No. 228: Stranger Originated Life Insurance—Sun Life of Canada Wins a Partial Court Victory

Sun Life Assurance Company of Canada recently won a partial victory in a lawsuit relating to stranger originated life insurance (STOLI). There have been many STOLI lawsuits, and I have written about a few of them. I am writing about this one because it illustrates vividly the fraudulent nature of STOLI transactions.

U.S. District Judge Pamela Lynn Reeves handled the case. President Obama nominated her in May 2013, and the Senate confirmed her in March 2014. (See Sun Life v. Conestoga, U.S. District Court, Eastern District of Tennessee, Case No. 3:14-cv-539.)

Developments in the Lawsuit
In November 2014 Sun Life filed a lawsuit against Conestoga Trust Services, LLC. The defendant was the sixth assignee of a $2 million life insurance policy Sun Life issued in April 2008 on the life of Erwin Collins. At the time, Collins was a 74-year-old resident of Knoxville, Tennessee. Conestoga acquired the policy in April 2013. Collins died in June 2014, more than four years beyond the expiration of the two-year contestability period. Sun Life sought a court declaration that the policy was void from inception as an illegal wagering contract. In December 2014 Conestoga answered the complaint.

In January 2015 Conestoga filed an amended answer and a counterclaim against Sun Life. In February 2015 Sun Life responded to the answer and counterclaim, and Conestoga filed a motion for judgment on the pleadings. In April 2015 Sun Life opposed the motion. In September 2015 Judge Reeves denied the motion as premature, saying the record was not sufficiently developed for her to determine whether the policy was void from inception as a STOLI scheme, or whether Conestoga was an "innocent bona fide assignee."

In March 2016 Conestoga filed a motion for summary judgment. In September 2016 Judge Reeves denied the motion as moot. In October 2016 Conestoga filed an amended motion for summary judgment, and Sun Life filed a motion for summary judgment.

In January 2017 the parties requested a delay in the proceedings. Judge Reeves postponed the trial, which had been scheduled for March 2017, until November 2017.

The Ruling
On July 12, 2017, Judge Reeves handed down a memorandum opinion and a judgment. Here is the third paragraph of the opinion:

For the reasons that follow, the court finds there was a pre-existing agreement for Erwin Collins to obtain the policy and transfer it to a stranger investor. Therefore, the policy constitutes a STOLI scheme, and under Tennessee law, it violates public policy and is void ab initio. As a result, Sun Life does not have to pay the death benefit to Conestoga. However, Sun Life must refund the premiums to Conestoga so that Sun Life does not obtain a windfall.

The Scheme
Eugene E. Houchins, III (Norcross, Georgia) was the key figure in the case. He was a life insurance broker and president of Bonded Life Company, which he used to procure life insurance policies. He invited Robert Coppock to earn fees by referring elderly persons to him for a program under which those persons would receive money through life insurance policies taken out on their lives. Houchins retained Coppock as a Bonded Life agent. Bonded Life paid Coppock a referral fee of 20 percent of the first-year premium on any completed transaction. Coppock referred Collins to Houchins.

Collins created "The Erwin A. Collins Irrevocable Life Insurance Trust." The trust applied for the policy, and was to be owner, beneficiary, and premium payer of the policy. Houchins worked with David Wolff of Iron Core Capital. Wolff worked with Life Asset, a firm in the secondary market for life insurance policies.

In September 2007 Houchins submitted an informal inquiry to Sun Life about whether Collins would qualify for a Sun Life policy. A week later, Sun Life made a tentative offer subject to a formal application and full underwriting. On November 5, 2007, Ann Collins, the wife of Erwin Collins, signed an application in Knoxville in her capacity as trustee of the Collins trust. A couple of months later, the application and supporting documents were submitted to Sun Life.

In late February 2008 Life Asset told Wolff it would not acquire a beneficial interest in a policy on Erwin Collins because Tennessee was a state where Life Asset would not conduct business. To solve the "Tennessee problem," Houchins had a different trust, with a Georgia address, reapply for a policy. The new application supposedly was signed in Georgia by the insured, by a Houchins friend as trustee, and by Houchins' father as broker/registered representative. Houchins removed references to Tennessee from the policy and trust documents, used a phony Georgia address as the insured's residence, and arranged to have signatures falsely notarized in Georgia. Houchins arranged financing for the initial premium payment, and Sun Life issued the policy.

