Court rejects insurer’s argument that life insurance policy was STOLI contract, void under Illinois law

by Jim Orr

In Illinois, “the procurer of an insurance policy on the life of another must have an insurable interest in the other’s life.” Bajwa v. Metro. Life Ins. Co., 333 Ill.App.3d 558, 267 Ill.Dec. 237, 776 N.E.2d 609, 617 (Ill.App.Ct.2002). Illinois treats a life insurance contract that was procured by someone without an interest in the life of the insured as a wagering contract. Dresen v. Metropolitan Life Ins., 195 Ill.App. 292, 293 (Ill.App.Ct.1915). Such contracts create “a sinister counter interest” in having the life of the insured come to an end. Bajwa, 267 Ill.Dec. 237, 776 N.E.2d at 617 [citing Grigsby v. Russell, 222 U.S. 149, 154–55, 32 S.Ct. 58, 56 L.Ed. 133 (1911)].

Accordingly, STOLI contracts, as they have come to be called, are considered illegal and void from their inception in Illinois. Ill. State Bar Ass’n Mut. Ins. v. Coregis Ins., 355 Ill.App.3d 156, 290 Ill.Dec. 394, 821 N.E.2d 706, 712 (Ill.App.Ct.2004) (“[I]f the subject matter of a contract is illegal, that contract is void ab initio.” ). A contract that is void from inception must be treated as though it never existed; no provision can be enforced. In re Marriage of Newton, 353 Ill.Dec. 105, 955 N.E.2d 572, 585 (Ill.App.Ct.2011).

LincolnWay Community Bank, a bank located in New Lenox, Illinois, is currently involved in litigation with Allianz—a life insurance company based in Minneapolis, Minnesota—concerning the validity of a life insurance policy. The life insurance policy in dispute was issued by Allianz in 2008 and ended up in LincolnWay’s hands, about a year and a half later, when it was transferred to LincolnWay as collateral on a defaulted loan. LincolnWay seeks a declaration that the life insurance policy it holds with Allianz is valid. If it is not valid, then LincolnWay wants restitution of the premiums paid to and accepted by Allianz on the policy. Allianz alleges the policy is a stranger-originated life insurance (STOLI) policy, and therefore is against Illinois public policy, unlawful, and void at its inception. However, concluding that at least more discovery of the underlying facts was needed, Allianz’s motion was denied. LincolnWay Community Bank v. Allianz Life Ins. Co. of North America, No. 11–CV–5907, 2013 WL 5212750 (N.D.Ill. September 17, 2013).

According to the complaint filed by LincolnWay, Scott Veselik—an insurance agent for Allianz—applied for a life insurance policy on the life of his own father, Raymond Veselik, in January 2008. Scott listed himself as the owner and payor of the Policy and his mother, Judith, as the beneficiary. Around the same time that Scott Veselik applied for the Policy, a man named William Passero approached LincolnWay to apply for a loan to be used to purchase life insurance policies from those policies’ original owners. In the process of applying for the loan, Passero brought Scott Veselik to one of his meetings with LincolnWay. At that meeting, Passero and Scott Veselik discussed with LincolnWay how the loan funds would be used with respect to the Policy, but they did not show LincolnWay the application for the Policy.

Not long after, on March 14, 2008, Scott Veselik paid the initial premium of $210,900 on the Policy and the Policy was officially approved and issued by Allianz four days later (on March 18). Meanwhile, on March 17, having been approved for a $242,000 business loan from LincolnWay, Passero instructed the bank to direct $210,900 in loan proceeds to be paid to Scott Veselik. Also on March 17, Passero “assigned” the Policy to LincolnWay as collateral for the loan. At the time the assignment was executed, however, LincolnWay alleges that the bank knew Scott Veselik was still the owner of the Policy, and that it was up to Scott Veselik whether and when to transfer to the policy to Passero.

Scott did transfer ownership of the Policy to Passero on December 22, 2008, but he did not change the designation of Judith as the beneficiary on the policy at that time. About a month later, Allianz acknowledged and recorded that LincolnWay had an interest in the Policy as collateral on Passero’s business loan. Then in late 2009 and early 2010, Passero ran into financial difficulties, and on July 30, 2010, Passero transferred the Veselik Policy (as well as another policy-the Scelsi Policy) to LincolnWay as part of a settlement with LincolnWay over a number of defaulted loans.

Allianz confirmed LincolnWay’s ownership of these two policies, and following the death of the insured on the Scelsi Policy, paid the death benefit amount on that policy to LincolnWay. But Allianz’s investigation of the Scelsi policy caused LincolnWay to grow concerned that Allianz might not honor the Veselik Policy. Allianz continued to accept premium payments on the Policy from LincolnWay, but refused to provide assurances that Allianz still considered the policy valid.

In August 2011, LincolnWay brought suit against Allianz, seeking a declaration that the Veselik policy is valid. On July 16, 2012, LincolnWay filed an amended complaint, which added an alternative unjust-enrichment claim (if the Policy is found to be void) seeking restitution of the premiums that LincolnWay has paid.

