ACLI Blasts New York Court Decision Allowing STOLI Transactions

The New York Court of Appeals has ruled that someone can buy an insurance policy on their own life and immediately transfer it to others without an insurable interest in that person's life.

The American Council of Life Insurers blasted the decision on stranger-owned life insurance transactions, saying it "runs counter to three centuries of English and U.S. court rulings that purchasing life insurance solely as a vehicle for wagering on human life violates public policy and should be prohibited."

The public policy "has been reinforced in the 29 states across the nation that have enacted laws to deter stranger-originated life insurance," the group said a statement. ACLI "will continue to work in the remaining states for legislation that would deter STOLI abuses and protect the social purpose of life insurance, which is financial protection."

The litigation involved several insurance policies obtained by Arthur Kramer, a prominent New York attorney, on his own life, allegedly with the intent of immediately assigning the beneficial interests to investors who lacked an insurable interest in his life, according to the decision. He died in January 2008.

Four months later, Alice Kramer, his widow, sued in New York federal district court, seeking to have the death benefits from the policies paid to her.

The case is titled Alice Kramer vs. Phoenix Life Insurance Co. and Lincoln Life & Annuity Co. of New York. But other parties in the underlying case include trustees and various brokers and investors, who filed third-party complaints and counter-claims.

The policies, Alice Kramer alleged, which collectively provide about $56.2 million in coverage, violate New York's insurable interest rule because her husband obtained them without intending to provide insurance for himself or anyone with an insurable interest in Arthur's life.

The principal of Lockwood Pension Services, allegedly approached Arthur about participating in a STOLI transaction in 2003. They started the alleged scheme in June 2005, when Arthur established the first of two insurance trusts that named two of his adult children as beneficiaries.

After Arthur died, Alice refused to turn over copies of the death certificate to investors holding the interests in the policies and she sued, according to the decision.

Phoenix Life and Lincoln Life sued Lockwood, wanting a judgment that the policies are void and that they aren't required to pay the policy proceeds to anyone.

The district court allowed an appeal to the Second Circuit U.S. Court of Appeals, which certified a question to the New York high court: The question was whether New York insurance law "prohibit an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured's life, if the insured did not ever intend to provide insurance protection for a person with an insurable interest in the insured's life?"

Senior Associate Judge Carmen Beauchamp Ciparick ruled the answer is no.

"In light of the overwhelming textual and historical evidence that the legislature intended to allow the immediate assignment of a policy by an insured to one lacking an insurable interest, we are not persuaded by plaintiff and the insurers' argument."

A spokeswoman for Phoenix Cos. Inc., parent of Phoenix Life, said in an e-mail the company is "disappointed with the decision and are still evaluating it."

In addition to the ACLI, the Life Insurance Settlement Association and the Institutional Life Markets Association also filed friend-of -the-court briefs.

Associate Judge Robert S. Smith dissented, writing that he would answer the question with "a qualified yes.

"My view of New York law is that where, as in this case, an insured purchases a policy on his own life for no other purpose than to facilitate a wager by someone with no insurable interest, the transaction is unlawful."

(By Fran Matso Lysiak, senior associate editor, BestWeek: )