This Kind of “STOLI” is Against New Jersey’s Public Policy

Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., 238 N.J. 157 (2019). This appeal came to the Supreme Court via questions certified by the Third Circuit Court of Appeals in the area of insurance. Some such certified question appeals can be rather dry. In contrast, the opening paragraph of Chief Justice Rabner’s opinion today, for a unanimous Court, whets one’s appetite to read more:

“In New Jersey and elsewhere, no one can procure a life insurance policy on a stranger’s life and receive the benefits of the policy. Betting on a human life in that way, with the hope that the person will die soon, not only raises moral concerns but also invites foul play. For those reasons, state law allows a policy to be procured only if the benefits are payable to someone with an ‘insurable interest’ in the person whose life is insured. N.J.S.A. 17B:24-1.1(b).”

Today’s case involved a life insurance policy issued by plaintiff Sun Life Assurance Co. to a trust. A group of investors who did not know the insured paid for the policy. Originally, the insured’s grandson was named as the beneficiary. Five weeks later, however, “the trust was amended and the strangers who invested in the policy became its beneficiaries. In short, the insurable interest requirement appeared to have been satisfied at the moment the policy was purchased, but the plan from the start was to transfer the benefits to strangers soon after the policy was issued. The policy in question is known as a ‘STOLI –a stranger-originated life insurance policy.'”

When the insured died, a number of years later, the insurer, Sun, sought to void the policy. Through a number of intervening events, Wells Fargo had become the owner of the policy, and had even paid premiums under it. Wells Fargo sought to validate the policy or, in the alternative, if the policy were void, to recoup the premiums that it had paid.

The main issue in this appeal was whether a STOLI violates the public policy of New Jersey and, if so, whether a STOLI is void ab initio (from the beginning). The Court concluded that although New Jersey, unlike some other states, does not have a statute that rejects STOLIs, such an arrangement violates the common law and New Jersey’s public policy. The Court concluded that the STOLI was void ab initio.

Chief Justice Rabner’s opinion offered an insightful analysis of life insurance and the “insurable interest” requirement that dates back centuries, and across the sea to England. He also explained that there are circumstances in which insurance policies can be sold, including those covered by the Viatical Settlements Act, N.J.S.A. 17B:30B-1 to -17. Also in the mix were the New Jersey Constitution’s ban on gambling (except for certain specific exceptions), in Article 4, Section 7, Paragraph 2 of that document, and the Legislature’s enactments that directly barred gambling, N.J.S.A. 2A:40-1 and -3.

The Chief Justice cited New Jersey cases, the view of the Department of Banking and Insurance that a STOLI is against New Jersey’s public policy (an opinion “entitled to considerable weight in this area, which falls within its field of expertise”), law review articles, and cases from other jurisdictions. This was an impressive array of supporting authorities for the Court’s conclusion.

Wells Fargo offered two major arguments as to why STOLIs should not be voided as against public policy. First, insurance policies in New Jersey, as in 42 other states, must contain an “incontestability clause,” under which a policy “shall be incontestable [by the issuing insurer], except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue.” Wells Fargo contended that since the subject STOLI had been in force for longer than that, the incontestability clause barred Sun’s attempt to void it.

The Chief Justice did not agree. Since the policy was void ab initio, the incontestability clause never came into effect.

Wells Fargo’s other major argument relied on the fact that, as the Chief Justice stated, “[t]hirty states have enacted anti-STOLI legislation to date.” New Jersey is not one of those states. In fact, ten anti-STOLI bills were introduced in our Legislature during the period 2009-2014, but not were enacted. Wells Fargo contended that this showed a legislative intent not to ban STOLIs.

The Court rebuffed that argument, stating that it was “difficult to discern the Legislature’s intent from bills it has not passed. [Citations]. Some legislators may have thought that current law already barred STOLI policies under the insurable interest statute and that the proposed laws were unnecessary; others may have opposed the bills. Under the circumstances, we are unable to determine what the Legislature meant when it did not act on proposed legislation.”

But though Wells Fargo lost the battle to enforce the STOLI for its benefit, the Court left the bank with some hope on the other issue. That was whether “a later purchaser of the policy, who was not involved in the [earlier] illegal conduct, [is] entitled to a refund of any premium payments that they made on the policy?”

Chief Justice Rabner noted that the traditional rule that courts will leave parties to an illegal contract where they find them has been softened in many circumstances. Citing cases from other courts, as well as a treatise, the Court stated that “trial courts should develop a record and balance the relevant equitable factors. Those factors include a party’s level of culpability, its participation in or knowledge of the illicit scheme, and its failure to notice red flags. Depending on the circumstances, a party may be entitled to a refund 48of premium payments it made on a void STOLI policy, particularly a later purchaser who was not involved in any illicit conduct.”

This is an opinion well worth reading in full. The Third Circuit now has good guidance on these issues, which had not been the subject of any New Jersey state court opinions before today.