Stranger-originated life insurance (STOLI) is a scheme pursuant to which someone purchases life insurance on the life of another for whom the purchaser does not have an insurable interest on the life of the insured. In a common variant of the scheme, a trust set up by the insured will purchase and own the insurance policy for a period of time, with the premiums paid by a third-party lender in the form of a secured loan. After the passage of a few years, the policy will be sold to the lender in exchange for cancellation of the loan and a substantial payment to the person on whose life the insurance was taken out.
Various STOLI schemes were widespread throughout the country during the 2000’s, and many states enacted legislation to outlaw the practice. Florida in particular saw widespread STOLI plans being sold, often marketed through seminars to seniors looking to supplement their income.
STOLI arrangements are illegal in most states, including Florida. In a recent case of first impression from the Florida Supreme Court, the Court was required to address the illegality of STOLI, on the one hand, and the two-year life insurance incontestability limitation, on the other.
In Wells Fargo v. Pruco Life Insurance Company , (Fla. 2016), two policies were at issue, one insuring Mr. Berger, and the other Mrs. Guild. Regarding the Berger policy, it was undisputed that the policy was issued pursuant to a STOLI arrangement. As explained by the Court:
Throughout 2005 and 2006, Arlene and Richard Berger attended financial planning seminars at which they were told that they could obtain “free life insurance.” The Bergers talked with insurance salesman Stephen Brasner, who arranged for them to participate in his STOLI scheme by obtaining (1) financing for the payment of premiums from a third-party lender and (2) a fraudulent financial report listing Arlene Berger’s net worth as $15.9 million and her annual income as $245,000. Brasner then applied to Pruco for a $10 million insurance policy on the life of Arlene Berger, naming her husband Richard as beneficiary.
The policy premiums were financed by a third party lender. At some point, the policy was put into a trust. Two years and one month after the policy was purchased, the policy was tendered to the lender in exchange for a payment of $173,000 to Mr. Berger. The policy was then sold to a client of Wells Fargo.
What Is An Insurable Interest?
Under Florida law, a person purchasing insurance on the life of another must have an insurance interest in the life of that person. An insurance interest is defined to include”
the interest of “[a]n individual . . . in the life, body, and health of another person to whom the individual is closely related by blood or by law and in whom the individual has a substantial interest engendered by love and affection.” Fla. Stat. 627.404(2)(b)2.
The trial court below refused to dismiss the claim that the policy in question was an illegal STOLI policy:
Plaintiff’s allegations here, if proven, would show that there was an agreement prior to the issuance of the Berger Policy to assign the policy to an entity without an insurable interest in Ms. Berger’s life. Such facts would demonstrate that the Berger Policy was not procured in good faith, and that there was therefore no valid insurable interest. Pruco Life Ins. Co. v. Brasner, 2011 U.S. Dist. LEXIS 1598 (S.D. Fla. Jan. 7, 2011).
How Long Does An Insurance Company Have To Contest The Issuance of A Life Insurance Policy?
Florida law provides that an insurance company has two years to contest the issuance of a life insurance policy, if the policy was obtained through a violation of the insurance contract or was otherwise illegal. Florida Statute 627.455 provides:
Every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue except for nonpayment of premiums and except, at the option of the insurer, as to provisions relative to benefits in event of disability and as to provisions which grant additional insurance specifically against death by accident or accidental means.
Here, the policy was transferred just after the two year incontestability period (perhaps to avoid scrutiny by the insurance company during the two year period). The Florida Supreme Court was tasked with determining whether a policy, illegal from inception, could nevertheless not be challenged where the challenge took place after the two-year window.
The Florida Supreme Court upheld the validity of the policy, reasoning:
While the Berger and Guild policies were procured in furtherance of STOLI schemes, the incontestability statute, section 627.455, by its plain language does not authorize a belated challenge to a policy, which has the required insurable interest as the result of a STOLI scheme.
The point of a STOLI scheme is for the insured to work with an investor to create the insurable interest necessary, hold the policy until the two-year contestability period expires, and then transfer the policy as permitted by section 627.422 to an investor who would not have had the insurable interest required to procure the policy in the first place. Thus, as a result of STOLI schemes, life insurance policies like the Berger and Guild policies, which at their inception named members of the insureds’ immediate family as beneficiaries, have the insurable interest required by section 627.404.
Accordingly, under the plain language of section 627.455, a policy that has the required insurable interest at its inception, even where that interest is created as the result of a STOLI scheme, is incontestable after two years.