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The Supreme Court of New Jersey has ruled that stranger-originated life insurance (STOLI) policies are against public policy and are void ab initio. The court also ruled in the June 4 decision that a party to a STOLI policy may be entitled to a refund of premium payments depending on factors including its participation in and knowledge of the original illicit scheme.
As the court explained, in April 2007, Sun Life Assurance Company of Canada received an application for a $5 million insurance policy on the life of Nancy Bergman. The application listed the Nancy Bergman Irrevocable Trust dated 4/6/2007 as the sole owner and beneficiary of the policy. Bergman signed the application as the grantor of the trust, and her grandson, Nachman Bergman, signed as trustee.
The trust had four additional members. All of them were investors, and all were strangers to Bergman. The investors deposited money into the trust account to pay most if not all of the policy’s premiums. The original trust agreement provided that any proceeds of the policy would be paid to Bergman.
Bergman was a retired middle school teacher. Sun Life received an inspection report that listed her annual income as more than $600,000 and her overall net worth at $9.235 million. In reality, her income was about $3,000 a month from Social Security and a pension, and her estate was later valued at between $100,000 and $250,000.
Although Bergman represented that she had no other life insurance policies, five policies were taken out on her life in 2007 from various insurance companies, including Sun Life, for a total of $37 million.
Sun Life issued the $5 million policy on July 13, 2007. At the time, the trust was the sole owner and beneficiary. The policy had an incontestability clause that barred Sun Life from challenging the policy – other than for non-payment of premiums – after it had been “in force during the lifetime of the Insured” for two years.
On August 21, 2007, about five weeks after the policy was issued, Bergman resigned as trustee and appointed the four investors as successor co-trustees. The trust agreement was amended so that most of the policy’s benefits would go to the investors; they also were empowered to sell the policy on their own.
More than two years later, in December 2009, the trust sold the policy to SLG Life Settlements, LLC, for $700,000. The investors received nearly all of the proceeds from the sale. Afterward, a company named LTAP acquired the policy for a brief period, and Wells Fargo Bank, N.A., obtained it in a bankruptcy settlement in or about 2011. Wells Fargo continued to pay the premiums. It claimed that it paid $1,928,726 through a combination of direct premium payments and loans to LTAP to pay premiums.
After Bergman passed away in 2014 at age 89, Wells Fargo sought to collect the policy’s death benefit. Sun Life investigated the claim and declined to pay.
Instead, Sun Life filed an action in federal court and sought a declaratory judgment that the policy was void ab initio as part of a STOLI scheme. Wells Fargo counterclaimed for breach of contract and sought the policy’s $5 million face value; if the court voided the policy, Wells Fargo sought a refund of the premiums it paid and funded.
The district court partially granted Sun Life’s motion for summary judgment. The district court found that New Jersey law applied and concluded “that this was a STOLI transaction lacking insurable interest in violation of [the State’s] public policy. . . . As such, it should be declared void ab initio.” The district court also granted Wells Fargo’s motion to recover its premium payments. The district court reasoned that “Wells Fargo is not to blame for the fraud here” and that “[a]llowing Sun Life to retain the premiums would be a windfall to the company.”
Wells Fargo appealed the determination that the policy was void, and Sun Life cross-appealed the order to refund the premiums.
The 3rd U.S. Circuit Court of Appeals noted that “[n]o New Jersey state court has considered” the issues at the heart of this case: “whether STOLI arrangements violate the public policy of New Jersey, and if they do, whether the affected insurance policies are rendered void ab initio.” The circuit court also observed that “[i]f the [p]olicy is declared void ab initio, then the nature of the remedy available to the parties is another unresolved question of New Jersey law.”