(Article from Insurance Law Alert, June 2019)
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The New Jersey Supreme Court ruled that a life insurance policy procured with the intent to benefit individuals with no insurable interest in the life of the insured is void ab initio. Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., 2019 WL 2345444 (N.J. June 4, 2019).
In 2007, Sun Life issued a $5 million life insurance policy. The policy application listed a trust as the beneficiary, with the insured’s grandson as a member of that trust. All other trust members were investors who were strangers to the insured and who paid most of the policy’s premiums. About five weeks after the policy issuance, the grandson resigned as trustee and the trust agreement was modified to direct all policy benefits to the investors. Approximately two years later, the trust sold the policy. Eventually, Wells Fargo Bank obtained the policy in a bankruptcy settlement, and when the insured died, attempted to collect the proceeds. Sun Life sought a declaration that the policy was stranger-oriented life insurance (“STOLI”) and therefore void ab initio. Wells Fargo counterclaimed for breach of contract or a refund of the premiums it paid.
Noting a lack of dispositive New Jersey law relating to STOLI policies, the Third Circuit certified the following two questions of law 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?
The New Jersey Supreme Court answered the first question in the affirmative. It explained that where, as here, a life insurance policy is obtained for the purpose of directing financial benefits to strangers of the insured, the policy does violate the public policy of New Jersey and is therefore void ab initio. The court noted that even if the “insurable interest” requirement is met at the time the policy is procured, the policy is nonetheless void if the “plan from the start was to transfer the benefits to strangers.” The court explained that “a number of considerations” should guide the STOLI inquiry, including the nature and timing of discussions between the original purchaser and the strangers and the reasons for transfer, among other things. In addition, the court held that an incontestability clause, which prevents insurers from contesting the validity of policies except based on non-payment of premiums, does not prohibit challenge to the validity of a STOLI policy.
As to the second question, the court held that a party “may be entitled” to a refund of premiums after a STOLI policy is voided, “depending on the circumstances.” The court adopted a “fact-sensitive approach” to the premium question that focuses on equitable factors, including the party’s level of culpability, its participation in or knowledge of the illicit scheme, and its failure to heed red flags.
As discussed in previous Alerts, courts in other jurisdictions have addressed whether and under what circumstances STOLI policies violate state law and/or public policy. See October 2016 Alert; October 2011 Alert; and December 2010 Alert.