STOLI Policy Gone Wrong- How Not To Buy Life Insurance
Insurance policy was illegal wager on stranger’s life, appeals court holds
(Reuters) — Sun Life Assurance of Canada does not have to pay a $5 million death benefit on a life insurance policy because it was an illegal “wager on the life of a stranger,” a federal appeals court held.
The 7th U.S. Circuit Court of Appeals affirmed on Wednesday that former Illinois business owner Robert Corwell was acting as a straw man for an investment company, Coventry Capital, when he “seemed to buy” a policy on his own life in 2006.
Since Coventry and Corwell had no other relationship, the policy was an unlawful stranger-originated life insurance (STOLI) policy and void from the outset, Circuit Judge David Hamilton wrote for the three-judge panel.
The decision is a loss for Wells Fargo Bank, which holds record title to Corwell’s policy as an intermediary for the current beneficial owner, Vida Longevity Fund.
Representatives and attorneys for Sun Life, Wells Fargo and Vida did not immediately respond to requests for comment late Wednesday. Coventry and Vida are not parties to the appeal.
According to the 7th Circuit, STOLI schemes run afoul of longstanding Supreme Court precedent and insurance laws in Illinois and most other states, which require the first purchaser of a life insurance policy to have an “insurable interest” in the life of the person whose life is covered.
Crucially, the insurable-interest rule does not apply to subsequent transfers of a valid policy. That has fostered “an active secondary market for life insurance policies and even securitization of pools of policies,” Hamilton wrote, joined by Circuit Judges Frank Easterbrook and Diane Wood.
In fact, Corwell’s policy was part of a program Coventry designed to create more policies for investors to buy on the secondary market, Hamilton wrote.
Unbeknownst to Sun Life, Coventry arranged for a loan to provide Corwell with $5 million in coverage at no cost for 30 months. Technically, Corwell could have kept the policy after that by repaying $570,000 and taking over the premiums. However, “as everyone involved in the financing expected,” he walked away and let a Coventry affiliate take over the policy.
The policy was transferred twice before Vida acquired it in May 2017. Corwell died that June.
Sun Life refused to pay the death benefit to Vida because it concluded the policy was a STOLI.
The lower court agreed. That judge also refused to order Sun Life to return nearly $1.8 million it had received in premiums since 2006, but did order restitution of Vida’s premiums, totaling $13,000, after finding Vida was an “innocent party.”
The 7th Circuit reversed the $13,000 award, saying Vida was a “multibillion-dollar company in the business of purchasing life insurance policies,” which was “fully informed about Coventry’s scheme and took a calculated risk to try to profit from it by purchasing Corwell’s policy at a discount and then attempting to cash in at his death.”
While the monetary stakes are low, the restitution issue “may be important for the secondary market in life insurance,” Hamilton wrote.
The case is Sun Life Assurance Co of Canada v. Wells Fargo Bank N.A. as Securities Intermediary, 7th U.S. Circuit Court of Appeals, №20–2339.
For Sun Life: Brian Burack, Corey Hickman and Joseph Kelleher of Cozen O’Connor
For Wells Fargo: Timothy Carwinski of Reed Smith, Julius Rousseau and Andrew Dykens of ArentFox Schiff
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