Life Settlements & STOLI A Case Law Update NAIC CLE PRESENTATION Mary Jo Hudson Bailey Cavalieri LLC

Transcription

1 Life Settlements & STOLI A Case Law Update 2013 NAIC CLE PRESENTATION Mary Jo Hudson Bailey Cavalieri LLC 1

2 Discussion Topics Background STOLI Insurable Interest & STOLI Incontestability, Insurable Interest & STOLI Impact of Amended Insurable Interest Laws Insurable Interest & Indentify of Third Party Investor Return of Premium & STOLI State Law Updates Discussion 2

3 STOLI Background Stranger Originated Life Insurance Transaction, or STOLI is: a practice or plan to initiate a life insurance policy for the benefit of a third party investor who, at the time of the policy origination, has no insurable interest in the insured. NCOIL Life Settlements Model Act 2(Y) STOLI prohibitions are based on long standing public policy prohibiting wagering on a human life. Grigsby v. Russell, 222 U.S. 149, 154, 32 S. Ct. 58, 56 L. Ed. 133 (1911) Current Decisions Did an insurable interest existed at inception of the policy? Where no insurable interest is present at inception, the policy is void ab initio Where there are concerns with the application process or source of premium funds, but an insurable interest was present, then policy may be voidable, with claims subject to the incontestability limitations of state insurance law and the policy terms Foundational Cases Addressing Insurable Interest and Incontestability Issues & STOLI PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1059 (Del.2011) Principal Life Insurance Company v. Lawrence Rucker 2007 Insurance Trust, 869 F. Supp. 2d 556 (D.Del.2012) 3

4 Insurable Interest & STOLI PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1059 (Del.2011) PHL Variable Insurance Company issued Price Dawe a $9 million Delaware life insurance policy, with benefits to be paid to a family trust allegedly established by Dawe PHL alleged that Dawe misrepresented his income and assets on application & that Dawe was compensated for serving as the insured GII, a private investing entity with no insurable interest in Dawe s life, purchased the beneficial interest in the policy from the Family Trust 2 months after issuance for over $370,000 GII did not file a change of ownership or change of beneficiary form with Phoenix; After Dawe s death, Phoenix received two competing claims for the death benefit. Delaware no anti STOLI law 4

5 Insurable Interest & STOLI PHL v. Price Dawe 3 Key Holdings Delaware Law: Permits insurer to make STOLI challenge after the expiration of contestability period (constitutional limit on wagering) Permits an insured to obtain policy on own life and immediately transfer policy to a person without an insurable interest in the insured s life Trustee of trust has insurable interest if trust was established by an insured with an insurable interest Key Analysis If policy purchased by someone without an insurable interest, policy is void from inception so incontestability does not apply DE law prohibits wagering contracts, so key analysis is to determine who paid premium, and assure that the insured is not being used as a cover for a wagering contract 5

6 Insurable Interest & STOLI Principal Life Insurance Company v. Lawrence Rucker 2007 Insurance Trust, 869 F. Supp. 2d 556 (D.Del.2012) Agent assisted insured with completing application, which misrepresented insured s income & net worth (listed $425,000 income vs $120,000 actual & listed net worth $4.85 million vs. actual significantly less) Insured worked with agent to establish trust; insured funded trust with $100 of own money then borrowed almost $80,000 from agent to pay first premium installment, and after investor, GII, purchased the policy, insured repaid agent Principal issued policy for $3.5M GII became sole beneficiary of policy 6

7 Insurable Interest & STOLI Principal v. Rucker Trust Holdings no STOLI, based on Price Dawe test If insured funds trust himself, then trust has insurable interest ($100 was enough) If insured finances premium, not impact insurable interest, even if insured intends to immediately settle policy Key Analysis To constitute a wager voiding any insurable interest must be both: (1) intent to immediately transfer the policy to third party, and (2) financial inducement by third party to procure life insurance on insured No evidence of financial inducement 7

8 Insurable Interest & STOLI Alice Kramer v. Phoenix Life Insurance Co., 15 N.Y.3d 539, 940 N.E.2d 535 (2010) As early as 2003, Arthur Kramer purchased over $56M in life insurance, with premium paid by investors; insurance used to fund trusts; Kramer received cash consideration in return for the trust beneficiaries assigning their beneficiary rights to stranger investors Kramer died in 2008 & his widow challenged investor claims to policies, that the policies has no insurable interest and were void Court ruled that the NY insurable interest law allowed an insured to purchase a policy for the benefit of anyone or any entity, without any limitation on who paid premium (prior to enactment of NY Life Settlements Model Act) Good example of why updated life settlement law is helpful to stop such transactions 8

9 Incontestability, Insurable Interest & STOLI Ohio National Life Assurance Corp. v. Douglas W. Davis, 2011 U.S. Dist. LEXIS (N.D. Ill., Jul. 6, 2011)(IL Law) In 2007, Defendants (agents & non agents) obtained over $5 million in life insurance policies on senior citizens who attended church meetings, misrepresenting financial & other information on applicants, and promising them payment in exchange for serving as insured Case was not barred by incontestability because insurable interest was lacking at inception of policies PHL Variable Insurance Company v. Charter Oak Trust, 2012 Conn. Super. LEXIS 1218 (May 4, 2012)(CT Law) Genuine issue of fact if insurable interest existed at inception of policy, because STOLI transaction alleged If insurable interest was lacking, then incontestability would not apply 9

