The war between life insurance carriers and STOLI promoters is in full force, and the tide may be turning in the carriers’ favor. In the latest battle, the Delaware Supreme Court reached a ruling on Sept. 20 in the case of Lincoln National Life Insurance Co. v. Schlanger that could dramatically affect stranger-originated life insurance (STOLI) schemes across the country.
In the Lincoln case, the policy at issue was a $6 million face-value policy issued by Lincoln on Joseph Schlanger’s life and owned by the Joseph Schlanger 2006 Insurance Trust.
Schlanger died just over two years after the policy was issued. The life insurance trust sought to collect the death benefit from Lincoln shortly thereafter. Lincoln sued in Delaware state court asking the court to find that the policy was void for lack of an insurable interest.
Lincoln claimed that the policy was never intended for legitimate insurance needs and that it was intended by the insured to be transferred to GIII, a private investing firm, using a multi-layer trust scheme to hide the true nature of the transaction from the carrier.
The Court’s Decision
The Delaware Supreme Court answered the following question in its ruling: “Can a life insurer contest the validity of a life insurance policy based on a lack of insurable interest after expiration of the two year contestability period set out in the policy?”
The policy at issue has an incontestability clause that, as required by Delaware law, limited the insurance company’s right to contest the validity of the policy to the two years immediately after the policy was issued.
The carriers argued that a policy issued without an insurable interest is void when it is issued because it amounts to a “wager on human life.” Because the contestability period is specified in the policy’s incontestability clause, it is a part of the policy. If the policy is void from issuance, no policy exists and thus the incontestability clause is never operative.