Stranger-originated life insurance policies in New York affected by changes to state law

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by Michael Heygood

Stranger-originated life insurance (“STOLI”) generally means an arrangement to initiate the issuance of a life insurance policy for the intended benefit of a person who, at the time of policy origination, does not have an insurable interest in the life of the insured. In a STOLI transaction, the insurance is purchased primarily as an investment vehicle for the benefit of someone other than the person whose life is involved.

Some states have acted to ban STOLI transactions. Thus, in many jurisdictions, if a life insurance policy is obtained with the intent to transfer the policy to someone with no insurable interest, the insurer may avoid paying the death benefit to the new owner of the policy.

In New York, whether a STOLI transaction will be enforced likely depends on whether 2009 changes to state insurance law apply to the life insurance policy. In 2009, the New York legislature enacted a new law that defines and bans STOLI transactions. Specifically, New York Insurance Law § 7815 provides:

(a) In this chapter, “stranger-originated life insurance” means any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state, including:

(1) the purchase of life insurance with resources or guarantees from or through a person that, at the time of policy initiation, could not lawfully initiate the policy;

(2) an arrangement or other agreement to transfer the ownership of the policy or the policy benefits to another person; or

(3) a trust or similar arrangement that is used, directly or indirectly, for the purpose of purchasing one or more policies for the intended benefit of another person in a manner that violates the insurable interest laws of this state.

(b) Stranger-originated life insurance arrangements do not include lawful life settlement contracts as permitted by this article or those practices set forth in paragraph three of subsection (k) of section seven thousand eight hundred two of this article, provided that such contracts or practices are not for the purpose of evading regulation under this article.

(c) No person shall directly or indirectly engage in any act, practice or arrangement that constitutes stranger-originated life insurance

However, the law did not go into effect until May 2010. As to life insurance policies that are not governed by the new law, a life insurance policy is probably enforceable regardless of whether it was acquired through a so-called STOLI transaction.

New York’s insurance law defines an insurable interest as:

“in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection” or, for others, a “lawful and substantial economic interest in the continued life, health or bodily safety of the person insured.”

The New York statute also notes, however, that an insured may always procure a policy on his or her own life, stating:

“Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.”

On the other hand, the statute addresses the procurement of a policy indirectly by a person without an insurable interest, stating that:

“No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured”.

In Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539, 940 N.E.2d 535 (2010), New York’s highest court considered whether an insured may buy a policy on his or her own life with the intention of immediately transferring it to a person who lacks an insurable interest. The New York Court of Appeals held that yes, an insured could validly buy a policy on his or her own life, even if the insured had the intent promptly thereafter to transfer it to a person who lacked an insurable interest.

The court held that the New York Insurance Laws (at least prior to the 2009 changes) do not prevent individuals from procuring and immediately assigning life insurance policies to investors. The court expressly rejected the idea that an individual who procures insurance on his or her own life with the intent of immediately assigning the policy to someone who has no insurable interest violates the statute, because the New York statute contained no such requirement.

The legal landscape for STOLI transactions and life settlement investments is complex and evolving. Heygood, Orr & Pearson has filed numerous lawsuits on behalf of investors in life settlements who, according to the suits, were misled about the value of life settlements investments that they purchased. These lawsuits were filed on behalf of investors located nationwide.

If you or someone you know has been the victim of wrongful conduct on the part of a life settlement broker or provider, then you 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 the free case evaluation form located on this page.