TALLAHASSEE – The secondary insurance market in Florida has received a break with a ruling in its favor regarding stranger-oriented life insurance (STOLI) policies.
The case Wells Fargo Bank N.A. v. Pruco Life Insurance Co. examined STOLI life insurance policies and whether these contacts were a violation of insurable interest that would make them be considered an illegal wagering contract and essentially void. Held before the Florida Supreme Court, the case also explored if the validity of a life insurance policy can be challenged after the two-year contestability period. In both instances, the judge in the case ruled in favor of the secondary insurance market, since Florida has no laws in place that strictly prohibit STOLI policies.
A STOLI life insurance policy is often issued without an insurable interest, which in several states prohibits individuals from taking out these types of life insurance policies.
“STOLI was a made-up term that became a legal term,” Brian T. Casey, a partner at Locke Lord told the Florida Record. “You can think of it as basically a regurgitation of the insurable interest law. It’s essentially a violation of insurable interest. If I were to buy a policy on the life of a stranger, that would violate insurable interest. A life insurance policy is issued in violation or without insurable interest is an illegal wagering contract under criminal law and it’s void.”
In this case, the Florida Supreme Court ruled that the three life insurance policies in question didn’t violate the requirement of insurable interest because there were family members as beneficiaries.
“The decision was a favorable one for the secondary life insurance market and unfavorable to the life insurance company,” said Casey. “In this Florida case, it doesn’t get much better for the secondary life insurance industry.”
With the ruling in Florida, the state aligns itself with the thinking of New York and California on the insurable interest of STOLI policies and whether an insurance company can contest the payment of death benefits after the required two-year period.
“One court said the carrier can challenge the policy after two years because there’s a violation of insurable interest and that’s an illegal wagering contract that’s void from inception, so the contract never existed,” Casey said. “The other court said no – the plain language of the statute says insurable interest existed at the time and you can’t challenge it after two years. In this Florida case, it doesn’t get much better for the secondary life insurance industry. This is a very big deal in terms of the operation of the two-year cut off.”
The ruling comes as a surprise and is no doubt welcomed by the secondary insurance companies that typically handle STOLI life insurance policies, Casey said.
“The majority of the other courts that have addressed the issue of the two-year contestability period that cuts off insurable interest has gone the other way,” Casey said. “I was surprised by the decision as frankly, Florida is one of the hotbeds for this stuff,”