The Delaware Supreme Court considered the legality of certain Stranger Originated Life Insurance (STOLI) arrangements under Delaware law in two recent cases: The Lincoln National Life Insurance Company v. Joseph Schlanger 2006 Insurance Trust et al.; and PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust.
The cases were before the Delaware Supreme Court following the certification of three questions from the United States District Court for the District of Delaware. Both cases involved life insurers alleging that the challenged policies lacked an insurable interest and should be deemed void on policy grounds.
In The Lincoln National Life Insurance Company v. Joseph Schlanger 2006 Insurance Trust et al., the court was asked whether a life insurer could contest the validity of a life insurance policy after the expiration of the two-year contestability period mandated by Delaware law. The Delaware Supreme Court held that a life insurance policy which lacked an insurable interest is void on public policy grounds and therefore never comes into force. The contestability period is inapplicable in this context and a life insurer can challenge the policy even after the two-year period has run.
In PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, the Delaware Supreme Court considered two additional questions. First, the court examined whether Delaware’s insurable interest statutory requirement was violated by an insured who procured a life insurance policy with the intention of immediately transferring it to an entity without an insurable interest in such policy. The court held that an insured could sell the beneficial rights to the policy on the market. However, it must be a bona fide sale and the policy cannot have been taken out as cover for a wagering contract or have been part of a preconceived agreement under which the premium was to be paid by a third party.
Second, the court held that a trustee of a Delaware trust set up by an insured does have an insurable interest even if the insured’s intention at the time of the trust’s creation is for the beneficial interest of the trust to be assigned to a third party who has no insurable interest in the insured’s life. The court stressed that there is no insurable interest where the insured does not create and fund the trust. The court also stated that such an arrangement cannot be used as cover for an illegal wagering contract.
The Lincoln National Life Insurance Company v Joseph Schlanger 2006 Insurance Trust et al Supreme Court of Delaware 20 September 2011
PHL Variable Insurance Company v Price Dawe 2006 Insurance Trust Supreme Court of Delaware 20 September 2011