By Cyril Tuohy
Does Florida’s interest in forbidding the issuance of insurance policies bought with no insurable interest supersede the state’s interest in requiring carriers to determine whether a particular policy is subject to that or any other challenge?
That is a question for the Florida Supreme Court to decide, because for the moment two contradictory laws support both sides of the argument.
One Florida law, dating from 2008, supports an insurance company’s effort to void a stranger-originated life insurance (STOLI) policy because, the insurance company contends, there was no insurable interest when the policy originally was issued.
Another Florida law dating back to 1982 requires all insurance policies to include a clause providing that the policy is incontestable after it has been “in force” for two years.
“Thus, the question before this Court is which statue controls,” wrote U.S. Circuit Judge Julie Carnes of the 11th U.S. Circuit Court of Appeals based in Atlanta.
There are arguments to be made on both sides, Carnes wrote.
Since Florida has no precedent “on whether the incontestability clause can bar a challenge to the validity of an insurance policy lacking the necessary insurable interest at the time of issuance,” the Florida Supreme Court must resolve the question.
The case of dueling interpretations of the Sunshine State’s STOLI laws dates back to 2005.
That was when Arlene and Richard Berger were enticed into a STOLI scheme by insurance agent Stephen Brasner. He arranged to finance premium payments and submit fraudulent documentation listing Arlene Berger’s net worth at $15.9 million and annual income of $245,000.
On April 27, 2006, Prudential Life (Pruco) wrote a $10 million insurance policy on Berger’s life, naming her husband as beneficiary.
Brasner placed the policy in an irrevocable trust, which named Wilmington Trust as trustee and Richard Berger as co-trustee and beneficial owner of the policy. As part of the deal, Arlene Berger also granted the premium financing company power of attorney.
When the Bergers reneged on the arrangement, ownership of the policy was eventually sold to Wells Fargo after Arlene Berger relinquished her interest under the policy.
In 2010, four years after issuing the policy, Pruco sued Wells Fargo saying the Berger policy was void because there was no insurable interest as required by state law.
A district court agreed and ruled in favor of Pruco on the grounds that the Berger policy was in violation of Florida’s insured-interest statute.
A separate yet similar case, which also involved Pruco, was unfolding at about the same time and under similar circumstances.
In that case, dating back to September 2005, octogenarian Rosalind Guild was persuaded to participate in a $10 million STOLI scheme when insurance agent Gary Richardson lured her with the promise of free life insurance, according to court documents.
Richardson created an irrevocable trust to hold two Guild policies, each for $5 million, listing Guild’s daughter and the trust as primary and contingent beneficiaries, respectively.
Under terms of the deal, Guild’s daughter would receive no death benefit and any beneficial interest would be sold to an investor with no insurable interest in Guild’s life, according to details outlined in court documents.
Pruco issued the policies after Richardson submitted fraudulent financial statements detailing Guild’s net worth as $19.2 million and annual income of $345,000. Over the next few years, the $2 million in premiums were paid for by a financing company.
In 2008, following the sale of the beneficial interest in the policies to an investor, Pruco changed the ownership and beneficiary of the policies from the Guild Trust to U.S. Bank North America.
Pruco sued U.S. Bank in December 2012, seven years after issuing the two Guild policies, claiming that the two policies were void.
A district court in that case found against Pruco and in favor of U.S. Bank because the insurer had let the two-year Florida statute of limitations on contesting a policy run out, regardless of basis of the challenge as to whether the policy was valid or not.
“That the two district courts in the consolidated appeal before us reached different conclusions on the same question suggest that the answer is not clear cut, and this has proven to be the case,” Carnes wrote.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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