Contingent Fee Business Litigation Blog : Houston Patent & Contingent Fee Business Litigation Lawyer & Attorney : McClanahan Myers Espey Law Firm : Intellectual Property, Commercial Litigation

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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       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.” 

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     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. 

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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 for the purpose of selling it to a third party, often an unrelated investor, once the policy’s contestability period has expired. A recent ruling by a federal court in New Jersey, however, may undermine the security of such investments.

In a STOLI transaction, the insured person typically gets cash for the policy and the investor receives the right to the policy benefits when the insured person dies. Life insurers loathe the transactions because investors are unlikely to let STOLI policies lapse, meaning that insurers will have to pay death benefits on a greater percentage of insurance contracts than they have become accustomed. 

On January 27, 2009, the United States District Court for New Jersey became one of the first courts to weigh-in on what may become a recurring topic of litigation—an insurer’s effort to rescind one of its life insurance policies because of the possibility that it would be sold in a secondary market in a STOLI transaction. 

In Lincoln National Life Insurance Company v. Calhoun, Lincoln National sued to rescind a $3 million policy on the life of Walter Calhoun. First, the insurer argued that the policy is void because Calhoun intended—at the time he applied for the policy—to sell it to “stranger investors” in the secondary life insurance market, thereby removing the necessary insurable interest.  Second, Lincoln National argued that Calhoun made a material misrepresentation in his application by falsely stating that he had not discussed the possible sale or assignment of the policy in a secondary market.  

The court held that Lincoln National properly stated a case, noting that a material misrepresentation on the policy application may be reason to void the policy. But more importantly, the court added that Lincoln National’s allegation of no insurable interest could also serve to void the policy. The court held, “Insureds begin to run afoul of the insurable interest requirement, however, when they intend at the time of the policy's issuance, to profit by transferring the policy to a stranger with no insurable interest at the expiration of the contestability period.” 

The impact of the court’s insurable interest holding could be enormous. The market for STOLI policies is now estimated to be in the tens of billions of dollars. The court’s ruling that a policy may be void if the insured person intended, at the time of purchase, to transfer the policy to one without an insurable interest may undermine the security of those STOLI investments.     

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I have previously used this forum to describe instances of life insurance abuse and stress the role that human nature plays in those abusive acts. With the regulation of life insurance practices remaining a noteworthy topic, especially in the context of stranger-owned, bank-owned, and corporate-owned life insurance, these abusive acts should be a constant reminder of the potential harm that may result when a person has an incentive to profit from another’s early death. 

One especially horrific example of such abuse involves a scheme devised by Francis Marion Black, Jr., who was convicted of murdering twelve-year-old Marvin Noblitt to claim life insurance benefits. Black was sentenced to death. The appeals court that affirmed Black’s conviction held that there was no doubt that he formed, planned, and committed the crime. His acts were inhuman and the evidence from his trial supported the conviction.

Black and his wife Guinevere were married in 1934 and promptly lost their savings through poor stock investments.  Black schemed to recapture the losses by adopting a boy, purchasing an insurance policy on the child’s life, and then killing him in a way that appeared accidental. He contacted two insurance companies about policies on the life of a boy he “intended to adopt.”  He requested $50,000 in coverage, but was told that he could insure a child for only $5,000. 

Black and his wife then moved to San Benito, Texas and began asking about a twelve or thirteen year old boy they could adopt. Black met Marvin Noblitt’s mother, told her that he intended to open an ice cream parlor in San Antonio, and wanted to adopt a boy who would work at the store before and after school. Marvin’s mother refused the adoption. But she allowed Black to take him for six months and said she would reconsider the adoption if Marvin liked the arrangement. 

A few days after arriving in San Antonio, Black applied for a $5,000 policy on Marvin from the Acacia Insurance Company, which refused the application. Undeterred, he applied to the Great American Insurance Company for a $5,000 policy. Black lied in the application and stated that he had cared for Marvin since taking him from an orphanage in Oklahoma. Great American issued the policy on May 29, 1938 and named Black as the policy beneficiary. 

