Insight

STOLI Law Developing Across the Country As Courts Continue Deciding Cases

That Legal Bulletin highlighted a variety of issues frequently faced in STOLI litigation and discussed the growing life settlement market, which involves the sale of life insurance policies by owners to third parties.

STOLI Law Developing
John L. Rivkin

John L. Rivkin

November 18, 2016 12:00 AM

There have been a number of decisions from courts across the country – including from New York’s highest court, the Court of Appeals – in cases involving stranger-originated life insurance policies (“STOLI”) since our October 2010 Legal Bulletin, “Ruling Permits Life Insurance Company’s Claims To Proceeds In Case Involving Alleged STOLI Fraud.” That Legal Bulletin highlighted a variety of issues frequently faced in STOLI litigation and discussed the growing life settlement market, which involves the sale of life insurance policies by owners to third parties.

The most prominent STOLI-related case in recent months is Kramer v. Phoenix Life Ins. Co. This dispute reached the New York Court of Appeals when the U.S. Court of Appeals for the Second Circuit asked the New York Court to decide whether New York Insurance Law §§ 3205(b)(1) and (b)(2) “prohibit an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured’s life, if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured’s life?” The New York Court of Appeals answered that question in the negative, and held that New York law permits a person to procure an insurance policy on his or her own life and immediately transfer it to someone without an insurable interest in that life, even where the policy was obtained for just such a purpose.
The practical significance of the Kramer decision remains to be seen, given that a new law in New York that regulates the life settlement industry prohibits STOLI transactions, which it defines as “any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state.” The new law also prohibits anyone from entering a valid life settlement contract for two years following the issuance of a policy, with some narrow exceptions. (Because these provisions did not go into effect until May 18, 2010, they did not govern the appeal in Kramer.)

Florida Ruling
More recently, on January 7, a federal district court in Florida issued a decision in Pruco Life Ins. Co. v. Brasner, a STOLI case. The complaint in this case alleged that Arlene Berger had applied for a $10 million life insurance policy with Pruco Life Insurance Company and had listed her husband, Richard Berger, as the prospective beneficiary. Pruco asserted, however, that those involved in the policy’s procurement understood that Mr. Berger would not receive any death benefits from the policy upon his wife’s death; rather, the beneficial interest would be sold to an investor with no insurable interest in her life.

Moreover, Pruco alleged that the information provided to it in connection with the application was fraudulent because it “grossly overstated Ms. Berger’s income, assets and net worth.” Pruco also asserted that, because it did not know the information was false, Prudential issued the policy on Arlene Berger’s life in the amount of $10 million. Pruco’s complaint asserted that one month after the policy was placed in force, a request was made to change its owner and beneficiary to the Wilmington Trust Company as Trustee of the Arlene Berger 2006 Life Insurance Trust dtd. 6/5/06. Thereafter, on December 24, 2008, Prudential received a second request to change the owner and beneficiary, this time to Wells Fargo Bank N.A. as Securities Intermediary.

Pruco brought suit against Wells Fargo, among others, seeking a declaratory judgment that the policy lacked an insurable interest at inception and therefore was void ab initio. Wells Fargo moved to dismiss that claim, arguing, among other things, that an insurable interest existed on the policy’s inception date and that, in any event, Florida’s incontestability statute and the policy’s two-year incontestability provision barred Pruco’s claim. The court denied the Wells Fargo motion.

The court explained that the complaint asserted that Ms. Berger had never intended to maintain the policy herself, and that Mr. Berger had never intended to retain his interest. It found that those allegations, if proven, would show that there was an agreement prior to the issuance of the policy to assign the policy to an entity without an insurable interest in Ms. Berger’s life. That “would demonstrate” that the policy was not procured in good faith, and that “there was therefore no valid insurable interest.” Accordingly, the court refused to dismiss that claim based on Wells Fargo’s argument that there was a valid insurable interest at the policy’s inception.

Importantly, the court also ruled that Pruco’s claim did not have to be dismissed even though the insurer had brought its action after the expiration of the incontestability period. The court found that the majority view allowed a lack of insurable interest claim to proceed despite the expiration of an incontestability clause, and it decided that that was “the proper view” under Florida law.

A California Ruling
Another notable recent case, Ohio Nat’l Life Assur. Corp. v. Davis, involved claims of a fraudulent scheme to procure life insurance policies as to which no insurable interests existed at the time of the policies’ inception. Here, a federal district court in California granted the insurer’s request for a preliminary injunction, finding that the complaint alleged a STOLI arrangement, which was a prohibited “fraudulent life settlement act” under applicable California law. The court noted that the insurer alleged that two individuals who were asked to apply for life insurance policies were promised that they would not have to pay premiums but that they would receive payments for their participation and that they were convinced to sign irrevocable trusts naming the trusts as owners of the policies.

The court stated that it seemed “highly likely” that the insurer would succeed in establishing that the procurement of the policies were STOLI transactions, and it prohibited the sale or transfer of any interest in the policies, directly or indirectly.

Conclusion
The rapid, and continuing, growth of the life settlement industry is undoubtedly going to be accompanied by litigation in courts across the United States until the major STOLI issues are resolved, or until states adopt legislation that clearly sets forth the rules. Different rules are likely to govern in different jurisdictions, so it is important to keep in mind the applicable law.

Related Articles

Protecting Small Business Owners: Trial Experts Connick Law LLC Notoriously Successful with Fire Litigation


by Justin Smulison

When small business owners become the target of insurance companies in fire-related lawsuits, hiring a firm with a reputation for understanding the science of fire suppression trials can save their livelihoods.

