On September 22, 2016, the Florida Supreme Court issued an eagerly-awaited opinion in Wells Fargo Bank, N.A. v. Pruco Life Insurance Co. The Court held that Florida's two-year contestability statute applies to bar an insurer's challenge to a life insurance policy on the basis that it was procured through an alleged STOLI transaction, as long as the policy nominally benefitted persons with an insurable interest in the life of the insured. The decision answered questions of Florida insurance law presented in two federal district court cases that were consolidated on appeal before the U.S. Court of Appeals for the 11th Circuit and certified to the Florida Supreme Court. The decision lifts the cloud that hung over Florida policies that complied with the letter of the law concerning insurable interest, but were procured through what some insurance companies have characterized as STOLI schemes that involved misrepresentations about the insureds' finances, use of premium financing, or intent to transfer the policy. After Pruco, such policies should now be insulated from challenge outside of the contestability period.
The policies at issue in Pruco were all originated through so-called STOLI transactions, which, according to the Court, occurs "when an investor actively seeks out elderly people to purchase life insurance with the promise of 'no risk' money in exchange for transferring the policy to the investor after the general two year contestability period has expired." One of the policies, on the life of Arlene Berger, was procured through Stephen Brasner, an infamous insurance broker who subsequently pleaded guilty to insurance fraud. Mr. Brasner solicited Ms. Berger and her husband to participate in a STOLI scheme at a financial planning seminar advertising "free insurance." Mr. Brasner submitted an application to Pruco for a policy on Ms. Berger's life, which included a fraudulent financial report. The policy was issued to a trust with Ms. Berger's husband as co-trustee and beneficiary, but the Bergers did not need or want the insurance, never intended to pay the premiums, and had no intention of keeping the policy. Brasner obtained financing for the policy through a premium finance lender and the Berger policy was later transferred to that lender in satisfaction of obligations under the premium financing agreement. The Bergers received $173,000 in exchange for their participation in the transaction.
The other two policies at issue in the case were on the life of Rosalind Guild, who was also persuaded to participate in the scheme with an offer of free life insurance and monetary compensation. Like the Berger policy, the two Guild policies were procured with an application containing a fraudulent financial statement and issued to a trust, listing a blood relative (Ms. Guild's daughter) as the beneficiary. However, it was understood that Ms. Guild's daughter would not receive the death benefit and that any beneficial interest in the policies would be sold to an investor with no insurable interest. After the policy was issued, a third party paid the premiums for the next few years, and the policy was subsequently transferred to U.S. Bank, as securities intermediary.
Applying Florida law to these facts, the Florida Supreme Court concluded that the plain language of Florida's insurable interest statute only required an insurable interest at the inception of a life insurance policy and found that such an interest was present at the inception of both the Berger and the Guild policies because, at inception, they benefitted individuals with insurable interests (Ms. Berger's husband and Ms. Guild's daughter). Although the Court found that the policies were procured in furtherance of a STOLI scheme, it held that the plain language of Florida's incontestability statute does not authorize a belated challenge on that basis. The Court observed that the incontestability statute provided for specific exceptions allowing certain types of challenges outside the two-year period and concluded that the Florida legislature intended to limit insurers to those exceptions. Because a STOLI challenge was not an enumerated exception to incontestability, the Court held that it was barred by the incontestability clause.
Quoting the Eighth Circuit's decision in PHL Variable Ins. Co. v. Bank of Utah, which also held that an incontestability statute barred challenges based on lack of insurable interest, the Florida Supreme Court noted that whether there is an agreement at inception to sell a policy, either to an identified person who lacks an insurable interest or to a third-party investor in the secondary market, is a risk that an insurance company can promptly investigate, and that "to declare that a facially valid policy on which [the insurance company] collected substantial premiums…. was never in force is simply a fiction."
The Pruco decision is welcome news to investors that own policies issued in Florida, as insurance companies should now be barred from challenging policies as STOLI if the policies were issued more than two years ago and complied with Florida insurable interest law.