A few months ago, I wrote about corporate-owned life insurance policies, also known as "dead-peasant" insurance policies, which involve an employer insuring an employee, usually without the employee’s knowledge, and naming itself as the policy’s beneficiary. Then when the employee dies, the employer collects the proceeds. As I explained, the policies are less attractive than they used to be, if for no other reason than changes in the law that require insured employees to be notified when the policies are issued.
Now, according to a story by Mark Maremont and Leslie Scism in last Friday’s Wall Street Journal, another type of policy has become popular. Known as stranger-originated (or -owned) life insurance (STOLI) — that acronym should be easy to remember — or investor-owned insurance policies, they work much as their name suggests: an insurance investor approaches an elderly person, and offers to buy a policy that names the investor as the beneficiary of the policy; hence, the "stranger-originated" description. The insured receives some cash up front as the inducement to take out the policy. Or the insured initiates the process and sells the policy to investors, who receive the proceeds when the insured dies.
Except that it’s not turning out that way in the case that Maremont and Scism write about, which is currently before the New York Court of Appeals and involves $56.2 million worth of life-insurance coverage obtained by the late Arthur Kramer, name partner and co-founder of Kramer Levin Naftalis and Frankel LLP, a 375-lawyer firm headquartered in New York City.
According to the Journal, Kramer took out seven policies, then sold the policies to investors, who would collect on his death, which occurred unexpectedly in January 2009 when he was 81 years old.
But his widow refused to provide a death certificate to the investors, then filed suit in federal court alleging that the sales violated New York’s "insurable interest" law, which requires a connection or relationship between the person obtaining insurance and the insured.
After Kramer’s widow sued, two of the three insurance companies involved refused to pay the proceeds, apparently because of the dispute between Kramer’s estate and the investors. (But because the two-year contestability period has passed, the insurance companies are going to have to pay someone, whether it’s the estate or the investors, aren’t they? This seems even more likely in view of New York law, which provides that the insured’s estate may file an action to recover the policy proceeds, rather than simply seek to void the policy and obtain a refund of the premiums.)
At this point, all of the litigation is on hold pending a ruling from the Court of Appeals on this issue, as described in the article (which I think is actually a certified question, at least according to an update from Bricker & Eckler): "Does state law prohibit taking out a policy on your own life and immediately transferring the rights to an investor, never intending the policy as protection for your loved ones?"
The article also mentions a lawsuit in federal court in New York decided shortly before Kramer’s death, in which a butcher-store owner had obtained a policy for $10 million on himself, then sold it to investors for $300,000, and died a month later. His daughter claimed the benefits on the grounds that the investors were improperly gambling on her father’s life. The federal court ruled that the issue had to be decided in a trial, and that an insured could sell a policy only if it had been taken out in good faith with no prior intent or agreement to transfer it to an investor. Soon after the court ruled, the parties settled.
The name of the case isn’t mentioned, but I think it is Life Product Clearing LLC v. Linda Angel, Personal Representative of the Estate of Leon Lobel, Civil Action No. 07-CV-0475 (S.D.N.Y. 2007). (Interestingly, Life Product Clearing LLC is also involved in the Kramer case.)
Here is Judge Denny Chin’s order denying LPC’s motion for judgment on the pleadings, with its holding that Maremont and Scism referred to in their article, which apparently prompted the settlement:
Finally, as previously noted, cases that turn on the issue of intent are generally not appropriate for summary disposition. Because Lobel’s pre-assignment intent is central to LPC’s claim, and Angel’s claim — that Lobel never intended to obtain life insurance but always intended, for a $300,000 fee, to transfer his beneficial interest in the Policy to an investor — is more than plausible, LPC cannot prevail as a matter of law at this stage in the litigation.
There’s a lot at stake with the outcome in the Kramer case, as Maremont and Scism describe:
The Kramer case is among the most significant of several hundred wending their way through courts nationwide as families, insurers and investors sort out the legal wreckage from a now-collapsed boom in the market for life-insurance policies purchased by investors.
From 2004 to 2008, tens of thousands of older people sought to make some fast cash by taking out multimillion-dollar policies on their own lives and flipping these to brokers, who resold them to investors like hedge funds and investment banks. The initiative often came from commission-hungry insurance agents, who in some cases paid older people to take out the policies and then misrepresented the seniors’ health or wealth to insurance companies. The boom ended for reasons including new state laws, revised actuarial tables and fading investor interest after the 2008 financial crisis.
Human drama and litigation are generally a powerful combination, and I expect that the Kramer case will continue to attract publicity. I’ll report on how the Court of Appeals answers the certified question, and any other developments.