What's Happening?
A federal appeals court has upheld a lower court's decision to void two life insurance policies with a combined face value of $8 million, ruling them as illegal stranger-originated life insurance (STOLI) policies under New Jersey law. The Court of Appeals
for the Third Circuit affirmed the summary judgment in favor of Lincoln National Life Insurance Co., rejecting claims by Retirement Value LLC, which sought to collect death benefits after the insured, Haya Majerovic, passed away in 2019. The policies, originally issued in 2007 by Jefferson Pilot Life Insurance Co., were purchased by Retirement Value after several transfers. Lincoln National Life Insurance Co. filed a lawsuit in 2021, arguing that the policies were void from inception due to a lack of valid insurable interest and were structured to benefit investors with no relationship to the insured. The court determined that New Jersey law applied, as the policies were applied for and issued in New Jersey, and concluded that the arrangements were classic STOLI, violating public policy.
Why It's Important?
This ruling is significant as it reinforces the legal stance against STOLI policies, which are increasingly scrutinized as illegal wagering contracts lacking a legitimate insurable interest. The decision represents a victory for insurers like Lincoln National Life Insurance Co., who challenge investor-backed life insurance arrangements. Such rulings help maintain the integrity of the life insurance industry by ensuring that policies are not used as speculative investment vehicles by parties with no insurable interest. The outcome also highlights the importance of state laws in determining the validity of insurance contracts, as seen in the application of New Jersey law over New York law in this case. The decision may deter future attempts to exploit life insurance policies for financial gain without a legitimate insurable interest.
What's Next?
The ruling leaves intact a 2024 decision by District Judge Robert Kirsch, which found the policies to be STOLI arrangements and granted summary judgment to Lincoln. Retirement Value LLC's challenge to the dismissal of its claim for reimbursement of premiums paid was also rejected, as the argument was not adequately raised in district court proceedings. This decision may prompt other insurers to pursue similar legal actions against STOLI policies, potentially leading to further legal precedents that reinforce the prohibition of such arrangements. Additionally, the ruling may influence legislative efforts to tighten regulations around life insurance policies to prevent their misuse as investment tools.
