To obtain a life insurance policy on an individual’s life, the life insurance benefits must be payable to the individual insured or their personal representative or to any person having an “insurable interest” in the insured. For example, I can buy a life insurance policy on my husband’s life and name myself as a beneficiary because I have an “insurable interest”, as defined in Section 627. 404 of the Florida statutes. This “insurable interest” only has to exist at the inception date of the contract.
Some individuals or entities purchase and invest in stranger owned life insurance (“STOLI”) policies . The insured works with the investor to create the insurable interest necessary at the inception, waits the 2 year incontestability period and then transfers the policy as permitted under Florida law to an investor who did not have an insurable interest at inception.
Can a party challenge an insurance policy as being void ab initio for lack of the insurable interest required by Fla. Stat. Section 627.404, if the challenge is made after the expiration of the two-year contestability period mandated by Fla. Stat. Section 627.455?
Assuming that a party can do so, does Fla Stat. Section 627.404 require than an individual with the required insurable interest also procure the insurance policy in good faith?
Pruco Life Insurance Company contested the payout of 2 life insurance policies, the Berger Policy and the Guild Policy.
In 2006, Brasner, a life insurance salesman, obtained financing to purchase a $10 million dollar life insurance policy on Mrs. Berger’s life and named Mr. Berger as the beneficiary. Brasner submitted a fraudulent financial report to Pruco for Mrs. Berger. Brasner later established a life insurance trust to hold the policy and the ownership of the policy was later transferred to the trust. The Bergers ultimately received $173,000 from Brasner in 2008 and the policy was sold from the trust to a third party lender. Four years later, Pruco argued the policy was void ab initio because Brasner had no insurable interest at the inception of the policy.
In 2005, Richardson, an insurance broker, persuaded Ms. Guild to participate in a $10 million STOLI .He offered her free life insurance and money. Richardson created an irrevocable trust to hold the Guild policy and submitted 2 life insurance applications to Pruco each asking for two $5 million policies on Guild’s life, with Guild’s daughter as primary beneficiary and the trust as contingent beneficiary. Like Brasner, Richardson submitted a fraudulent financial statement stating Guild’s net worth was $19.2 million. Over the years, another third party paid premiums of $2 million. In 2008, upon request, Pruco changed the ownership and beneficiary of the policies to U.S. Bank, N.A. In 2012, Pruco filed suit against U.S. Bank asserting the policies were void ab initio, again because of the lack of insurable interest.
The Court determined that both policies initially benefited those with insurable interests. The Berger policy beneficiary was Mrs. Berger’s husband and the Guild policy beneficiary was Mrs. Guild’s daughter. Thus, the insurable interest was met. The Court stated that the 2 year incontestability period did provide exceptions but none for STOLI transactions. The Court then rephrased the certified questions into one question:
Can a party challenge the validity of a life insurance policy after the two-year contestability period established by section 627.455 because of its creation through a STOLI scheme? The Court answered NO.
ADVICE: If you or your client plan on investing in life insurance policies that others own be sure that there is an insurable interest at the time of the purchase. If a life insurance company objects or contests any payout, then be sure that you carefully review the 2 year statute on incontestability.
WORD OF THE WEEK: Ab initio means at the beginning. Void “ab initio” means that the policy was void from the beginning.
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