A subsidiary of the Phoenix Companies Inc. has sued U.S. Bank and other parties it claims were part of a scheme to create a stranger-originated life insurance policy, known as STOLI.

The lawsuit was filed in Minnesota in April by PHL Variable Insurance Co., a unit of Phoenix, Hartford, naming U.S. Bank, part of U.S. Bancorp, Minneapolis, the Martha Higuera Irrevocable Trust, and the trust’s trustee, BNC National Bank, a unit of BNCCorp Inc., Bismarck, N.D.

U.S. Bank ultimately became owner of the policy, according to papers filed by PHL with the U.S. District Court in Minnesota.

Court papers filed in the lawsuit state that Martha Higuera, a resident of California, was approached by a stranger, who informed her that because she was over 70 years old, she qualified for a free life insurance policy. The person then offered Higuera, who spoke little English, $5,000 to apply for the policy, according to Phoenix’s court document.

That discussion ultimately led to the establishment of the Higuera Trust, which then applied for a life insurance policy on behalf of Martha Higuera with a face value of $5 million, according to the lawsuit.

During the application process, it was represented to Phoenix that Higuera had a net worth of more than $9 million and an annual income of $410,000, according to PHL. It was also represented to the insurer that the policy was sought as part of Higuera’s estate planning, that there was no understanding or agreement that the policy would be sold to a third party and that Higuera had not received any financial inducements to submit the insurance application.

“These representations were all false,” PHL stated.

In fact, Higuera was retired and living on Social Security and bought the insurance with the understanding she would sell it to a third party on the secondary market, according to the lawsuit.

Phoenix issued the policy in December 2009.

The company recently warned its own investors that the growth of life insurance settlements ultimately could affect its profitability.

In its annual report for 2009, Phoenix stated that the emergence of a secondary market for life policies was among trends that could affect it mortality, persistency and funding levels.

“While we instituted certain controls and procedures to screen applicants, we believe that our sales of universal life products include sales of policies to third party investors who, at the time of policy origination, had no insurable interest in the insured,” Phoenix stated in its report. “The effect that these changes may have on our actual experience and profitability will emerge over time.”

In the Higuera case, Phoenix is asking the court to rescind the policy due to a lack of insurable interest and allow it to keep all premiums paid because the policy application allegedly provided false information.

A spokesman for BNC Bank declined to comment on the case. A USB Bank spokeswoman and an attorney representing Phoenix did not return calls seeking comment.