STOLI – Stranger-Originated Life Insurance – was the subject of the court’s decision in Estate of Malkin v. Wells Fargo Bank, NA, 2021 Westlaw 2149344 (11th Cir. May 27, 2021). Judge Beverly Martin authored the court’s opinion, which affirmed a Florida district court’s invalidation of the life insurance policy at issue but certified questions relating to defenses and a counterclaim to the Delaware Supreme Court.
Under Delaware law, applicable to the case, a life insurance policy that is procured or effected without an insurable interest is an unlawful wagering contract. The case arose from Ms. Malkin’s purchase of a $4 million insurance policy on her life. She financed the premium but eventually defaulted on the loan and decided to relinquish her rights to the policy to satisfy the debt. The policy, however, remained in effect and was eventually purchased by Berkshire Hathaway’s life insurance unit. Ms. Malkin eventually died and her estate sought to recover the policy proceeds on the theory that the policy was an illegal STOLI policy. The district court found that the policy lacked an insurable interest at inception because of the circumstances of its origination and was thus void under Delaware law. The estate accordingly was entitled to recover the proceeds under a Delaware statute which provides a cause of action for an insured or an insured’s estate to recover the benefits of a life insurance policy that lacks an insurable interest.
The Eleventh Circuit affirmed the STOLI characterization. Applying Del. Code Ann. tit. 18 §2704(a), the court concluded that the key issue was whether the owner of the policy had an insurable interest in the insured at the time the life insurance contract became effective. Subsequent transfer of the policy is not restricted. However, if a third party financially induces the insured to procure a life policy with the intention to immediately transfer the policy, this is a mere cover for a wager and therefore illegal.
In affirming, the court rejected the defendants’ argument that the insured’s subjective intent in procuring the policy matters for purposes of determining whether the policy is unlawful. The proper inquiry, the court held, examines who pays the policy premiums and whether that person meets insurable interest requirements. The existence of an agreement to immediately transfer ownership is not dispositive of whether there is an insurable interest. Here, however, considering the circumstances under which the policy was issued, it was undisputed that the insured never paid any premiums on the policy. The insured also played no role in procuring the policy, which was arranged by third parties, including Coventry Capital, LLC.
As to two defenses raised, however, the court concluded that certification to the Delaware Supreme Court would be best. Specifically, defendants Berkshire Hathaway and Wells Fargo raised a bona fide purchaser defense under the Uniform Commercial Code, section 8-502. Wells Fargo also claimed that it was not liable based on its limited role as a securities intermediary under UCC section 8-115. These defenses presented unsettled Delaware law questions warranting certification under a Delaware Supreme Court rule.
Regarding Berkshire Hathaway’s counterclaims for unjust enrichment (seeking return of paid premiums) and allegedly fraudulent and negligent misrepresentations by Ms. Malkin, the court found little Delaware authority governing the former and so added the issue to its list of certified questions. But the court vacated the district court’s Fed. R. Civ. P. 12(b)(6) dismissal of the misrepresentation counterclaims, concluding that the district court considered matters outside the pleadings without proper notice.