 1263) was unanimously approved by the New Jersey Assembly and by the New Jersey Senate. It was signed into law by the governor on October 19, 2020. It supplements the New Jersey Viatical Settlements Act by outlawing STOLI, which is defined as
an act, practice, or arrangement to initiate or procure the issuance of a policy in this State for the benefit of a third party investor who, at the time of policy inception, has no insurable interest under the laws of this State in the life of the insured.
In No. 317 (June 13, 2019), I discussed the developments that led to the recent legislation. It all began with a dispute between Sun Life Assurance Company of Canada and Wells Fargo Bank. A $5 million policy was issued in 2007. Wells Fargo later acquired the policy in a bankruptcy proceeding and thereafter continued to pay the premiums. The insured died in 2014, and Wells Fargo sought to collect the death benefit.

Sun Life investigated and discovered massive fraud in the original application for the policy. The elderly insured's income and assets were vastly overstated, her life insurance in force was vastly understated, and a phony inspection report verified the false information. The application named a trust as owner and beneficiary of the policy, and the insured's grandson signed the application as trustee. Five weeks later, the grandson resigned as trustee and appointed certain investors (I often refer to them as speculators in human life) as successor co-trustees. The trust agreement was amended so that most of the benefits would go to the investors. More than two years later, after the expiration of the two-year contestability period, the trust sold the policy and the investors received nearly all the proceeds.

The Courts
Sun Life refused to pay the death benefit, 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 paid.

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 granted Wells Fargo a refund of the premiums it paid, on the grounds that Wells Fargo was not responsible for the fraud.

On appeal, the federal Third Circuit found no dispositive New Jersey case law, and certified two questions of law to the New Jersey Supreme Court:
  1. 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?
  2. 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?
The New Jersey Supreme Court answered yes to both parts of the first question. On the second 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.

General Observations
My first article about the secondary market for life insurance policies was in the March 1989 issue of The Insurance Forum, the monthly newsletter I published from January 1974 through December 2013. My second article about the secondary market was in the March 1999 issue of the Forum, and was prompted by my first evidence of what later became known as STOLI.

From the beginning, my views about the secondary market for life insurance policies in general, and about STOLI in particular, have been strongly negative. I think life insurance companies have instituted 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 about 15 years ago. That business continues to move around among a shrinking number of investors. I think the STOLI business will continue to generate litigation for many years.

I am not aware of any state, other than New Jersey, in which STOLI is prohibited by law. However, I am aware of certain legal restrictions in Canada. I would welcome comments from readers about other legal prohibitions relating to STOLI.

Available Material
In the above mentioned No. 317, I offered a complimentary 69-page PDF containing details of the New Jersey Supreme Court ruling, and the articles in the March 1989 and March 1999 issues of the Forum. That June 2019 package remains available.

Now I am offering a three-page PDF containing the Cozen O'Connor press release. Send an email to and ask for the June 2019 package and/or the November 2020 package about STOLI.