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Penn Mutual Life Insurance Company sued two insurance agents, Kevin Bechtel and Steven Brasner, alleging they unlawfully initiated a “stranger originated life insurance” or “STOLI” policy. Penn Mutual claimed Bechtel and Brasner contacted a seventy-one-year-old woman, encouraged her to participate in a STOLI scheme, and then submitted an “Agent's Underwriting Report” which falsely stated the policy was not intended for sale in the secondary market and the premiums would not be paid with borrowed funds. Brasner was to receive 60% of the policy’s sales commission. Bechtel was to receive 40% of the commission

Bechtel moved to dismiss the case, arguing that the Illinois federal court did not have jurisdiction over him because he did not: (1) do business in Illinois, (2) speak with the woman insured by the policy while he was in Illinois, or (3) sign the underwriting report. The Court was not persuaded. It denied Bechtel’s motion and noted he carefully crafted his statements to leave the misleading impression that he did not engage in any conduct with regard to the policy, but did not actually deny any of the essential claims against him. The Court concluded it had jurisdiction because Bechtel had an Illinois insurance agent’s license and was therefore subject to suit in Illinois. Bechtel also asked the Court to dismiss the case because Penn Mutual had not “stated a claim” against him. The Court refused, stating Bechtel’s arguments “merit little discussion.” It denied the motion on a procedural matter and also restated the obvious sufficiency of Penn Mutual’s allegations.  

Notably, Bechtel’s co-defendant Brasner has been accused in other civil actions alleging the same type of STOLI scheme, including suits filed by Axa Equitable Life Insurance Company and West Coast Life Insurance Company. He was also indicted in Florida on charges of grand theft, insurance fraud, creating an organized scheme to defraud, and aggravated white-collar crime for allegedly inflating the income and net worth of several senior citizens on life insurance applications to foster STOLI transactions.

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     Near this time every year, I am reminded of this story.  And it demonstrates why insurance regulators and policy makers who are currently analyzing regulations on life settlements and “stranger owned life insurance” should consider the impact of human nature on those insurance transactions.  Insurance products are frequently abused by profiteers and life insurance policies pose a significant risk in the hands of the unscrupulous. There is no better example of this abuse than Ronald Clark O’Bryan.

     Ronald Clark O’Bryan had serious personal financial problems. He earned $150 per week, was eight months behind on his car payments and had total debts up to $100,000. In January of 1974, over his wife’s objection, he took out $10,000 life insurance policies on both of his two children. Later that year, over the objection of his life insurance agent, he bought additional $20,000 life insurance policies on his son and daughter.  By mid-October, both of his children were covered by several life insurance policies but O’Bryan had virtually no coverage on himself. It was also at this time that O’Bryan told a creditor that he expected to receive a large sum of money before the end of the year and extended his debt obligations into 1975.

     In August of 1974, O’Bryan, who worked as an optometrist, asked his manager for cyanide to clean gold glass frames—an unusual request considering that cyanide had not been used in the industry for over twenty years.  He also talked about the commercial uses of cyanide with his co-workers, as well as what dosages of the chemical would be deadly. After his request for the cyanide was denied, O’Bryan asked a friend (and employee of Arco Chemical Company) where he could buy cyanide and, “out of curiosity,” what doses would be fatal to humans. He finally asked how one could detect the presence of chemicals in a dead body. 

     Two weeks before Halloween, O’Bryan bought costumes for his children and appeared excited about taking them “trick or treating” even though he had never been excited about it before. A week later, he invited a friend’s family to dinner on Halloween night and suggested that the children from both families “trick or treat” together. 

     On Halloween, the families met for dinner as planned and then went “trick or treating.”  The group approached a house, only to find no one home. The children ran to the next home, but O’Bryan remained behind in the darkness for about thirty seconds.  He quickly caught up with the group holding “giant pixy styx” and exclaimed that the "rich neighbors" were handing out expensive candy. 

     When they returned home, O’Bryan’s son Timothy asked for one of the pixy styx. He took two gulps of the powder, complained that it tasted bad and began vomiting. He went into convulsions and was taken to the hospital where he died within an hour. Fluids taken from his stomach contained 16 milligrams of cyanide.  The level of cyanide in his blood was .4 milligrams.  A fatal human dose of cyanide is a blood level between .2 and .3 milligrams.

     On November 1st, O’Bryan met with the funeral director and learned that a separate death certificate was required to make a claim under each policy on Timothy’s life. He ordered six death certificates. He also described how he intended to use the insurance policy benefits and said the didn't see how the police could “pin” the death on anyone.

     O’Bryan was mistaken. The police did, in fact, pin Timothy’s death on him. O’Bryan was tried, convicted, and sentenced to death. He was executed by lethal injection on March 31, 1984.

     The story of Ronald Clark O’Bryan is horrific. It is almost impossible to comprehend how a person could murder his or her own child for life insurance proceeds. But examples of life insurance abuse, often equally horrific, are legion. And such examples speak volumes about how basic human nature, when presented with profiteering opportunities through life insurance, can produce unimaginable results. 

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     Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment. 

     In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.

     One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.

     To learn more about this topic, please contact any of the firm's partners at mmellp.com.

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