Allianz moved the district court to dismiss LincolnWay’s claim for declaratory relief for lack of standing and for failure to state a claim, and to dismiss the claim for restitution for failure to state a claim. Allianz argued that it is clear on the face of the complaint that William Passero “orchestrated” the purchase of the Policy where he had no insurable interest in the life of the insured, Raymond Veselik. Allianz argues that the Policy is therefore a STOLI contract and void, and that dismissal of the claim for declaratory relief is appropriate

As noted above, under Illinois law the disputed policy would be a STOLI contract if the procurer did not have an “insurable interest” on the life of Raymond Veselik. The meaning of “an insurable interest is an interest in having the life [of the insured] continue.” Gray v. N. Am. Mut. Union, 249 Ill.App. 74, 84 (Ill.App.Ct.1928). The district court determined that whether Scott Veselik had an “insurable interest” in the life of his father is a question of fact that cannot be resolved on a motion to dismiss. See Charbonnier v. Chicago Nat’l Life Ins., 266 Ill.App. 412, 421 (Ill.App.Ct.1932) (“[I]t is a question of fact as to whether a person has an insurable interest in the life of another.”). In other words, assuming Scott Veselik was the one who procured the policy, the Court ruled is was not in a position to declare the policy void and dismiss the complaint. See Colgrove v. Lowe, 343 Ill. 360, 175 N.E. 569, 572 (Ill.1931) (“[A] parent has an insurable interest in the life of his child, and a child in the life of his parent[.]”); Bowman v. Zenith Life Ins., 67 Ill.App.3d 393, 393–95, 24 Ill.Dec. 82, 384 N.E.2d 949 (Ill.App.Ct.1978) (upholding a trial court’s finding that policy holder had an insurable interest in the life of his son).

The district court continued:

But was Scott Veselik truly the one who procured the Policy? Allianz argues that, even taking all of the allegations of the amended complaint as true, it was Passero who had complete control over the Policy from the beginning, and Passero had no insurable interest in the life of the insured, Raymond Veselik. Def.’s Br. at 9–11. Allianz contends that the initial purchase of the Policy by Scott Veselik and the listing of Scott’s mother as beneficiary were a mere smokescreen, and that the ultimate intent was always to sell the Policy to Passero. Id. Although there are good reasons to doubt the plausibility of the amended complaint’s description of who really procured the Poilcy,FN3 discovery is needed to flesh out whether there really was an agreement between Scott Veselik and Passero when the Policy was procured. As it stands, Allianz’s theory is just that-a theory. For example, in its brief, Allianz claims that “Scott Veselik never was obligated to repay the loan [from Passero],” but Allianz provides no citation to the amended complaint for this fact. Def.’s Br. at 9. The nature of the agreement between Passero and Scott Veselik is crucial to the validity of the Policy, and at this stage of the case, the Court cannot conclusively determine what that agreement (if any) was. The sequence of events in this case is indeed suspicious, and some focused discovery (for example, the depositions of Passero and Scott Veselik) may provide a basis for an earlier-than-usual summary judgment motion by Allianz. But at this point, LincolnWay has alleged that Scott Veselik procured the policy on the life of his father and named his mother as the beneficiary. Am. Compl. ¶ 12. Taking all facts and reasonable inferences in LincolnWay’s favor, dismissal at this stage is not appropriate.

LincolnWay v. Allianz, 2013 WL 5212750.

The district court also ruled that even if the Policy were declared void, LincolnWay might still be entitled to restitution, and so the claim cannot be dismissed. The fact that the Policy here might be declared void does not preclude LincolnWay’s unjust enrichment claim, because that claim is not based on the existence of a contract. “That is likely why LincolnWay pleaded the unjust enrichment claim in the alternative: if the Policy is declared valid, LincolnWay cannot pursue restitution; if declared invalid, then the restitution claim is the remaining theory.” Id.

The parties are now exchanging discovery and preparing for trial.

Life Settlements Lawsuits filed by Heygood, Orr & Pearson

The lawyers at Heygood, Orr & Pearson have filed several class action lawsuits against Life Partners on behalf of investors who were allegedly misled about the value of the life settlements investments that they purchased through the company. These lawsuits were filed on behalf of investors located nationwide.

Our law firm has also filed lawsuits on behalf of life settlements companies who have been denied the death benefit on a life insurance policy due to wrongful claims by an insurance company that it was a STOLI policy.

If you or your company has been aggrieved by wrongful conduct on the part of Life Partners or have been unable to collect the benefit on a life insurance policy, then you may need a sophisticated and knowledgeable law firm such as Heygood, Orr & Pearson to represent you. For more information and a case evaluation that will help determine your legal rights, please contact us by calling toll-free at 1-877-446-9001, or by filling out our free case evaluation form.

by Jim Orr

Jim Orr is a licensed attorney and a partner at HO&P focusing on business and personal injury litigation. Jim was selected multiple times to the Super Lawyers List and has tried 70+ cases to verdict.