Questions Regarding Whether “Insurable Interest” for Stranger Orginated Life Insurance Policy (“STOLI”) Exists Where Intent to Sell the Policy Exists at the Time it was Purchased

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AMERICAN GENERAL LIFE INSURANCE v. HELEN GOLDSTEIN (District Court, Delaware  September 30, 2010)

The insured was approached by a "friend" regarding a "fabulous deal":  in exchange for six-figures, the insured would simply have to submit to a medical examination and apply for a life insurance policy.  The insured set up a trust, naming her husband as beneficiary.  She applied for a life insurance policy, listing her unearned income as $200,000 per annum, and her net worth as between $5-6 million.   In fact, her net worth was significantly less and her income about one-half of the claimed amount. She, the trust and the agent all indicated that the policy was being purchased for estate planning purposes.  The agent also signed a statement asserting that the policy was not being issued for purposes of sale to a third-party.

After questioning the insured's income and assets, and being assured by its agent that the insured was liquidating investments to meet the premium, a policy was issued.  Less than a month later, the insured's husband sold the policy to a third-party investor for over $100,000.   Twenty-one days after that, the third-party sold the policy to a third entity for nearly $270,000. 

 

In a routine follow-up investigation after the policy was issued, the insurer discovered the misrepresentations.  It sued for recission of the policy, claiming among other things that the policy was void ab initio because there beneficiary had no insurable interest at the time the policy was issued. The case presented an issue of first impression under Delaware law:  is a STOLI policy voidable from inception if the intent in purchasing the policy was for a beneficiary with an insurable interest to transfer it to a stranger?

 

An insurance policy is valid if there is an insurable interest at the time of issuance.  The policy initially named a trust for the benefit of the insured's husband as beneficiary, i.e. there was an insurable interest at the time the policy was issued.  The federal court found that allegations alleging a unilateral intent to transfer the policy due to its immediate sale was sufficient to allege lack of insurable interest.

The insurer alleged that (1) the stranger paid the premiums; (2) the trust was never intended to maintain a controlling or beneficial ownership interest in the policy; (3) material misrepresentations were made on the application regarding the insured's income, net worth and purpose for the Policy in order to conceal its STOLI nature; (4) the husband sold the policy less than a month after its issuance; (5) an interview with the insured's daughter confirmed that insured's income, net worth, and reason for applying for the policy were misrepresented; and (6) contrary to the representations made to plaintiff, the insured did not liquidate her assets to pay the premiums for the Policy.

The court founds that the complaint sufficiently alleged circumstances demonstrating that no insurable interest existed in the policy at the time it was issued, even though the insured's husband was the beneficiary at the time of issuance.

For a copy of the decision click here

Sarah Delaney and Daniel Gerber

https://www.goldbergsegalla.com/attorneys/Delaney.html

https://www.goldbergsegalla.com/attorneys/Gerber.html