The New Jersey Supreme Court recently condemned stranger-originated life insurance (STOLI) transactions as void ab initio human life wagers in a case that the life insurance and life settlement industries watched closely. The unanimous court ruled that STOLI transactions run afoul of New Jersey’s insurable interest statute — and they violate New Jersey’s Constitution, anti-gambling statutes, and public policy against wagering. Sun Life Assur. Co. v. Wells Fargo Bank, N.A., 238 N.J. 157 (2019) (Bergman).
The $5 million policy at issue, insuring the life of Nancy Bergman, was applied for and initially owned by a trust set up in the insured’s name with the insured’s grandson as trustee and beneficiary of the trust, and with the premiums funded by stranger investors. The U.S. District Court for the District of New Jersey ruled that (i) the policy was a void ab initio wagering policy under New Jersey; (ii) no death benefit was payable; and (iii) premiums paid by the subsequent policy owner, which acquired the policy on the secondary market and was not involved in the origination of the policy, were to be refunded.
On appeal, the U.S. Court of Appeals for the Third Circuit certified two questions to the New Jersey Supreme Court. In addition to the parties’ briefs, the New Jersey Department of Banking and Insurance and two life settlement industry organizations filed amicus briefs on the certified questions.
The first certified question was, “Does a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate the public policy of New Jersey, and if so, is that policy void ab initio?” The state Supreme Court answered “both parts of the first certified question in the affirmative.” The court noted that governments have expressed concerns about human life wagering for more than 500 years; even the Venetian Senate of 1419 “outlawed wagers on the Pope’s life and nullified speculative bets about ‘how long the reigning pope would live.’”
In support of its ruling that human life wagers are illegal, the court relied on New Jersey’s insurable interest statute, as well as its general constitutional, statutory, and public policy prohibitions against wagering. The court also recognized that, “[i]f a third party without an insurable interest procures or causes an insurance policy to be procured in a way that feigns compliance with the insurable interest requirement, the policy is a cover for a wager on the life of another and violates New Jersey’s public policy.” The court distinguished illegal STOLI from legal life settlements, where an insured (or someone with an insurable interest in the insured’s life) purchases a policy for a legitimate insurance purpose using their own funds and later sells the policy on the secondary market to investors when they no longer have a financial need for the policy. In contrast, “[g]enerally, an investor funds a STOLI policy from the outset, which makes it possible to obtain a policy with a high face value.”
The court also indicated that other types of transactions may constitute illegal STOLI. For example, a prohibited STOLI transaction may occur where an insured’s child, with the “inten[t] to do so from the start,” procures a policy on their mother’s life with their own funds and shortly thereafter transfers the policy or beneficial interest in the policy to “a group of strangers in exchange for full reimbursement and some compensation.” The court explained that “[a] number of considerations could affect the validity of the policy: the nature and timing of any discussions between the purchaser and the strangers; the reasons for the transfer; and the amount of time the policy was held; among other factors.”
The court further held that the contestable provision — otherwise requiring policy challenges within two years — does not apply to STOLI policies because they are void ab initio and, consequently, the provision never comes into existence.
The second certified question was, “If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?” In response to this question, the court answered that “a party may be entitled to a refund of premium payments it made on [a void STOLI] policy, depending upon the circumstances.” The court explained that, in making this determination, courts should balance “relevant equitable factors” including: “the level of the party’s culpability”; “its participation in or knowledge of the illicit scheme”; and “its failure to notice red flags.”
To date, the legality or illegality of STOLI has only been addressed by the highest courts of four states: New Jersey, Delaware, New York, and Florida. Courts in states that have yet to address this issue are likely to look to Bergman for guidance on how to resolve this issue under their respective states’ laws.
Click here to review a copy of the Bergman decision.