U.S. appeals court labels STOLI transactions "insurance fraud"
Liberte Capital Group advertised itself as a “viatical investment company.” Its stated business was to buy existing life insurance policies from terminally-ill or elderly persons with a lump-sum payment and then receive the policy benefits when they died. But in reality, Liberte was a fraud. Its chief executive was convicted of two counts of conspiracy and 155 counts of money laundering for buying life insurance policies from others who, with his assistance and through false statements, acquired the policies after receiving diagnoses of terminal illnesses. The owner of Liberte’s escrow agent was also convicted of multiple counts of fraud and tax violations relating to the transactions and sued for embezzling the company’s assets.
On May 28, 2009, the United States Court of Appeals for the Sixth Circuit made the most recent examination of Liberte’s affairs after Liberte’s receiver sued for rescission of three policies and return of the premiums. The Court’s opinion contains the unexpected and remarkable statement that:
The viators’ purchases of the insurance policies with the intent to re-sell them to Liberte immediately constituted insurance fraud, because the viators never intended to insure their own lives.
It would not have been remarkable for the Sixth Circuit to label the policies fraudulently-procured. The false statements in policy applications were legion and well-litigated. The Court’s statement was remarkable because it focused on the insured person’s intent to immediately sell the policy to an investor.
STOLI is an acronym for “stranger-owned life insurance” or “speculator-owned life insurance.” It is a shorthand reference for transactions in which someone buys insurance on his own life only to sell it to a third party, often an unrelated investor, once the policy’s contestability period expires. For those who participate in STOLI transactions, the Court’s opinion is noteworthy. Perhaps inadvertently, perhaps not, the Sixth Circuit’s opinion classifies the basic STOLI transaction as “insurance fraud.”