Contingent Fee Business Litigation Blog

     Litigation involving “stranger-owned life insurance” or “STOLI” is on the rise as insurance companies take aggressive legal action to rescind policies that they perceive to be involved in STOLI transactions.  These cases may be the beginning of a cottage industry of litigation concerning alleged STOLI arrangements.

     In January, a New Jersey federal court ruled that Lincoln National Life Insurance Company could seek rescission of a $3 million policy allegedly used for a STOLI transaction. In February, Hartford Life and Annuity Company announced that it was nearing a settlement of a case in a Texas federal court involving its rescission of a $5,900,000 policy. And on March 31, 2009, a Florida federal court ruled that Axa Equitable Life’s claim to rescind five policies—valued at approximately $73,000,000—would be decided partially in arbitration.

     The cases have two characteristics in common. First, the insurers base their claim for policy rescission on alleged misrepresentations in the policy application—usually that the insured person falsely stated that he or she did not intend to sell the policy in a secondary market transaction. Second, the policies involved carry a multi-million dollar death benefit. Based on the vast market for STOLI policy transactions, future cases involving these characteristics appear imminent.