Court Revives Challenge to Stranger-Originated Life Insurance Policies (STOLIs)

In Sun Life Assurance Co. of Canada v. Imperial Premium Finance, LLC, 2018 WL 4443054 (11th Cir. Sept. 18, 2018), the Eleventh Circuit reversed the dismissal of fraud and breach of contract claims related to the sale of life insurance policies to strangers to the insureds.  Sun Life Assurance Company sold life insurance to senior citizens, who, in some cases, obtained premium financing with Imperial Premium Finance.  The life insurance policies served as collateral to the financing, so, if an insured defaulted on the loan, Imperial could foreclose on the loan and obtain ownership of the policy.

Sun Life sued Imperial in the Southern District of Florida, alleging that Imperial’s ownership of policies violates state law restrictions on wagering on human life, and that Imperial obtained the policies through a fraudulent and conspiratorial scheme.  Sun Life maintained that it would not have sold life insurance policies if it knew that the applicants intended to use premium financing.  Imperial allegedly hired insurance producers to recruit senior citizens to buy Sun Life insurance policies financed with Imperial.  The producers would fill out the applications, inaccurately disclosing that the applicants did not intend to use premium financing.  After the policies were granted, Imperial would hide the fact that it was paying the premiums.  Imperial allegedly structured their premium loans so that borrowers would generally default after two years, allowing Imperial to foreclose on the loans and take ownership of the policies.  Sun Life alleged fraud, RICO, fraud conspiracy, and sought a declaratory judgment that the insurance policies were void ab initio.

Imperial also sued Sun Life in the Southern District of Florida, alleging that Sun Life’s efforts to challenge Imperial’s ownership of the policies was in breach of the policy agreements, and part of Sun Life’s own fraudulent scheme.  Imperial relied on the policy’s two-year incontestability clause, arguing that Sun Life’s claims were a breach of the agreement not to contest the policy after two years.  Imperial also alleged Sun Life’s fraud scheme was premised on Sun Life telling policy owners that it would not contest their policies after a two-year period, when in fact Sun Life planned to challenge Imperial-owned policies.

The district court consolidated the two cases, and dismissed all the claims in each action.

Applying Florida law, the Eleventh Circuit reversed the dismissal of Sun Life’s RICO and fraud claims.  The Court held that Sun Life’s RICO and fraud claims were not barred by the policy’s two-year incontestability clause, holding that such clauses do not apply to fraud claims.  However, the Court upheld the dismissal of Sun Life’s fraud conspiracy claims, holding that Sun Life had not adequately established a conspiracy with the producers to commit fraud, because Sun Life did not plausibly allege that the producers and Imperial were independent entities that were capable of conspiring to commit fraud as is required by a fraud conspiracy claim.

The Court likewise revived Imperial’s breach of contract claim, holding that Sun Life’s claim for a declaratory judgment that the policies were void ab initio was a challenge to the contract that was barred by the incontestability clause.  The Court upheld the district court’s order dismissing Imperial’s fraud claim, holding that it was duplicative of its breach of contract claim.

Posted by Margaret Flatt.

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