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Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A.

Supreme Court of New Jersey

June 4, 2019

Sun Life Assurance Company of Canada, Plaintiff-Respondent,
v.
Wells Fargo Bank, N.A., as Securities Intermediary, Defendant-Appellant.

          Argued January 29, 2019

          On certification of questions of law from the United States Court of Appeals for the Third Circuit.

          Julius A. Rousseau, III, of the New York and North Carolina bars, admitted pro hac vice, argued the cause for appellant (Arent Fox, attorneys; Julius A. Rousseau, III, and Eric Biderman, on the briefs).

          Charles J. Vinicombe argued the cause for respondent (Cozen O'Connor, attorneys; Charles J. Vinicombe, Michael J. Miller, and Sarah E. Kalman, on the briefs).

          Raymond R. Chance, III, Assistant Attorney General, argued the cause for amicus curiae State of New Jersey Department of Banking and Insurance (Gurbir S. Grewal, Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel; and James A. Carey, Jr., Deputy Attorney General, and Adam B. Masef, Deputy Attorney General, on the brief).

          Joseph D. Jean submitted a brief on behalf of amicus curiae Institutional Longevity Markets Association (Pillsbury Winthrop Shaw Pittman, attorneys).

          Michael M. Rosensaft submitted a brief on behalf of amicus curiae Life Insurance Settlement Association (Katten Muchin Rosenman, attorneys).

          RABNER, C.J., writing for the Court.

         In New Jersey and elsewhere, no one can procure insurance on a stranger's life and receive the benefits of the policy. Betting on a human life in that way, with the hope that the person will die soon, not only raises moral concerns but also invites foul play. For those reasons, state law allows a policy to be procured only if the benefits are payable to someone with an "insurable interest" in the person whose life is insured. N.J.S.A. 17B:24-1.1(b).

         In April 2007, Sun Life Assurance Company of Canada received an application for a $5 million insurance policy on the life of Nancy Bergman. The application listed a trust as the sole owner and beneficiary of the policy. Ms. Bergman's grandson signed as trustee. The other members of the trust were all investors, and all strangers to Ms. Bergman. The investors paid most if not all of the policy's premiums.

         Sun Life received an inspection report that listed Ms. Bergman's annual income as more than $600, 000 and her overall net worth at $9.235 million. In reality, her income was about $3000 a month, and her estate was later valued at between $100, 000 and $250, 000. Although Ms. Bergman represented that she had no other life insurance policies, five policies were taken out on her life in 2007, for a total of $37 million.

         Sun Life issued the policy on July 13, 2007. At the time, the trust was the sole owner and beneficiary. The policy had an incontestability clause that barred Sun Life from challenging the policy -- other than for non-payment of premiums -- after it had been "in force during the lifetime of the Insured" for two years. About five weeks after the policy was issued, the grandson resigned as trustee and appointed the investors as successor co-trustees. The trust agreement was amended so that most of the policy's benefits would go to the investors, who were also empowered to sell the policy.

         More than two years later, the trust sold the policy and the investors received nearly all of the proceeds from the sale. Wells Fargo Bank, N.A. eventually obtained the policy in a bankruptcy settlement and continued to pay the premiums.

         After Nancy Bergman passed away in 2014, Wells Fargo sought to collect the policy's death benefit. Sun Life investigated the claim, uncovered the discrepancies noted above, and declined to pay. Instead, Sun Life sought a declaratory judgment that the policy was void ab initio, or from the beginning. Wells Fargo counterclaimed for breach of contract and sought the policy's $5 million face value; if the court voided the policy, Wells Fargo sought a refund of the premiums it paid.

         The United States District Court for the District of New Jersey partially granted Sun Life's motion for summary judgment. The court found that New Jersey law applied and concluded "that this was a STOLI [(stranger-originated life insurance)] transaction lacking insurable interest in violation of [the State's] public policy. . . . As such, it should be declared void ab initio." The court also granted Wells Fargo's motion to recover its premium payments, reasoning that "Wells Fargo is not to blame for the fraud here" and that "[a]llowing Sun Life to retain the premiums would be a windfall to the company."

         Both parties appealed. Finding no dispositive New Jersey case law, the United States Court of Appeals for the Third Circuit certified two questions of law to this Court:

1. Does a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate the public policy of New Jersey, and if so, is that policy void ab initio?
2. If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?

         HELD: The Court answers both parts of the first certified question in the affirmative: a life insurance policy procured with the intent to benefit persons without an insurable interest in the life of the insured does violate the public policy of New Jersey, and such a policy is void at the outset. In response to the second question, a party may be entitled to a refund of premium payments it made on the policy, depending on the circumstances.