Gold Indoor Sprinkler Heads on Red Background

Will Recent Boeing Settlements Create Tailwinds In Corporate Law?


by Justin Smulison

Prominent litigation against Boeing is setting a precedent of accountability, professionalism and commitment among company boards as well as ushering ESG further into the courtroom to help monitor and prevent safety issues.

Recent Boeing Settlements and Corporate Law

Colorado's Best Lawyers 2022


by Best Lawyers

Our 2022 Colorado's Best Lawyers publication features top-ranked legal talent in Boulder, Denver and Western Colorado.

Colorado's Best Lawyers 2022

Newly Launched COVID-19 Litigation Project Offers Open Access To Pandemic-Related Court Judgments From Over 70 Countries


by Sara Collin

A worldwide database of COVID-19 cases is uniting more than 70 countries as judges, lawmakers and lawyers continue to navigate pandemic related litigation and the ways in which it’s evolving amid year three.

COVID-19 Worldwide Litigation Project

Look for the Zoom Label


by Anne R. Yuengert and Matthew C. Lonergan

Will the virtual platforms that got such a boost during the pandemic replace how you interact with your employees, unions, and lawyers?

Virtual Platforms Replacing Work Interactions

Discovery in the Time of COVID-19


by H. Barber Boone

The pandemic has affected the vital process of legal discovery in ways both good and bad. Which changes are likely to become widely accepted in the years ahead?

The Impact of COVID-19 on E-Discovery

Busting a Trust


by Joseph Marrs

The rules governing trusts and asset distribution are often much more flexible than many might assume. Here’s a primer.

Rules Governing Trusts and Asset Distribution

The Next Chapter


by Patrick M. Shelby

Among its uncountable other disruptions, the pandemic upended U.S. bankruptcy procedures. Congressional relief, legislative changes, amended legal provisions: What lies ahead for those looking to file?

COVID-19's Impacts on Bankruptcy Procedures

Phoning It In


by Alyson M. St. Pierre, Ashley C. Pack and Crystal S. Wildeman

It’s not easy for employers to weigh requests from employees to work from afar, even in the wake of the pandemic. Considerations include COVID-19, vaccinations, the Americans with Disabilities Act and the nature of the job itself.

Employer Considerations for Teleworking

Compelled to Compete


by Ashish Mahendru

Courts and legislatures—and now the White House—are taking an increasingly dim view of noncompete employment agreements, a development the pandemic has quickened. What can employers do to protect their confidential information?

Protection for Employers Beyond Noncompetes

Meeting Halfway


by Julia B. Meister

To resolve family and business disputes including wills, trusts, estates and more, mediation is often a more effective, gentler and cheaper option than litigation.

Mediation to Resolve Wills, Trusts, Estates

Look Out Below


by Mary Jo Larson

Employee 401(k) and other pension plans that include company stock can be a financial minefield. What’s a responsible fiduciary to do to lessen the risk of a plummeting share price—and the risk of a subsequent “stock-drop” lawsuit from aggrieved workers?

Navigating Employee 401(k) and Pension Plans

Family Law – Sometimes All in the Family


by Justin Smulison

Led by a father-and-son team of Family Law lawyers and trial advocates, with the support and assistance of family members, Blevans & Blevans, LLP continues its tradition of excellence serving the Northern California Bay Area in 2020 and beyond.

Blevans & Blevans

Achieving Justice For Essential Workers


by Justin Smulison

Patrick Regan of Regan Zambri Long describes how the recent resolution of a corporate negligence case brought closure to survivors of a fatal 2016 apartment building explosion.

Patrick Regan Best Lawyers 2021

Is It Live . . . Or Is It Virtual?


by Adrian L. Bastianelli III, Kevin J. O'Connor, Paulo Flores and Robert S. Peckar

Mediation via Zoom is just one of the legal-industry oddities the pandemic has wrought. Here’s a cheat sheet for how to make it work for you—and some thoughts on whether it’s here to stay.

Virtual Mediation

Equal to the Task


by Joyce D. Edelman

Fighting for gender equity in the law firm can seem like the very definition of a thankless task. But you just might find yourself able to make great strides.

Gender Equity in the Workplace

Trending Articles

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

The U.S. Best Lawyers Voting Season Is Open


by Best Lawyers

The voting season for the 31st edition of The Best Lawyers in America® and the 5th edition of Best Lawyers: Ones to Watch® in America is officially underway, and we are offering some helpful advice to this year’s voters.

Golden figures of people standing on blue surface connected by white lines

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

2021 Best Lawyers: The Global Issue


by Best Lawyers

The 2021 Global Issue features top legal talent from the most recent editions of Best Lawyers and Best Lawyers: Ones to Watch worldwide.

2021 Best Lawyers: The Global Issue

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Best Lawyers Voting Is Now Open


by Best Lawyers

Voting has begun in several countries across the globe, including the United States, the United Kingdom and Europe. Below we offer dates, details and answers to voting-related questions to assist with the voting process.

Hands holding smartphone with five stars above phone

Inflation Escalation


by Ashley S. Wagner

Inflation and rising costs are at the forefront of everyone’s mind as we enter 2023. The current volatile market makes it more important than ever to understand the rent escalation clauses in current and future commercial lease agreements.

Suited figure in front of rising market and inflated balloon

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards


by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

Announcing The Best Lawyers in South Africa™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 15th edition of The Best Lawyers in South Africa™ for 2024, including the exclusive "Law Firm of the Year" awards.

Sky view of South Africa town and waterways

Presenting the 2024 Best Lawyers Family Law Legal Guide


by Best Lawyers

The 2024 Best Lawyers Family Law Legal Guide is now live and includes recognitions for all Best Lawyers family law awards. Read below and explore the legal guide.

Man entering home and hugging two children in doorway