Following several courtroom losses, a federal judge in Pennsylvania has ruled against insurers and in favor of investors who bought several stranger-originated life insurance policies (STOLI).

The much-critiqued practice refers to clients who purchase a life insurance policy with its immediate resale value in mind. In a STOLI transaction, an insurance agent or other middleman typically encourages an elderly person to take out a policy that can then be sold to investors. Following the policy transfer, investors pay the premiums and collect the death benefit upon the death of the original policyholder.

The Pennsylvania case was brought to court by Principal Life Insurance Co., who alleged that a lender and a family trust who purchased three policies totaling $35 million in coverage hid an intent to sell those policies on the secondary market.

U.S. District Judge Christopher Conner ruled that policies sold on the secondary market are valid, so long as the original beneficiary has an “insurable interest” in the life of the insured. However, he did allow the insurer to move forward with claims seeking to void the policies based on alleged misrepresntation, as well as claims to retain the premiums to offset expenses that occurred in issuing the policies.

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