SOURCE: Life Insurance Settlement Association

January 30, 2008 12:10 ET

LISA: New York Court Case Demonstrates Wisdom of Common Law, NCOIL Model in Addressing STOLI

ORLANDO, FL--(Marketwire - January 30, 2008) - Life Insurance Settlement Association (LISA) Executive Director Doug Head issued the following statement regarding the recent order of the United States District Court in LPC v. Angel.

In this case, litigated between the estate of a deceased insured and an investor LLC which had funded the premiums and taken control of the death benefit, Judge Chin of the Southern District of New York denied the LLC's motion to dismiss in a dispute which raised important issues regarding life insurance, insurable interest, and STOLI (stranger originated life insurance).

STATEMENT:

We read Judge Chin's order with great interest because the Angel case applies the fundamental common law and the New York insurable interest statute, establishing the prohibition against wager policies, to a modern day transaction alleged to be STOLI. The Court applied and followed several leading cases which, as LISA has repeatedly explained, properly balance essential property rights in life insurance policies with the requirement that a life insurance contract be initiated with a legitimate insurable interest and, in Justice Oliver Wendell Holmes's classic formulation, not "as a cloak to what is, in its inception, a wager."

Judge Chin expressed what appears to be justified skepticism about the facts surrounding the purchase of this policy. The insured was promised that he would "receive an immediate, substantial cash payment by taking out a life insurance policy on himself for the benefit of an investor who was a stranger to him... [T]he investor would pay all the premiums." The insured immediately assigned the beneficial interest in the trust to the investor, which received the whole death benefit. The facts demonstrated that the insured never intended "to obtain a life insurance policy for the benefit of his family or as part of an estate planning decision." Instead, he took out the policy "solely because of the promise of quick cash." And, importantly, "[t]he identity of the investor -- LPC -- was known to all parties well in advance."

In other words, at policy inception, there was a tangible agreement in place, under which the insured took out the policy for the benefit of a particular, pre-identified stranger in exchange for a large cash payment from that speculative investor. LISA has expressed concern over such arrangements since the STOLI public policy debate began three years ago, and, based on our knowledge of the case, we support Judge Chin's concern about the transaction, because, as the Court explained, "[t]he law has long shown a disdain for 'wager' insurance policies," whereby "Federal and New York courts have continuously criticized attempts to evade the insurable interest rule."

We note that Judge Chin built his order around the classic case establishing the fundamental property rights in life insurance, the U.S. Supreme Court's decision in Grigsby v. Russell. The Angel Court explained that Grigsby ensures that, once a policy is created with insurable interest, it is freely alienable on the open market to any willing buyer. As has been frequently observed, Justice Holmes's opinion in Grigsby holds that impairing the property right to resell a life insurance policy "is to diminish appreciably the value of the contract in the owner's hands."

The second pillar of Grigsby is its establishment of the line between legitimate purchases and improper wager policies. Judge Chin explained: "The Grigsby Court drew the distinction that 'cases in which a person having an interest lends himself to one without any, as a cloak to what is, in its inception, a wager, have no similarity to those where an honest contract is sold in good faith.'" This is precisely the language which the National Conference of Insurance Legislators used in its recent anti-STOLI model language pertaining to insurable interest, which explicitly suggested State codification of Grigsby.

The Angel order repeatedly demonstrates the wisdom of the NCOIL Model. The NCOIL press release upon passage of the new Model quoted its Life Settlements Subcommittee Chairman's explanation that "STOLI occurs at the front-end of a life insurance sale." That is precisely the rule applied by the court in Angel. The NCOIL Model provides a legislative definition of STOLI as "a practice or plan to initiate a life insurance policy for the benefit of a third party investor." This is virtually identical language to the court's holding in Angel. And NCOIL's pioneering consumer affirmations -- including written certifications stating "I have not entered into any agreement or arrangement providing for the future sale of this life insurance policy" and "I have not entered into any agreement by which I am to receive consideration in exchange for procuring this policy" -- would likely have stopped issuance of this policy. So would the NCOIL Model's definition of a life settlement contract as "a premium finance loan made for a policy on or before the date of issuance of the policy where... [t]he Owner agrees on the date of the premium finance loan to sell the policy or any portion of its death benefit on any date following the issuance of the policy." All of these provisions, combined with the NCOIL Model's unique and aggressive inclusion of trust arrangements throughout the document, would have operated to regulate the arrangement in the Angel case before the policy was issued.

With the leadership of NCOIL in the legislative arena and the application of the well-established standards in the common law by the Angel court to a modern allegation of STOLI, a consensus is developing around two key points: (1) Insurable interest applies only at policy inception; and (2) a wager policy is a transaction where, at policy inception, the insured has entered into a specific agreement to transfer the policy to a particular investor.

LISA believes that the Angel decision, properly interpreted as an application of the leading common law as embodied by Grigsby, provides helpful guidance. Due to the important considerations raised by this case, we intend to closely follow the progress of this case to ensure that the decision, as further interpreted or applied, hews to the precedent that it cites and is tethered to the controlling facts recited by Judge Chin's order.

Founded in 1994, the Life Insurance Settlement Association is the oldest and largest trade organization in the industry. Its goal is to promote the development, integrity and reputation of the life settlement industry, and to promote a competitive market for the people it serves. LISA now represents 171 members with a wide variety of interests in the industry. For more about the Association, visit www.lisassociation.org.

Contact Information

  • Contact:
    Doug Head
    LISA Executive Director
    407-894-3797
    Email Contact