Jury Finds Lincoln National Life Insurance Company Suffered No Harm Despite Misrepresentations on Policy Application

Arent Fox LLP attorneys Jule Rousseau and James Westerlind and local Florida attorney, Thomas L. David, scored a huge victory this past Friday (March 2) against The Lincoln National Life Insurance Company in the first case to be tried in Florida under the new standard that two federal courts in the state have set for cases involving challenges to insurable interest by carriers. Following a three and half day trial, the jury rendered a verdict concluding that: (1) the circumstances of policy issuance, including undisclosed funds provided by an agent that were used to pay premium, did not indicate that there was intent at the time of policy procurement to sell the subject $5 million life insurance policy sufficient to meet the new standard; and (2) while there were material misrepresentations made in the policy’s application and the insured’s trust (the owner of the policy) had participated in a civil conspiracy to defraud Lincoln, the insurer had neither relied on the fraud nor sustained harm as a result. The jury in Sciarretta v. The Lincoln National Life Insurance Company, No. 9:11-cv-80427 (S.D. Fla. 2011) agreed with Arent Fox’s client – a trust created by the insured to benefit his wife and children – that Lincoln cannot engage in lax underwriting, collect premiums when it has reason to suspect wrongdoing, and only attempt to challenge the validity of policies that result in death claims.

The Sciarretta lawsuit was commenced by the plaintiff trust against Lincoln in order to recover the subject life insurance policy’s $5 million death benefit, interest, and attorneys' fees. Lincoln counterclaimed, contending that the policy was void for lack of insurable interest because it was purportedly purchased with the intention that it would later be sold or transferred to someone without an insurable interest in the insured’s life. In addition, Lincoln asserted tort claims against the trust for fraud, negligent misrepresentation, and civil conspiracy, based on allegations that the trust and the insured had made false statements in the policy’s application and conspired with others to engage in a STOLI scheme.

Sciarretta is the second federal court case to include a decision that Florida’s insurable interest statute, Fla. Stat. § 627.404, implicitly contains a “good faith” requirement. Under this new standard, which every other state to consider the subject has rejected, a carrier may refuse to apply a death claim if it can show that the policy was procured with the sole intent to sell it to a stranger who lacked an insurable interest in the life insured. The court instructed the jury that “(i)ntent to assign or otherwise transfer a policy may be evidenced by such factors such as (1) a pre-existing agreement or understanding that the policy is to be assigned to one having no insurable interest; (2) the payment of some or all of the premiums by someone other than the insured and, in particular, by the assignee; or (3) the lack of a risk of actual future loss.”

The issue of intent was complicated because the insured was deceased. The evidentiary quagmire posed by the subjective “intent” standard — determining what a dead person intended years ago — has been avoided by all other decisions on insurable interest challenges by carriers across the country. See, e.g., First Penn-Pacific Life Ins. Co. v. Evans, 313 Fed. Appx. 633, 636 (4th Cir. 2009) (stating that “subjective intent of the insured” standard “would be unworkable").

Lincoln was unable to satisfy the intent standard that it advocated for in Sciarretta. The trust produced the insured’s family members at trial, who each testified that the insured intended that the policy and the trust that owned it would benefit them when the policy was procured. Lincoln was unable to convince the jury that an Exclusive Rights Agreement (ERA) that granted one of the agents the exclusive right to obtain insurance on the insured’s behalf, sell the insurance procured and obtain premium financing for the policy (if the insured elected to sell the policy and/or finance the premiums in the future) in return for funds with which the insured paid the initial premium, established that the insured had intended, at the time of procurement, to sell the policy to a stranger. The trust presented evidence that Lincoln had accepted numerous other cases with similar arrangements and yet had not challenged any of the other cases.

Furthermore, in rejecting Lincoln’s tort claims against the trust, the jury apparently was persuaded that the insurer had not relied on the misrepresentations of the insured. The court had permitted Lincoln to pursue the tort claims of fraud, negligent misrepresentation, and civil conspiracy against the trust, despite the fact that Lincoln could not seek to void the policy by virtue of Florida’s incontestability statute, Fla. Stat. § 627.455. While the jury found that there were material misrepresentations made in the policy’s application, the jury ultimately concluded that Lincoln had not relied and was not harmed as a result. Evidence presented by the trust at trial established that Lincoln did not follow its own underwriting guidelines when it issued the policy, and cross examination of three Lincoln employees raised questions about the carrier’s practice in hundreds of other cases. In fact an internal memo created by Lincoln dated December 2006, showed that Lincoln was aware that its universal life insurance policies were favored by institutional investors of life insurance policies, and that Lincoln’s concern with STOLI was simply a loss in profits for the company — a concern that resulted in Lincoln increasing the price of its universal life insurance products to protect its anticipated internal rate of return (IRR) (rather than avoiding the sale of high face value policies to seniors). It appears that the jury concluded that Lincoln had not suffered financial harm as a result of the misrepresentations in the application and civil conspiracy engaged in by the trust because it had already increased the price of its products to deal with the phenomenon and failed to act on other cases except where a death claim resulted.

Prior to the verdict, the trust had scored another important victory in securing a dismissal, on summary judgment, of Lincoln’s claim to void the policy for failure of a condition precedent. Though the policy was post-contestable, Lincoln claimed that the alleged misrepresentations in the policy’s application constituted a condition precedent, the failure of which rendered the policy and all of its provisions, including the incontestability clause, void and of no effect. By dismissing this claim on summary judgment, the court closed a potential loophole that would have afforded insurers like Lincoln the ability to contest a policy, for reasons other than lack of insurable interest and nonpayment of premiums, even after the policy’s contestability period had expired.

The jury verdict in Sciarretta suggests that even in the one state where carriers have been successful in achieving the “good faith” standard, a careful defense that focuses on carrier knowledge and failure to seek rescissions may yet prove not as troublesome to the life settlement market as originally feared.

Questions regarding this case can be sent to the attorneys listed at right.