Common Law Wins Out In STOLI Case

By Cyril Tuohy
InsuranceNewsNet

An appeals court has reversed a decision in a stranger-owned life insurance (STOLI) policy case after it found a lower court had failed to apply Minnesota common law in the dispute over a $5 million policy.

In PHL Variable Insurance Co. v. Bank of Utah, PHL had sought to void the policy because of a lack of an insurable interest. Lacking such an interest, the carrier argued the policy was therefore not legally binding.

The U.S. Court of Appeals for the Eighth Circuit, however, found that the U.S. District Court for the District of Minnesota erred in finding that the insurer could challenge the validity of the policy.

“Unlike the district court, we conclude that neither PHL contention is supported by Supreme Court of Minnesota decisions applying the applicable Minnesota common law,” wrote U.S. Circuit Judge James B. Loken.

In its arguments, PHL, a subsidiary of Phoenix Companies, relied on cases from other jurisdictions when it moved to block paying death benefits to the Bank of Utah, which owned the policy on the life of 74-year-old retiree William Close.

The case is governed solely by Minnesota law. The principle that the Close policy was invalid from the outset “urged by PHL and accepted without discussion by the district court is not consistent with Minnesota common law,” Judge Loken wrote in a 15-page ruling handed down last week.

In Minnesota, “when a person purchases insurance on his own life and later assigns it to a stranger, the contracts between the insured and insurer is valid unless voidable for fraud or other defenses that are subject to the incontestability bar,” the judge wrote

As it turned out, this case did involve fraud, as do so many other STOLI disputes.

Rescinding the policy on account of fraud — a policy on which the insurer had collected premiums for more than four years — was invalidated by the two-year incontestability provision in Minnesota law, the court also found.

The case began in 2006 when Close applied for a $5 million life insurance policy, more than he could afford.

Close, with the help of agent Brad Friedman, falsely claimed a net worth of 10 times his actual net worth.

The policy, owned by an irrevocable trust with Mrs. Close named as the trust beneficiary, was issued in 2007 with the help of a two-year $300,225 premium financing loan.

Court documents indicate that Close was told the policy would be worth $1.3 million in two years, after which the policy became incontestable under Minnesota law, and that he would be able to sell the policy for $500,000, or 10 percent of the face value.

When the secondary market crashed in 2009, Close couldn’t find a buyer and surrendered the contract to financing intermediaries, which themselves went bankrupt.

The policy ended up in the hands of Bank of Utah, which filed a death benefit claim in January 2012, shortly after Close died of lung cancer.

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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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].