Clarifying STOLI Schemes: A Supreme Court Framework for Insurers
The Supreme Court of Georgia recently provided a detailed framework clarifying how insurers should approach potential stranger-originated life insurance (STOLI) schemes. On February 17, the court unanimously ruled that evaluating whether third-party investors unlawfully obtained a life insurance policy requires a comprehensive examination. This goes beyond merely considering who paid the premiums or if the insured person signed the paperwork appropriately.
Understanding the Court Decision
The ruling addressed a case involving a $6 million policy, which Ameritas Life Insurance Company declined to pay out. The insurer claimed it was a speculative investment on the life of Jacqueline Leone, a Miami resident who passed away in November 2022. Ameritas argued the policy, originally issued in 2006, was the result of a premium financing arrangement benefiting investors rather than Leone's beneficiaries.
Key Insights for Claims Investigators
For claims investigators and insurers, this case profile serves as a critical guide to identifying potential STOLI arrangements. The Leone policy was entrenched in a "cost-free, risk-free" program supported by a $50 million premium financing deal between Peachtree Settlement Funding and Barclays Bank. Essential details comprised boilerplate trust documents, tight restrictions on trust management, and pre-arranged loan defaults, which enabled the transfer of policy rights to financial entities.
Legal Interpretations and Implications
Initially, the trust managing the policy was nominally funded and controlled by parties without personal ties to Mrs. Leone. Rights to the policy were immediately assigned to Barclays as collateral, with the bank holding exclusive authority over any changes or benefits. Upon reaching federal court, the case required Georgia's Supreme Court's guidance on interpreting "procured or caused to be procured" within state law. The court dismissed simplistic arguments regarding lawful procurement through insured consent or premium payments.
A Comprehensive Framework for Scrutiny
Justice Ellington emphasized that understanding who procured a life insurance policy demands analyzing multiple facets. These include the entities arranging and financing premiums, the roles of those recruiting the insured, control over documentation, the intentions behind the policy creation, and the insured party's financial understanding. Such an approach ensures a balanced consideration, preventing life insurance policies from being misused as mere financial instruments.
The Georgia Supreme Court's guidance has remanded the case back to federal court to ascertain whether the contested death benefit should be honored. For insurers, this clarified framework is invaluable for scrutinizing STOLI activities. It strengthens the grounds for denying claims linked to such schemes, thereby protecting the integrity of life insurance products from exploitation in speculative underwriting practices.