         1. The Court reviews the history of wagering concerns associated with life insurance and the development of the insurable interest requirement in response to those concerns. In New Jersey, the Legislature adopted the current insurable interest requirement in 1968. The Legislature expressly imposed an insurable interest requirement and thus superseded dated case law holding that a policy could be valid without an insurable interest. N.J.S.A. 17B:24-1.1(a) outlines situations in which an individual has an insurable interest, as well as circumstances under which a corporation or a nonprofit or charitable entity has an insurable interest in the lives of its employees, officers, or others. Critical to the questions presented in this case, section (b) of N.J.S.A. 17B:24-1.1 bars procurement of a life insurance policy payable to someone who lacks an insurable interest in the life of the insured. (pp. 8-13)

          2. Just as all New Jersey insurance policies must be based on an insurable interest, they must also contain an incontestability clause. See N.J.S.A. 17B:25-4 ("There shall be a provision that the policy . . . shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue."). Incontestability clauses, however, are not a bar to all defenses. A majority of courts have held that the lack of an insurable interest can be asserted as a defense even after a policy has become incontestable. As the Delaware Supreme Court has explained, "if a life insurance policy lacks an insurable interest at inception, it is void ab initio because it violates . . . clear public policy against wagering. It follows, therefore, that if no insurance policy ever legally came into effect, then neither did any of its provisions, including the statutorily required incontestability clause." PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr., 28 A.3d 1059, 1067-68 (Del. 2011). (pp. 14-16)

         3. Although life insurance policies must be payable to a person with an insurable interest when they are procured, policies can be sold later on -- including to individuals who would not have been able to buy the policy originally because they lacked an insurable interest. In New Jersey, life insurance policies may be sold subject to the regulatory scheme outlined in the Viatical Settlements Act, N.J.S.A. 17B:30B-1 to -17. Aside from limited exceptions, the law bars policyholders from entering into a viatical or life settlement contract -- and thus transferring the policy benefit to a stranger -- for two years from the date the policy was issued. N.J.S.A. 17B:30B-10(a). STOLI policies are a subset of life settlements in which a life settlement broker persuades a senior citizen to take out a life insurance policy for a cash payment or some other current benefit arranged with a life settlement company. Generally, an investor funds a STOLI policy from the outset, which makes it possible to obtain a policy with a high face value. STOLI arrangements thus present a significant legal problem: the investors have no insurable interest in the life of the insured. As a result, the transactions pose questions in light of New Jersey's policy against wagering, which finds expression in the State Constitution and in statutory provisions. (pp. 16-22)

         4. The first part of question one asks whether "a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate[s] the public policy of New Jersey." Consider a policy that strangers financed or caused to be procured for Mary's life. When the policy is issued, Mary's daughter is the named beneficiary or the trustee of an irrevocable trust that owns the policy. The trust thus has an insurable interest at the time the contract for the policy is made. But the strangers actually have a side agreement with Mary or her daughter to transfer control of the trust, the beneficial interest in the policy, or ownership of the policy, at a later time. In short, the outside investors who funded the policy effectively control it from the start. It would elevate form over substance to suggest that the policy satisfies the insurable interest requirement. The policy is a cover for a wager on Mary's life by a stranger. It therefore violates public policy. STOLIs commonly involve life insurance policies procured and financed by investors -- strangers -- who have no insurable interest in the life of the insured yet, from the outset, are the ultimate intended beneficiaries of the policy. That type of arrangement runs afoul of New Jersey's insurable interest requirement and counters the principle underlying the requirement: the individual with an insurable interest must have an interest in the continued life of the insured rather than in his early death. The Court explains why, contrary to Wells Fargo's assertions, sections (c) and (d) of the insurable interest statute do not call for a different result and notes that an incontestability provision does not bar a challenge to a STOLI policy. (pp. 23-28)

         5. Imagine Mary's daughter procured the above policy, paid the premiums for a few months, and then transferred her role as trustee, or the ownership or beneficial interest in the policy, to strangers in exchange for reimbursement and compensation. Suppose as well that Mary's daughter intended to do so from the start. That arrangement likewise might be little more than a cover for a wager on Mary's life, and it raises questions about the manner in which the policy was procured. A number of considerations could affect the validity of the policy: the nature and timing of any discussions between the purchaser and the strangers; the reasons for the transfer; and the amount of time the policy was held; among other factors. Courts cannot devise a bright-line rule for the type of transaction this second hypothetical presents. The area is best addressed by the Legislature and the Division of Banking and Insurance (DOBI). (pp. 28-30)

