The judges on a California Court of Appeal panel have ruled 2-1 that a 2009 state law that is supposed to stop stranger-originated life insurance (STOLI) transactions does not apply to policies written before the law took effect.
The judges, in California’s 4th Appellate District, were ruling on an appeal filed in connection with The Lincoln Life and Annuity Company of New York vs. Jonathan S. Berck, as Trustee, etc. (Court of Appeal Case Number D056373).
The Teren Life Insurance Policies
Jack Teren, a California resident, decided in early 2006 to buy a life insurance policy so that he could sell the beneficial interests, Justice Alex McDonald writes in an opinion for the 4th District majority.
A New York company that acquires and manages life insurance policies for investors helped Teren set up a trust and provide financing that he could use to pay for life insurance, McDonald says.
Teren then applied for two life insurance policies with $20 million in combined death benefits, and he falsely represented on the application that he had a net worth of $46.4 million and $3 million in annual income, McDonald says.
Teren’s actual net worth was less than $50,000, and his monthly income was about $1,333, McDonald says.
Underwriters at Lincoln Life, a unit of Lincoln Nation Corp., Radnor, Pa. (NYSE:LNC), received the application and flagged it for a STOLI review. Lincoln Life then had Teren and the trust’s initial trustee sign a form in May 2006 stating that Teren was buying the coverage for the benefit of his personal beneficiaries and that an outside party was not helping him pay for the coverage, McDonald says.
Teren’s son, the beneficiary of the trust that held the policies, transferred his interest in the trust to the New York company in exchange for $600,000, McDonald says.
The Trial Court Case
In May 2008, Lincoln filed a declaratory relief action against Teren and the trust in a state court in San Diego. Lincoln stated four causes of action, including a declaration that the policies were void ab initio, or that Lincoln was entitled to rescind the policies, because the policies were issued without “any legally cognizable insurable interest,” McDonald says.
Lincoln also sought a judicial declaration stating that the policies were void ab initio, or that Lincoln was entitled to rescind the policies, because Lincoln issued them in reliance on material misrepresentations, McDonald says.
A trial court judge granted judgment in favor of the trust and Teren on the cause of action involving misrepresentation, but the court found that the policies lacked insurable interest under California law and were avoid ab initio, McDonald says.