This is the second installment (read Part 1) of a two-part blog analyzing two recent court cases certifying questions to the Florida Supreme Court from the Eleventh Circuit. The questions before the court involve policy denials based on a lack of insurable interest in the context of STOLI schemes.
In the Brasner case, an insurance broker arranged for an elderly couple to purchase a life insurance policy as part of a STOLI scheme. The application prepared by Brasner contained multiple false claims and misrepresentations, such as the wife’s annual income and net worth. Although the policy issued to the wife listed her husband as the beneficiary, the couple indicated they did not need the coverage and that they had no intention of keeping the policy. The insurance broker secured a third-party investor to pay the premiums on the policy and coordinated a transfer of the policy into a trust. The policy was then surrendered to the investor in exchange for satisfaction of the policy premiums with the consent of the wife after the two year contestability period had expired. Beneficial interest in the policy was subsequently sold to yet another investor.
In U.S. Bank, the broker worked with an insured to purchase a policy from Pruco as part of a similar STOLI scheme. The insurance broker submitted an insurance application that named the insured’s daughter as the primary beneficiary. However, it was understood that both the policyholder and beneficiary were to transfer their beneficial interest to an investor. The premiums were paid by a third party while the beneficial interest was sold to an investor.
Despite their similarity in terms of the facts, the courts reached widely disparate decisions. The court in Brasner agreed that the policy could be voided based on a lack of insurable interest despite the failure of the insurer to assert this defense within the contestability period. The court reasoned that the policy was invalid from its outset because of fraud, so the contestability provision in the policy never took effect. The court also ruled that policyholders have an obligation to exercise “good faith” and that purchasing a policy with the intent to assign the policy to a party with no insurable interest constitutes a violation of this duty.
The U.S. Bank court rejected Pruco’s position, by contrast, based on the failure of the insurer to assert its claim within the two-year contestability period. According to the analysis by the court, a challenge based on a STOLI claim is indistinguishable from the fraud used to obtain the life insurance policy. Because Florida law requires that challenges to insurance claims based on misrepresentation or fraud be brought within the two-year contestability period, the insurer’s claim was barred. As the challenge by Pruco was not brought in a timely manner, the court did not reach the substance of the insurance company’s insurable interest claims.
The certification of the issues arising out of these cases to the Florida Supreme Court should resolve confusion about these questions which have long been unsettled under Florida law. While it is unclear how the Florida Supreme Court will resolve this issue, prior decisions by federal trial courts have generally interpreted Florida law to be unfavorable to investors.
You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].