On February 27, 2015,
the United
States Court of Appeals for the Eleventh Circuit certified two
important questions of Florida insurable interest law to the
Florida Supreme Court. The Eleventh Circuit asked the Supreme Court
to determine: (1) whether under Florida law, an insurer may
challenge a policy for lack of insurable interest after expiration
of the statutory two-year contestability period; and (2) whether
Florida insurable interest law requires that an individual procuring
life insurance do so in “good faith” and not with the intent to
effect an assignment of the policy to one without an insurable
interest. The certified issues arose in separate appeals from
conflicting decisions rendered by two federal courts in the Southern
District of Florida interpreting Florida law. In both Pruco
Life Ins. Co. v. Brasner and Pruco
Life Ins. Co. v. U.S. Bank, the insurer filed suit
years after the statutory contestability period expired, alleging
that the policies at issue were procured as part of a
stranger-originated life insurance (“STOLI”) scheme and seeking to
invalidate them for lack of insurable interest.
In
Brasner, an infamous insurance broker, Stephen
Brasner, arranged for an elderly couple, Arlene and Richard Berger,
to participate in a “STOLI scheme.” On Brasner’s application, which
contained fraudulent misrepresentations concerning Ms. Berger’s net
worth and annual income, Pruco issued a policy on Ms. Berger’s life.
Her husband was the beneficiary, but the Bergers claimed they did
not need and never intended to keep the insurance. Brasner secured
third-party financing to pay the policy premiums, and arranged the
transfer of the policy to a trust. More than two years after the
policy was issued, the trust, with Ms. Berger’s consent, surrendered
the policy to the third-party premium lender in satisfaction of the
debt incurred to finance the premiums. The beneficial interest in
the policy was subsequently sold to a different investor.
The U.S.
Bank case involved a different insurance broker and
insured but, like Brasner, the case concerned a
similar “STOLI scheme” in which Pruco issued a policy based on a
fraudulent application submitted by an insurance broker. The policy
named the insured’s daughter as the primary beneficiary, although it
was understood that the insured and her named beneficiary intended
to transfer the beneficial interest in the policy to an investor. As
in Brasner, a third party paid the policy
premiums, and the beneficial interest in the policy was sold to an
investor.
While the facts of the two
cases were similar, the courts reached vastly different decisions.
In Brasner, the court invalidated the
policy for lack of insurable interest,
notwithstanding that Pruco initiated its challenge outside the
contestability period. In so holding, the Brasner
court ruled that because the policy at issue was void
ab initio, the clause in the policy providing
for a two-year contestability period never took effect. The court
then ruled that Florida law required persons procuring life
insurance policies to do so in “good faith” and that purchasing a
policy with the intent of effecting an assignment to a person
without an insurable interest, as was the case in
Brasner, did not satisfy that requirement.
By contrast, the U.S.
Bank court dismissed Pruco’s claim on the grounds that it
was initiated outside of the two-year contestability period, and
therefore barred as a matter of law. The court reasoned that in the
STOLI context, a lack of insurable interest is inseparable from the
fraud employed to procure the insurance policy, and because Florida
law required insurers to contest fraudulently procured policies
within the two-year contestability period, Pruco’s challenge to the
policy was time-barred. Having dismissed Pruco’s claim as untimely,
the U.S. Bank court did not address the
substance of Pruco’s insurable interest claims.
Because the Florida Supreme Court has the final word on the
interpretation of Florida law, and insurable interest is governed by
state law, the resolution of the certified questions by the Florida
Supreme Court should provide answers to issues that have long
remained unclear under Florida law. The Eleventh Circuit’s
certification order provides an opportunity for the Florida Supreme
Court to upend rulings issued by federal trial courts that have
largely interpreted Florida law unfavorably for investors.
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