Last week, a federal district court in New York issued a ruling in Life Product Clearing LLC v. Angel, 07 Civ. 475 (S.D.N.Y) (2008), that may have implications for stranger owned/ initiated life insurance (“STOLI”) transactions.
In Life Product Clearing LLC, the insured, Leon Lobel, a butcher, created the Leon Lobel Insurance Trust (“Trust”), designating himself as the beneficiary. On the same day, Lobel procured a $10 million life insurance policy, with an initial premium of $572,000, naming the Trust as the beneficiary. Six days after policy issuance, Lobel assigned his rights in the Trust to the plaintiff, Life Products Clearing LLC (“LPC”) for a sum of $300,000, and died shortly thereafter. The insurance company disbursed the face value plus interest to the Trust.
LPC brought suit against the insured’s daughter and executrix, Linda Angel, seeking judgment on the pleadings declaring its beneficial rights with respect to the Trust, and subsequently, with respect to the life insurance proceeds under the policy. In response, Angel counterclaimed, alleging that the issued life insurance policy violates public policy against “wagering” on human lives, as her father procured the insurance with the intent to effectuate a transfer to a third party – LPC – who did not have an interest in the insured’s continued life (i.e. an insurable interest).
In analyzing the case, the Court cites Warnock v. Davis, 104 U.S. 775 (1881), and Grigsby v. Russell, 222 U.S. 149 (1911), amongst other authorities, to acknowledge a general “disdain” for policies by which the owner or beneficiary has an interest in the insured’s death rather than life. However, it also cites N.Y. Ins. Law § 3205(b)(1) to note that an individual who procures insurance on his or her “own initiative” is not precluded from immediately transferring or assigning the policy to a person without an insurable interest, provided the insured procured the policy in good faith and that the transaction was not a mere “disguise” for a “wager” contract. The Court then considers the factual allegations to conclude that Angel could make a "plausible" argument that Lobel intended to transfer the policy prior to procurement, thus violating the prohibition against “wager” contracts. The Court denied LPC’s request for judgment on the pleadings at this stage in the litigation. It is clear from the Court's discussion that the factual particulars are important in determining whether a STOLI transaction is a "wager" contract.
We will continue to monitor this case at InsureReinsure.com to the extent it is reported.