10 Insurable Interest and Incontestability Impact of Amended Insurable Interest Law Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust, et al., 2012 U.S. Dist. LEXIS (Cent. Dist. CA 2012)(CA Law) Court found that insurable interest was present at policy issuance, and since claims made past 2 year incontestability period, policy was valid 2008 policy issuance ($8.5M) pre CA Ins. Code amendment Application misstated insured s income & net worth Transaction structured with family (insured, her husband as beneficiary and son as initial trustee) Family paid initial premium payment, after agent loaned them money for premium, then policy sold to investors within 2 months of issuance and family reimbursed agent 10

11 Insurable Interest and Incontestability Impact of Amended Insurable Interest Law After Barnes transaction occurred, CA amended its insurable interest law. California Amended Insurable Interest Law Ca Ins. Code (d)trusts and special purpose entities that are used to apply for and initiate the issuance of policies of insurance for investors, where one or more beneficiaries of those trusts or special purpose entities do not have an insurable interest in the life of the insured, violate the insurable interest laws and the prohibition against wagering on life. (e) Any device, scheme, or artifice designed to give the appearance of an insurable interest where there is no legitimate insurable interest violates the insurable interest laws. 11

12 Insurable Interest and Incontestability Impact of Amended CA Insurable Interest Law PHL Variable Insurance Co. v. Howard Abrams; Mayfair Strategies, LLC; and The Abrams Family Irrevocable Life Insurance Trust, by and through its trustee, H. Bruce Abbott, 2012 U.S. Dist. LEXIS 137 (Cent. Dist. CA 2012)(CA Law) $10M policy purchased after CA Ins. Code enacted. PHL alleged insured misrepresented income & net worth, and was working with third party investor at time of policy issuance Court found that PHL alleged a valid complaint for lack of insurable interest, based on revised CA statute Allegations that insured was a straw man for an investor purchase of life insurance would negate any insurable interest and void the policy Based on lack of insurable interest allegations, contestability would not affect PHL s ability to claim policy was void 12

13 Insurable Interest and Identity of Third Party Investor Courts are split as to whether or not insurance company must identify the third party investor who has allegedly funded a policy from the first premium dollar Sun Life Assurance Co. of Canada v. Berck, 719 F. Supp. 2d 410 (D. Del. 2010) must be initially identified PHL Variable Insurance Co. v. Howard Abrams; Mayfair Strategies, LLC; and The Abrams Family Irrevocable Life Insurance Trust, by and through its trustee, H. Bruce Abbott, 2012 U.S. Dist. LEXIS 137 (Cent. Dist. CA 2012) not necessary to initially indentify third party investor 13

14 Return of Premium & STOLI Rescission not available when contract is void Consequential or special damages may also be available PHL Variable Insurance Co. v. The P. Bowie 2008 Irrevocable Trust, 2013 U.S. App. LEXIS 9638 (1st Cir. May 13, 2013)(insurer permitted to retain premium as special damages due to fraud perpetrated on it) The Penn Mutual Life Insurance Company v. Greatbanc Trust Company, 887 F. Supp. 2d 822 (N.D. Ill. 2012)(no rescission, but unjust enrichment might be allowed) PHL Variable Insurance Company v. Abrams, 2012 U.S. Dist. LEXIS 137 (S.D. Cal. 2012)(CA law permitted insurer to keep return premium as consequential damage) 14

15 Summary of Status of State Law Updates NAIC Model 5 Year Waiting Period for Deals Involving Non recourse Premium Financing Life expectancy evaluation Guarantee of settlement NCOIL Model 2 Year Waiting Period Defines STOLI State variations combination of NCOIL and NAIC; amendments to insurable interest laws; further limits on premium financing Regulation Patchwork 5 year holding 9 states 4 year holding 1 state 2 year holding 21 states Variation without holding period 3 states Pre 2008 laws 11 states Nothing 5 states 15

16 Discussion Both Models Focus on: Keeping bad actors out of market (licensure & broker oversight, guidelines for contracts and disclosures to viators) Front end disclosures, monitoring market participants & some limits on nonresource premium financing Neither Model: Is structured to addresses circumstances when death claim is made & STOLI appears to be present Eliminates clear red flags from front end of transaction (e.g., non recourse premium financing) Suggested Lessons Learned from Recent Cases Further limits on non recourse premium financing Update incontestability laws to clarify inapplicability if certain elements of STOLI deals are present Update insurable interest definitions to avoid straw man situations with individuals & trusts Agents, applications and complexity how to avoid abuses without making transactions more complex 16

17 Questions? Mary Jo Hudson Bailey Cavalieri LLC 10 W. Broad St., Suite 2100 Columbus, Ohio