Florida Supreme Court Rules that Incontestability Applies to Claims of Lack of Insurable Interest
On September 22, 2016, in a very straight forward opinion issued in response to a certified questions posed by the Eleventh Circuit Court of Appeals, the Supreme Court of Florida held that Florida law bars challenges to the validity of life insurance policies based on a lack of insurable interest once Florida’s two-year contestability period has expired, even when those policies are procured through so-called “stranger oriented life insurance” (“STOLI”) transactions.
In Wells Fargo, N.A. v. Pruco Life Insurance Co., No. SC15-382, 2016 WL 5242593 (Fla. Sep. 22, 2016), plaintiff Pruco Life Insurance Company sued to rescind three policies, all of which were beyond Florida’s two-year contestability period. Florida, like many states, bars insurers from contesting a life insurance policy’s validity once that policy has been in effect for two years from the date of issuance during the life of the insured. See Fla. Stat. § 627.455. But in Wells Fargo, Pruco argued that this incontestability bar should not apply because the policies at issue had been procured through STOLI transactions and, therefore, allegedly lacked the requisite insurable interest when they were issued.
Florida law requires all life insurance policies to have an insurable interest at the time that they are issued. Florida’s insurable interest statute is clear that the person procuring the policy need not have the insurable interest, so long as the policy benefits someone with an insurable interest in the insured’s life at the time it is issued. Fla. Stat. § 627.404(1).
The policies at issue in Wells Fargo were procured through STOLI transactions. They were financed by investors; issued as a result of misrepresentations about the insureds’ net worth; and subsequently transferred to investors after Florida’s incontestability period had expired. Wells Fargo, 2016 WL 5242593 at *2-3. Pruco argued that because the policies had been procured as part of STOLI schemes, they lacked the insurable interest and requested that the Court create a “STOLI-policy exception” to the contestability statute. Id. at *1.
In a plain text analysis of Florida’s statutes, the Court rejected Pruco’s request to carve out a STOLI-policy exception, holding that “once the two-year contestability period has expired, a party cannot challenge a life insurance policy for lack of an insurable interest merely because it was created through a STOLI scheme.” Id. The Court noted that the STOLI policies at issue had insurable interests at inception because the beneficiaries of the policies were family members of the insureds, and “a policy that has the required insurable interest at its inception, even where that interest is created as the result of a STOLI scheme, is incontestable after two years.” Id. at *4-5.
The Court also noted that insureds have long been permitted to transfer their policies on the secondary market and that STOLI transactions are not unlawful in Florida. Id. at *1. The Court was adamant that altering policyholders’ rights to access this secondary market by creating a STOLI policy exception was a task properly assigned to the Florida Legislature, not the Court. Id.
With this decision, Florida joins a growing number of states that have rejected the argument that policies procured via STOLI transactions lack an insurable interest (an argument that has been accepted by a number of federal courts interpreting state law). New York, for example, previously rejected precisely such an argument in Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539, 549 (2010), which, like the Florida decision, was the result of certified questions from a federal Circuit Court of Appeals. The Wells Fargo decision also removes a significant barrier to investment in life insurance policies: the uncertainty regarding the validity of policies procured through STOLI transactions.
Arent Fox LLP is well positioned to counsel policyholders and investors on how recent decisions like Wells Fargo, N.A. v. Pruco Life Insurance Co. affect their life insurance policies. Feel free to contact Elliott Kroll, Jule Rousseau, Eric Biderman, James Westerlind, or Andrew Dykens from Arent Fox LLP’s Insurance Practice Group to discuss this decision or these issues further.