New Jersey Supreme Court Voids Stranger-Originated Life Policies

The 3rd U.S. Circuit Court of Appeals noted that "[n]o New Jersey state court has considered" the issues at the heart of this case: "whether STOLI arrangements violate the public policy of New Jersey, and if they do, whether the affected insurance policies are rendered void ab initio." The circuit court also observed that "[i]f the [p]olicy is declared void ab initio, then the nature of the remedy available to the parties is another unresolved question of New Jersey law."

To resolve those "difficult question[s] of New Jersey public policy" and law, the Third Circuit certified two questions of law to the Supreme Court of New Jersey:

1. 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?
2. 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?

(Related: New Jersey Supreme Court Hears Life Settlement Case)

The New Jersey Supreme Court's Decision

The court answered both parts of the first certified question in the affirmative, holding that a life insurance policy procured with the intent to benefit persons without an insurable interest in the life of the insured violated the public policy of New Jersey, and such a policy was void at the outset. The court, in response to the second question, held that a party may be entitled to a refund of premium payments it made on the policy, depending on the circumstances.

In its decision, the court ruled that if a third party without an insurable interest procured or caused an insurance policy to be procured in a way that feigned compliance with the requirement that there be an "insurable interest," the policy was "a cover for a wager on the life of another" and violated New Jersey's public policy.

It added that an incontestability provision did not bar a challenge to a STOLI policy, reasoning that an insurance contract that was contrary to public policy could not be enforced despite an incontestability clause. "If a policy never came into effect, neither did its incontestability clause," the court declared.

The court also ruled that, in deciding the appropriate remedy in the context of a void STOLI policy, a trial court should "develop a record and balance the relevant equitable factors," including a party's level of culpability, its participation in or knowledge of the illicit scheme, and its failure to notice red flags. Depending on the circumstances, the court concluded, a party may be entitled to a refund of premium payments it made on a void STOLI policy, particularly a later purchaser who was not involved in any illicit conduct.

The case is Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., No. A-49 (N.J. June 4, 2019).

The People

The attorneys involved include: Julius A. Rousseau, III, of the New York and North Carolina bars, admitted pro hac vice, argued the cause for appellant (Arent Fox, attorneys; Julius A. Rousseau, III , and Eric Biderman, on the briefs).

Charles J. Vinicombe argued the cause for respondent (Cozen O'Connor, attorneys; Charles J. Vinicombe, Michael J. Miller, and Sarah E. Kalman, on the briefs).

Raymond R. Chance, III, assistant attorney general, argued the cause for amicus curiae state of New Jersey Department of Banking and Insurance (Gurbir S. Grewal, attorney general, attorney; Melissa H. Raksa, assistant attorney general, of counsel; and James A. Carey, Jr., deputy attorney general, and Adam B. Masef, deputy attorney general, on the brief).

Joseph D. Jean submitted a brief on behalf of amicus curiae Institutional Longevity Markets Association (Pillsbury Winthrop Shaw Pittman, attorneys).

Michael M. Rosensaft submitted a brief on behalf of amicus curiae Life Insurance Settlement Association (Katten Muchin Rosenman, attorneys).

Thirty states have enacted anti-STOLI legislation to date.

Resources

A copy of the New Jersey Supreme Court STOLI opinion is available here.

— Read California Insurance Broker Did Not Have to Advise Life Insurance Beneficiary How to Protect Her Interest, on ThinkAdvisor.

Steven A. Meyerowitz, a Harvard Law School alumnus, is the director of the Insurance Coverage Law Center and the editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He is also the founder and president of Meyerowitz Communications Inc.