New Jersey Supreme Court invalidates stranger-originated life insurance policies
There was a time when it was not uncommon for strangers to purchase insurance on the lives of prominent people, essentially wagering on their premature death. See Crossman v. Amer. Ins. Co. of Newark, 164 N.W. 428, 429 (Mich. 1917). In 1991, New Jersey took steps to combat such sinister wagers by making it illegal to “procure . . . any insurance contract upon the life . . . of another individual unless the benefits under that contract are payable to the individual . . . , or to a person having . . . an insurable interest in the individual insured.” N.J.S.A. 17B:24-1.1(b). Thus, the beneficiary must be the insured, a close relative, or an entity with significant financial ties to the insured. N.J.S.A. 17B:24-1.1(a).
Recently, in Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A., 238 N.J. 157 (2019), the New Jersey Supreme Court considered whether the insurable interest requirement is satisfied when a life insurance policy is procured by someone with an insurable interest, but swiftly transferred to those who do not have one. There, in 2007, Sun Life issued a $5 million life insurance policy on the life of Nancy Bergman, with the sole owner and beneficiary of the policy being the Nancy Bergman Irrevocable Trust. Ms. Bergman’s grandson was named the trustee of the trust. Curiously, in applying for the policy, it was reported that Ms. Bergman’s wealth exceeded $9 million; however, it was later revealed that her total assets did not exceed $1 million.
The policy premiums were paid by a group of investors and, in August 2007, i.e, a month after the policy was issued, Ms. Bergman’s grandson resigned as trustee and named the investors as co-trustees. Two years thereafter, the policy was sold to SLG Life Settlements, LLC, and was later acquired by Wells Fargo.
Wells Fargo continued to fund the policy until Ms. Bergman’s death in 2014. When Wells Fargo sought to recoup the benefits of the policy, Sun Life disclaimed coverage, concluding it was fraudulently obtained and void as a “stranger-originated life insurance (“STOLI”) arrangement.” Sun Life filed a declaratory judgment action in the District Court of New Jersey, which entered judgment in its favor, but awarded Wells Fargo reimbursement of its past premium payments. On Appeal, the Third-Circuit -- recognizing a dearth of New Jersey precedent on the issue -- certified two questions to the New Jersey Supreme Court:
- 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?
In a lengthy opinion by Chief Justice Stuart Rabner, the Supreme Court held that “STOLI policies run afoul of New Jersey's insurable interest requirement and are against public policy.” In so holding, the Court recognized that in a traditional life insurance case, “investors purchase existing life insurance policies from insureds who no longer need the insurance to protect their families in the event of their deaths[,]” but in “a STOLI arrangement a . . . ‘broker persuades a senior citizen . . . to take out a life insurance policy’ -- not to protect the person's family but for a cash payment or some other current benefit arranged with a life settlement company.” The Court found STOLI agreements “elevate form over substance,” and permit “strangers to wager on human lives” by “feigned compliance with the insurable interest statute.” Thus, the Court announced that “STOLI policies are against public policy and are void ab initio, that is, from the beginning.
The Court stressed that “[v]alid life insurance policies are assets that can be sold,” but not policies purportedly purchased by people with insurable interests only to be sold to investors “who lack an insurable interest.” The Court noted that a valid secondary market exists for polices sold two years after they are issued.
As to the second certified question, i.e., whether the purchaser of an illegal STOLI policy is entitled to a refund of any premium payments, the Court did not directly decide the issue, holding that “trial courts should develop a record and balance the relevant equitable factors.” Those factors include “a party’s level of culpability, its participation in or knowledge of the illicit scheme, and its failure to notice red flags.”
Moving forward, insurers should be wary of life insurance beneficiaries who lack a substantial nexus to the insured life. As the Supreme Court intimated, any life insurance policy sold to a third party within two years of issuance is worthy of scrutiny, as the insurer may have valid reasons to disclaim coverage.