The Houchins Deposition
On August 4, 2016, a Sun Life attorney deposed Houchins in Atlanta. The transcript shows it was a memorable five-hour deposition. After answering questions about his name and address, Houchins invoked his Fifth Amendment right against self-incrimination in response to virtually all other questions. His attorney, apparently to be on the safe side, instructed Houchins to take the Fifth despite the fact that the statute of limitations had run out on any conceivable crime for which Houchins might have been charged. The facts in the case were developed from documents in the record and the testimony of others. The Sun Life attorney used the deposition questions to enter many documents into the record. To provide readers with a glimpse of what happened at the deposition, I am offering an excerpt from the transcript.

The Houchins Declaration
In addition to the Sun Life lawsuit, there were other cases involving Houchins. They suggest that he was involved with companies other than Sun Life, such as Pacific Life Insurance Company and Phoenix Life Insurance Company, that there was a $2 million Pacific Life policy on Collins, and that Houchins was involved with several trusts other than the Collins trust. Pacific Life filed an interpleader lawsuit in California when it received claims for the death benefit on the Collins policy from not only the Collins trust but also from a firm that had loaned money to the trust to pay premiums on the policy. In the interpleader case, Houchins filed a declaration describing his involvement in the Pacific Life case. To provide readers with his description, I am offering the Houchins declaration.

General Observations
I first wrote in 1999 about what later came to be known as STOLI. I sometimes called it speculator initiated life insurance (spinlife). I have criticized lax underwriting of policies with large face amounts on the lives of elderly individuals. It is difficult to understand how the companies allowed such cases to be approved, considering all the shenanigans that STOLI promoters used.

It should be noted that many STOLI schemes originated during the STOLI heyday before life insurance companies became aware of the full extent of the fraudulent activity. Here are some of the STOLI tactics I wrote about over the years: lying to proposed insureds, telling proposed insureds to sign blank forms, lying to insurance companies about the income and wealth of proposed insureds, coaching proposed insureds about how to respond if companies or inspection firms asked questions, paying accountants and inspection firms to lie in their reports, forging documents, paying notaries to certify forged signatures, lying to banks and premium lenders, paying attorneys to prepare trust instruments and loan documents, destroying evidence, and finding life insurance companies that were willing to look the other way and allow the issuance of STOLI policies.

I think Judge Reeves got it right. Although the Collins policy was well beyond the two-year period of contestability, she declared the policy void from inception. Also, despite the fact that Sun Life had incurred costs, including expenses associated with issuance of the policy and expenses associated with the lawsuit, the judge required Sun Life to return the premiums Conestoga had paid so as to avoid a windfall for Sun Life. In my view, Sun Life had only itself to blame for the lax underwriting that allowed the policy to be issued.

Available Material
I am offering a 57-page complimentary PDF consisting of the Sun Life complaint (12 pages), an excerpt from the Houchins deposition in the Sun Life case (18 pages), the Houchins declaration in the Pacific Life interpleader case (9 pages), the memorandum opinion by Judge Reeves (17 pages), and the judgment (1 page). Email jmbelth@gmail.com and ask for the August 2017 package about the Sun Life/Conestoga case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 189: Life Settlement Promotion Based on a Lawsuit That Went Nowhere

On November 10, 2016, I received an email from a marketing organization on the subject of "Fiduciary notice for life agents." Here is the full text of the email:

Recently, a family filed a class action lawsuit in a California U.S. District Court against their life insurance provider. They sought punitive damages, treble damages, restitution and an injunction because their agent failed to inform them of their options on the life settlement market.

This is not a fluke occurrence.

Uphold your fiduciary responsibility, save yourself from litigation and help seniors save the 100B worth of lapsed policies that could be used, for example, to fund long-term care.

Simply read a new white paper that provides a simple overview of life settlements in a fiduciary context, plus life and annuity options to help you uphold your responsibility and make additional sales. [Emphasis in original.]

The email identified the lawsuit as Grill v. Lincoln National Life. I had looked at the case in February 2016, but did not report on it at the time because it had gone nowhere. Now that the case is being used to support the argument that a life insurance agent has a "fiduciary responsibility" to mention life settlements as "options," I felt it would be appropriate to report on the case.

The Grill Lawsuit
On January 9, 2014, three members of the Grill family filed a class action lawsuit against Lincoln National Life Insurance Company. The case was assigned to U.S. District Judge Jesus G. Bernal. President Obama nominated him in April 2012, and the Senate confirmed him in December 2012. His career is an immigrant success story. Born in Mexico, he received his undergraduate degree cum laude from Yale University and his law degree from the Stanford Law School. (See Grill v. Lincoln National, U.S. District Court, Central District of California, Case No. 5:14-cv-51.)

The plaintiffs filed four complaints. The discussion here is based on the fourth (third amended) complaint, which was filed September 29, 2014.

