Due to a well-developed body of case law concerning stranger-originated life insurance (STOLI) transactions, an insurer facing such litigation often knows what to expect from both the opposition and the court. Recently decided cases involving stranger-originated annuity (STOA) transactions, however, indicate that such predictability does not necessarily extend to litigation involving these products.

Numerous federal courts have issued opinions concerning STOLI recently, with the majority finding in the insurer’s favor due to a lack of insurable interest. Even less insurerfriendly outcomes – for example, the federal district court in Minnesota recently dismissed an insurer’s cause of action for misrepresentation as barred by the incontestability clause – have been reasonably foreseeable in light of case law precedent and the state statutory provisions that were at issue.

The path forward for STOA cases, however, may be considerably murkier – largely because of the different statutes and principles applied to annuities. At least one federal court has found that an insurer will not prevail on an insurable interest argument, and the federal district court in Rhode Island recently granted a motion for judgment on the pleadings against an insurer because it had not properly invoked a termination clause. On the other hand, a New York court in a similar case recently found in favor of the insurer, dismissing the counterclaims against it and discharging the insurer from liability.