Court Ruling on STOLI Policies Upholds New Jersey Insurance Law

In a notable legal case, Lincoln National Life Insurance Co v. Retirement Value LLC, the U.S. Court of Appeals for the Third Circuit upheld a lower court's decision to void two life insurance policies. These policies were classified as stranger-originated life insurance (STOLI) under New Jersey law. Initially issued on the life of Haya Majerovic, the policies were structured to benefit investors who financed premiums with the expectation of receiving life insurance proceeds.

After the insured passed away in 2019, Retirement Value, LLC, which acquired the policies, filed a claim. Lincoln National sought a legal declaration in New Jersey to void the policies, arguing a lack of insurable interest according to state statutes. Retirement Value counterclaimed with breach of contract and fraud, arguing for the application of New York or Rhode Island law instead.

The Third Circuit determined that New Jersey law was applicable. It concluded the policies were void from inception as STOLIs, stating New Jersey public policy and statutory law override alternative jurisdiction claims. The court found that although New York insurance law could apply to some policies, it did not govern this particular case. Instead, factors like the transaction's core activities in New Jersey, including trust ownership and insurance delivery, took precedence.

Retirement Value contended that New Jersey’s group life insurance statutes omit insurable interest requirements. However, the court clarified this misunderstanding, reinforcing New Jersey’s anti-STOLI legislation, which broadly prohibits such investor schemes. Amendments to the Viatical Settlement Act were cited, underscoring regulatory compliance requirements to address investor-funded setups.

A crucial aspect of the ruling was the court's dismissal of Retirement Value's claim for premium recoupment, due to procedural missteps in presenting the argument. This highlights the importance of meticulous and well-supported legal arguments at the district court level to maintain issues for appeal.

While the Third Circuit's decision remains nonprecedential, it underscores a significant legal stance within New Jersey insurance law, particularly regarding enforcement of anti-STOLI regulations. This decision serves as a critical reminder for insurers about recognizing jurisdictional law nuances and ensuring comprehensive legal presentations to mitigate risk management challenges associated with STOLI arrangements.