In 2004 the plaintiffs purchased a second-to-die policy with a death benefit of $7.2 million. The insureds were aged 68 and 65. The third plaintiff was trustee of the trust that was owner and beneficiary of the policy. The policy type is not stated, but it was probably universal life because the complaint said the "premium payments were designed to generate investment returns that would cover the cost of insurance." Although the complaint did not say so, the policy probably was being paid for with minimum premiums so as to generate no account value.

By 2008 the investment returns became insufficient to cover the cost of insurance. The plaintiffs consulted their agent, who allegedly said "they had two options: (1) pay new premiums into the Policy to extend it, or (2) surrender the Policy, in whole or in part, to reduce the cost of insurance." The plaintiffs surrendered part of the policy, decreasing the death benefit to $5.4 million. By 2009 the investment returns again became insufficient, and the plaintiffs again surrendered part of the policy to reduce the death benefit to $2 million. The plaintiffs alleged that they had twice surrendered parts of the policy "for no consideration" and that their agent did not tell them about life settlements. Further, they alleged:

Defendant's failure to inform and/or concealment of the option of a life settlement is part of a common and systematic practice by Defendant to hide this option from its insureds. The reason for this failure to inform and/or concealment is clear: Defendant stands to profit significantly if Plaintiffs and similarly situated Class members pay new premiums into their policies or surrender their policies for little or no value. Conversely, if Plaintiffs and similarly situated Class members sell their policies in a life settlement, Defendant would have to pay the death benefit without receiving higher premiums and/or without a surrender.

The complaints survived Lincoln's motions to dismiss. On October 6, 2014, one of the insureds died. On May 29, 2015, Judge Bernal ordered the plaintiffs to file a motion for class certification by June 15. On that date the plaintiffs instead filed a notice of settlement. On August 24 the parties filed a joint stipulation to dismiss the case based on the fact that one of the lead plaintiffs had died and the survivors had not substituted another lead plaintiff. On August 25 Judge Bernal granted the stipulation to dismiss with prejudice (permanently) all claims asserted by the plaintiffs.

The Final Stipulation
On September 21, 2015, the parties filed a joint stipulation of dismissal. Here is the full text of the stipulation:

WHEREAS, Plaintiffs' investigation and analysis to date did not support the allegation that Defendant had a common and systematic practice of concealing life settlement options from its insureds;

WHEREAS, the parties have elected to settle each and every claim asserted in the above-captioned matter with no admission of wrongdoing, impropriety or liability on the part of any party;

NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and between the parties through their respective counsel of record pursuant to that settlement agreement, and pursuant to Rule 41(a)(1) of the Federal Rules of Civil Procedure, the individual claims of the named plaintiffs in the above-entitled action be dismissed with prejudice, and the claims of the putative class be dismissed without prejudice, with each party to bear its own costs.

General Observation No. 1
Citing a case that went nowhere to support the notion that the agent has a fiduciary obligation to disclose life settlement "options" is not the only phony tactic used by life settlement promoters. The requirement of insurable interest has caused a huge amount of litigation in the secondary market for life insurance. In the June 2009 issue of The Insurance Forum, in a discussion of an agent's lawsuit against Phoenix Life Insurance Company, I said the plaintiff had cited a 2007 article in a prestigious law journal condemning the insurable interest doctrine. The author argued that "the doctrine creates perverse incentives that encourage the very practices the doctrine seeks to deter," that "the doctrine also invites unfairness and inefficiency in the insurance market," and that the doctrine should be abolished. The article was written by a law student on the editorial staff of the law journal. In a note the author acknowledged the help of a fellow student on the editorial staff of the law journal, and the help of a member of the faculty of the law school.

I was certain that the article had been planted by promoters of the secondary market for life insurance. I wrote to the author and his fellow student, both of whom by then were associated with major law firms. I also wrote to the faculty member. I asked who had suggested the idea for the article. I also asked whether anyone at the law school had received compensation. In the December 2013 issue of the Forum, in an article entitled "Why the Secondary Market for Life Insurance Will Never Win Full Public Acceptance," I said I had received no reply.

General Observation No. 2
The plaintiffs in the Grill case, in their reasoning about why Lincoln allegedly concealed the life settlement option, are incorrect. As a general rule, life insurance companies want their policies to remain in force. That is why companies often reward agents for strong persistency. Exceptions to the general rule are so-called "lapse-supported" policies that are priced so as to depend on high lapse rates for profitability. The policy in this case does not fit into the "lapse-supported" category. Furthermore, in their reasoning, the plaintiffs neglected to point out that the speculator in human life who would have acquired the policy in the secondary market would have had to continue paying premiums to keep the policy in force until the death of the second insured, and that the need to pay those premiums would have been a factor in determining the price paid in a life settlement.

