Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A.

Supreme Court of New Jersey · Contracts

ContractsLife insuranceInsurable interestPublic policySTOLIIncontestabilityRemediesinsurable interest

Facts

Sun Life issued a $5 million policy on Nancy Bergman's life in July 2007 to an irrevocable trust, with her grandson initially designated to receive the proceeds, while stranger-investors funded most or all of the premiums through the trust. About five weeks later, the grandson resigned as trustee, the four investors became successor co-trustees, and the trust was amended so that most policy benefits would go to those investors, who also gained power to sell the policy. More than two years later, the trust sold the policy, and after additional transfers Wells Fargo obtained it and continued paying premiums. After Bergman's death, Sun Life refused to pay the death benefit and sought a declaration that the policy was void ab initio as part of a STOLI scheme, while Wells Fargo sought the face amount or, alternatively, a refund of premiums.

Issue

Does a life insurance policy procured with the intent to benefit persons who lack an insurable interest in the insured violate New Jersey public policy, and if so is the policy void ab initio? If the policy is void ab initio, may a later purchaser not involved in the illegal conduct obtain a refund of premium payments it made?

Rule

Under New Jersey law, if a third party without an insurable interest procures or causes a life insurance policy to be procured through a structure that merely feigns compliance with the insurable interest requirement, the policy is a cover for a wager on human life, violates public policy, and is void ab initio. Such a policy may be challenged notwithstanding an incontestability clause. Whether premiums paid on a void STOLI policy should be refunded depends on equitable, fact-sensitive considerations, including the claimant's culpability, participation in or knowledge of the illicit scheme, and failure to notice red flags.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Newark, Elena Ruiz, age 78, signed an application for a $4 million life insurance policy owned by the Ruiz Family Trust. Her nephew Daniel, who had an insurable interest, was named trustee and sole beneficiary on the trust documents, but two investors from Phoenix supplied all premium money and had a side letter requiring Daniel to resign as trustee ten days after issuance so they could take control of the trust and receive nearly all policy proceeds.

Under New Jersey law, what is the strongest argument about the policy's validity?

Explanation. New Jersey looks to substance over form. A policy violates public policy when strangers without an insurable interest procure or cause it to be procured through a structure that only technically complies at issuance, such as using a relative or trust as a temporary cover while investors effectively control the policy from the start. Such a STOLI arrangement is a wager on human life and is void ab initio. (Derived from Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A. (n.d.).)