Federal courts in New York, California and Florida have all recently issued opinions in litigation concerning stranger-originated life insurance (STOLI). First, a positive result: the Eastern District of New York, adopting a magistrate’s recommendation, denied the defendant trust’s motion for summary judgment because the insurer’s complaint had been filed within the policy’s contestability period. The court declined to adopt dicta in the magistrate’s opinion concluding that challenges to a policy based on a lack of insurable interest could not be made outside the contestability period, as it was not necessary to the opinion rendered.
On the other hand, in California (see Expect Focus Vol. I, Winter 2012), the Central District recently granted a defendant trust’s motion for summary judgment against the insurer, who sought a declaratory judgment that the policy was void. Even though the court found that the insured intended to sell the life insurance policy prior to its purchase, established a trust to facilitate the sale, and lied about her net worth and intent to transfer the policy on the application, the court decided that, when the policy was issued, the trust had an insurable interest and afterwards the policy could be freely transferred.
Additionally, a jury in the Southern District of Florida found in favor of an alleged STOLI scheme participant who sued to recover benefits under the policy. The jury concluded that, while the trust knowingly committed fraud and civil conspiracy with the intent that the insurer rely on its fraudulent statements, the insurer did not rely on the misrepresentation and was not harmed by acts done in furtherance of the conspiracy. The court entered final judgment for the trust and awarded it the $5 million death benefit.