General Observation No. 3
A matter somewhat related to the second observation above is the question of how much a company would pay on surrender of a policy whose insured is in poor health. At least two observers—an actuary and I—have suggested the idea of "health-related" or "health-adjusted" cash values. If an insured is in poor health, it would seem reasonable for a company to pay an enhanced cash value upon surrender of the policy. In the March 1999 issue of the Forum, which was a special 12-page issue, I mentioned health-related cash values as one of eleven suggested methods of dealing with "The Growth of the Frightening Secondary Market for Life Insurance Policies." The February 2001 issue of the Forum included an article by Albert E. Easton, FSA, MAAA. He had written a technical article on the subject in an actuarial journal, and I had invited him to write a nontechnical article for the Forum.

Available Material
I am offering a complimentary 21-page PDF containing the four Forum articles mentioned in the general observations above. Email jmbelth@gmail.com and ask for the November 2016 package of Forum articles about the secondary market for life insurance.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 443: The Secondary Market for Life Insurance Policies

In my 2015 book entitled The Insurance Forum: A Memoir, Chapter 9 is entitled "The Secondary Market for Life Insurance Policies." In that 12-page chapter, I discuss the origin and growth of the secondary market, including viatical settlements, life settlements, and stranger-originated life insurance (STOLI). I refer to STOLI as speculator-initiated life insurance (spinlife).

I have long been concerned about the negative impact of the secondary market (the "unselling" of life insurance) on life insurance companies and their policyholders. Recently I heard reports about life insurance companies and life settlement companies competing vigorously against one another in their efforts to persuade policyholders to cash in or sell their life insurance policies. For that reason, I decided to prepare this blog post to revisit the subject. After you read Chapter 9 of my Memoir, I would welcome your comments.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 375: A Viatical Is Ruled Illegal After 21 Years

In January 1999, a predecessor to Jackson National Life Insurance Company issued a $500,000 ten-year term insurance policy on the life of Kelly Douglas Couch. Recently a federal judge in Georgia declared the policy void ab initio (from the beginning) as an illegal human life wagering contract. The case illustrates the long-term consequences of viaticals issued during the AIDS crisis. (See Jackson v. Crum, U.S. District Court, Northern District of Georgia, Case No. 1:17-cv-3857.)

The Lawsuit

In October 2017, Jackson filed a lawsuit against Sterling Crum, an investor (I call him a speculator in human life) in the secondary market for life insurance policies. Crum had eventually acquired the Couch policy, and had sought the death benefit after Couch's death.

Midland Life Insurance Company, a Jackson predecessor, issued the Couch policy in 1999, as mentioned earlier. Jackson, in its lawsuit, sought a declaratory judgment that the policy was void ab initio as an illegal human life wagering contract.

In November 2017, Crum moved to dismiss the complaint for failure to state a claim. The judge denied the motion. In April 2018, Crum filed a counterclaim against Jackson. In June 2018, Jackson answered the counterclaim. In March 2019, both parties filed motions for summary judgment. In April 2019, the judge denied both motions.

A bench trial began August 26, 2019, and ended August 29. The judge heard closing arguments on November 5. On March 2, 2020, the judge issued an Order declaring the policy void ab initio as an illegal human life wagering contract. The details of the policy's long journey from Couch to Crum are complex. Instead of trying to summarize them here, I am including the Order, which describes the details thoroughly, in the complimentary package offered at the end of this post.

The Appeal

On April 1, 2020, Crum filed a notice of appeal. At this time, dates for the filing of initial briefs have not been set. (See Jackson v. Crum, U.S. Court of Appeals, Eleventh Circuit, Case No. 20-11280.)

General Observations

Before I started this blog site in October 2013, I published The Insurance Forum, my monthly newsletter, from January 1974 through December 2013. Working on this blog post brought to mind some Forum articles I wrote about viaticals in 1999, the year the Couch policy was issued. I think readers of this blog who did not see those articles may find them interesting. The articles may help readers understand my long-time negative outlook on the secondary market for life insurance policies in general and on viaticals in particular. The Forum articles are in the complimentary package offered at the end of this post.

Available Material

I am offering a complimentary 50-page package consisting of the judge's March 2020 Order (24 pages) and the 1999 Forum articles about viaticals (26 pages). Email jmbelth@gmail.com and ask for the June 2020 package about Jackson v. Crum.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com