Within a week, Black and Guinevere packed all of their possessions and began driving to San Antonio with Marvin. They stopped in Alpine, Texas on June 8th. Black went to a local drug store the next morning and asked about post cards of the Grand Canyon, the local mountain scenery and places of interest within a hundred miles of Alpine.  The pharmacist did not have the post cards, but suggested that Black visit Alpine’s Chamber of Commerce.  He did so and asked about the Limpia, Grand, and Santa Helena Canyons.  The Chamber of Commerce gave him information about the scenic beauty of the country and Agua Frio Springs, located at the foot of a 400 foot cliff.  Later that day, Black went to Agua Frio Springs.

The Agua Frio Springs were on a private ranch and the ranch’s owner appeared at Black’s trial. He testified that the springs were located at the foot of a cliff, approximately 400 feet high.  He also testified that Black, accompanied by his wife and a child, arrived at the ranch on June 9th at about 5 p.m. and asked for permission to look at the springs, the bluff, and the scenery.  He granted Black’s request and, in a very short time, saw two people on top of the cliff rolling stones into the canyon.  About thirty minutes later, Black went to the ranch house and reported that his little boy had fallen off the cliff and was injured.  The rancher drove his truck to the foot of the cliff and brought Marvin’s mangled body back to the ranch house. Marvin’s body was then taken to an undertaker in Alpine. 

Black told the undertaker that he had adopted the boy but had not yet gone through all of the legal formalities. He added that he had taken the boy from Oklahoma about a year earlier and that there was no reason to delay the burial because he did not think he could ever find the boy’s mother.  Black also said that he did not have much money and asked if the undertaker would help him collect a $5,000 insurance policy on the boy’s life.

After the funeral, Black and Guinevere were arrested and charged with homicide. Black made a written confession in which he admitted the killing. The confession stated that Black went to the top of the cliff with the boy, threw a few rocks, and then shoved the boy off the cliff.

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     On December 31, 2008, the United States District Court for the Northern District of Oklahoma held that employees whose lives were insured by an employer’s secret policies of corporate-owned life insurance possess a claim against the insurer that administered the policies for misusing the employees’ identities and personal information. (Read the Court’s opinion).

     Corporate-owned life insurance or “COLI” is insurance held by a company on the lives of its employees, or former employees, with the company named as the policy beneficiary. Because the company designates itself as the policy beneficiary, the insurer pays the policy benefits to the company when a covered employee dies.

     The plaintiffs in the case Havenstrite v. Hartford Life Insurance Company alleged that Hartford used their names, Social Security numbers, and other personal information without their consent or knowledge to administer and maintain the secret COLI policies on their lives. They claimed that Hartford violated an Oklahoma statute that provides a recovery against any person who, without consent, uses another’s name in products, merchandise, or goods. They also claimed that Hartford committed a common law invasion of privacy by misappropriating their names and identities when Hartford used that information in its insurance policies and administrative reports.

    Hartford asked the Court in the Havenstrite case to dismiss the claims against it by arguing that the plaintiffs’ names did not have any special value. The Court refused Hartford’s request and applied Oklahoma’s law that “one who appropriates to his own use or benefit the name or likeness of another is subject to liability to the other for invasion of his privacy.” The Court concluded that the plaintiffs adequately alleged that Hartford “appropriated to Hartford’s own use and benefit the commercial value of their names and private personal identifiers by receiving premiums, commissions and service and administration fees.”

     Between five and six million Americans are covered by a COLI policy, according to an attorney for Hartford.  COLI policies are sometimes referred to as"Janitor" or “Dead Peasant” policies.  "Dead Peasant insurance" is a phrase used within the insurance industry to describe the deceased employees whose lives were insured by one of the policies.

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