The basic concept behind life insurance is that a policyholder can pay premiums to financially protect family and loved ones if the insured dies. The policy will provide benefits to the beneficiaries that can replace the income of a breadwinner and otherwise help a surviving spouse, children, grandchild and other loved ones maintain their standard of living. However, this same instrument for protecting policyholders can become an instrument of fraud when investors essentially gamble on the death of an insured who is encouraged to take out a policy for the benefit of an investor. This two-part blog post analyzes two recent decisions regarding the use of STOLI schemes to circumvent Florida law regarding insurable interest.
The 11th Circuit has recently certified two separate cases to address legal issues involving an insurance company’s right to deny coverage to a party with no insurable interest. The two cases to be considered arise out of similar stranger-oriented life insurance (STOLI) schemes. The 11th Circuit had requested that the Florida Supreme Court rule on the following issues: (1) whether an insurance company can deny a claim based on a lack of an insurable interest outside of the two-year contestability period under Florida law; and (2) whether a party purchasing life insurance may do so with the purpose of assigning the policy to a party without an insurable interest.
Because both cases arose in the contest of a STOLI scheme, it is important to understand how this type of insurance fraud works. A STOLI scheme is designed to circumvent state insurable interest laws by permitting investors to profit from the deaths of people with whom the investor has no connection. The investor provides an incentive for a senior to obtain life insurance with the understanding that the policy will be transferred to the investor. The investor is essentially investing in the death of the insured. The amount of the return on investment increases if the insured dies sooner. The use of STOLI transactions is undesirable in a number of ways including encouraging betting on when people die, exposing consumers to unanticipated taxes, preventing future ability to purchase life insurance and compromising an insured’s privacy interests.
In the two cases certified to the Florida Supreme Court, Pruco Life Ins. Co. v. Brasner and Pruco Life Ins. Co. v. U.S. Bank, Pruco files its lawsuit long after the statutory contestability period had passed. The insurer contended that the policy should be invalidated because of a lack of insurable interest because the policies were obtained pursuant to a stranger-oriented life insurance scheme. Part II of this blog analyzes and compares these cases which reach completely different outcomes. (Read Part II)
If you are wrongfully denied benefits when you submit a claim, my law firm might be able to help. An experienced Miami insurance claims attorney can help you counter such denials. My law firm represents policyholders in claims disputes in Miami and throughout Florida. The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations. No Recovery, No Lawyer Fees. Call 305-461-1095 or Toll Free 1-866-71-CLAIM.