Washington, D.C. – What strategies are firms using to combat stranger-originated life insurance claims? “We…favor a selective approach, not a scorched earth, slash and burn, litigate every case” approach, said Stephan A. Serfass, a partner and chair of the insurance practice at Drinker Biddle & Reath LLP, Philadelphia, in a presentation here.
Another partner at the firm, Jason P. Gosselin, who is also in the insurance practice, noted that insurable interest laws go back to England in 1774, but that case law on stranger-originated life insurance litigation is still developing.
The two attorneys spoke during a breakout session of the annual life insurance conference co-sponsored by LIMRA LOMA, Society of Actuaries and ACLI. Among other things, they laid out considerations for evaluating whether to pursue a STOLI case.
Gosselin said the courts tend to apply three standards when evaluating STOLI litigation–the third-party participation standard, the insurable interest standard, and the agreement standard.
o The third-party participation standard: This looks at whether the insured took out a policy on his or her own life. In that situation, it is okay for the person to sell the policy later on “because an individual has an unlimited insurable interest in his own life,” said Gosselin, who noted that this is fairly consistent throughout the states. Courts have found that people by themselves “can take out a policy and do pretty much what they want” with it, he said.
o The agreement standard: “You have to show there was a written or oral understanding before a policy is taken out that the purpose was to fulfill an agreement that existed before the policy was issued.” Gosselin said. But that is very hard to show “because most people who intend to get involved in secondary market transactions don’t have a written contract with a buyer before the policy is issued. Usually, there is an intent to get the policy and then they shop it around on the market.”
o The intent standard: This is very fact intensive, Gosselin said. “We show there was an intent, that the person really didn’t want insurance for legitimate life insurance reasons, and that the real goal was to take the policy out, make it look legitimate and then get rid of it when he or she could in the secondary market.” In those cases, “we find there is no insurable interest,” he added. “That is the standard we prefer and advocate for in our cases.”
When evaluating whether a case that seeks to combat STOLI can be won, attorneys review five factors that help with the decision, indicated Serfass. They are:
1) Material misrepresentation in the case. Such cases ask the court to declare the policy void at birth, “because of a lack of insurable interest at the inception of the policy,” said Serfass. Such misrepresentations might be found in the stated purpose for buying the policy, the insured’s net worth and the insured’s health, he said. In more recent policies, it might also be found in answers to the specific STOLI and insurable interest questions, he added.
2) Challenge within the policy’s contestable period. If the challenge is made during this period, Serfass said, “you will be able to make a specific material misrepresentation-based claim, a separate cause of action, on that basis.”