Tuesday, June 4, 2019

All Bets Are Off

Two questions certified by a federal court were answered by the New Jersey Supreme Court

In New Jersey and elsewhere, no one can procure insurance on a stranger’s life and receive the benefits of the policy. Betting on a human life in that way, with the hope that the person will die soon, not only raises moral concerns but also invites foul play. For those reasons, state law allows a policy to be procured only if the benefits are payable to someone with an “insurable interest” in the person whose life is insured. N.J.S.A. 17B:24-1.1(b).

In April 2007, Sun Life Assurance Company of Canada received an application for a $5 million insurance policy on the life of Nancy Bergman. The application listed a trust as the sole owner and beneficiary of the policy. Ms. Bergman’s grandson signed as trustee. The other members of the trust were all investors, and all strangers to Ms. Bergman. The investors paid most if not all of the policy’s premiums.

Sun Life received an inspection report that listed Ms. Bergman’s annual income as more than $600,000 and her overall net worth at $9.235 million. In reality, her income was about $3000 a month, and her estate was later valued at between $100,000 and $250,000. Although Ms. Bergman represented that she had no other life insurance policies, five policies were taken out on her life in 2007, for a total of $37 million.

.Sun Life issued the policy on July 13, 2007. At the time, the trust was the sole owner and beneficiary. The policy had an incontestability clause that barred Sun Life from challenging the policy -- other than for non-payment of premiums -- after it had been “in force during the lifetime of the Insured” for two years. About five weeks after the policy was issued, the grandson resigned as trustee and appointed the investors as successor co-trustees. The trust agreement was amended so that most of the policy’s benefits would go to the investors, who were also empowered to sell the policy.

More than two years later, the trust sold the policy and the investors received nearly all of the proceeds from the sale. Wells Fargo Bank, N.A. eventually obtained the policy in a bankruptcy settlement and continued to pay the premiums.

After Nancy Bergman passed away in 2014, Wells Fargo sought to collect the policy’s death benefit. Sun Life investigated the claim, uncovered the discrepancies noted above, and declined to pay. Instead, Sun Life sought a declaratory judgment that the policy was void ab initio, or from the beginning. Wells Fargo counterclaimed for breach of contract and sought the policy’s $5 million face value; if the court voided the policy, Wells Fargo sought a refund of the premiums it paid.

The court explores the history of life insurance in general and in New Jersey in particular. Notable in the discussion is the impact of the AIDS epidemic on the sale of interest in life insurance proceeds. 

 It's not just a vodka

The policy in question is known as a “STOLI” -- a stranger-originated life insurance policy. Because such policies can be predatory and may involve fraud, other states have adopted legislation that bars them. We now consider STOLI policies as a matter of first impression.


The first certified question poses a supplemental inquiry: If the policy procured violates New Jersey’s public policy, is it void ab initio? When an insurance policy violates public policy, it is as though the policy never came into existence. The policy would be void from the outset.

The second certified question asks, “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 traditional rule -- that courts leave the parties to a void contract as they are rather than assist an illegal contract-- has evolved over time. Under the more modern view, equitable factors can be considered to determine the proper remedy. The Court reviews several decisions in which such factors were considered by courts assessing STOLI policies and observes that the fact-sensitive approach adopted in those cases is sound. To decide the appropriate remedy, 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. Depending on the circumstances, a party may be entitled to a refund of premium payments it made on a void STOLI policy, particularly a later purchaser who was not involved in any illicit conduct. The Court notes that the District Court considered equitable principles and fashioned a compromise award but does not comment on the award itself.

(Mike Frisch)


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