         6. Thirty states have enacted anti-STOLI legislation to date. Two model acts have been designed to stop STOLIs. Anti-STOLI legislation has been proposed multiple times in New Jersey. From 2009 through 2014, ten bills were introduced. None were passed or enacted. Despite suggestions by Wells Fargo, it is difficult to discern the Legislature's intent from bills it has not passed. (pp. 30-32)

         7. According to DOBI, absent an insurable interest, a life insurance policy is a "pure gamble" in violation of N.J.S.A. 17B:24-1.1 and "the anti-gambling provisions of both the New Jersey Constitution and New Jersey statutes." DOBI's views are entitled to considerable weight in this area, which falls within its field of expertise. (pp. 32-33)

         8. The Court reviews cases from other jurisdictions that have considered similar questions. Notably, three jurisdictions that found that STOLI policies passed muster under the states' then-existing laws -- all three have since adopted anti-STOLI legislation -- interpreted statutory provisions that either limited the duration of an insurable interest requirement to when the policy took effect or explicitly permitted the immediate transfer of policies. New Jersey statutory law does not permit the immediate transfer of a life insurance policy to people or entities that lack an insurable interest. (pp. 33-41)

         9. The Court stresses that it does not suggest that life settlements in general are contrary to public policy. Valid life insurance policies are assets that can be sold. An established secondary market exists for the sale of valid policies -- at least two years after they are issued or earlier in certain cases -- to investors who lack an insurable interest. (pp. 41-42)

         10. The first certified question poses a supplemental inquiry: If the policy procured violates New Jersey's public policy, is it void ab initio? When an insurance policy violates public policy, it is as though the policy never came into existence. The policy would be void from the outset. (pp. 42-43)

         11. The second certified question asks, "If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?" The traditional rule -- that courts leave the parties to a void contract as they are rather than assist an illegal contract -- has evolved over time. Under the more modern view, equitable factors can be considered to determine the proper remedy. The Court reviews several decisions in which such factors were considered by courts assessing STOLI policies and observes that the fact-sensitive approach adopted in those cases is sound. To decide the appropriate remedy, trial courts should develop a record and balance the relevant equitable factors. Those factors include a party's level of culpability, its participation in or knowledge of the illicit scheme, and its failure to notice red flags. Depending on the circumstances, a party may be entitled to a refund of premium payments it made on a void STOLI policy, particularly a later purchaser who was not involved in any illicit conduct. The Court notes that the District Court considered equitable principles and fashioned a compromise award but does not comment on the award itself. (pp. 43-48)

          JUSTICES LaVECCHIA, PATTERSON, FERNANDEZ-VINA, SOLOMON, and TIMPONE join in CHIEF JUSTICE RABNER's opinion. JUSTICE ALBIN did not participate.

          RABNER CHIEF JUSTICE

         In New Jersey and elsewhere, no one can procure a life insurance policy on a stranger's life and receive the benefits of the policy. Betting on a human life in that way, with the hope that the person will die soon, not only raises moral concerns but also invites foul play. For those reasons, state law allows a policy to be procured only if the benefits are payable to someone with an "insurable interest" in the person whose life is insured. N.J.S.A. 17B:24-1.1(b). The beneficiary can be the insured herself, a close relative, a person, corporation, or charity with certain financial ties to the insured, or select others. N.J.S.A. 17B:24-1.1(a).

         This case arises out of certified questions of law from the United States Court of Appeals for the Third Circuit. We consider whether the swift transfer of control over a life insurance policy and its benefit, from a named beneficiary who had an insurable interest to investors who did not, satisfies New Jersey's insurable interest requirement.

         Here, a group of investors paid for a life insurance policy through a trust. The insured was a stranger to them. When the policy was issued, the insured's grandson was the beneficiary. About five weeks later, the trust was amended and the strangers who invested in the policy became its beneficiaries. In short, the insurable interest requirement appeared to have been satisfied at the moment the policy was purchased, but the plan from the start was to transfer the benefits to strangers soon after the policy was issued.

         The policy in question is known as a "STOLI" -- a stranger-originated life insurance policy. Because such policies can be predatory and may involve fraud, other states have adopted legislation that bars them. We now consider STOLI policies as a matter of first impression.

         We find that STOLI policies run afoul of New Jersey's insurable interest requirement and are against public policy. It would elevate form over substance to conclude that feigned compliance with the insurable interest statute -- as technically exists at the outset of a STOLI transaction -- satisfies the law. Such an approach would upend the very protections the statute was designed to confer and would effectively allow strangers to wager on human lives.

         In response to the certified questions, we find that STOLI policies are against public policy and are void ab initio, that is, from the beginning. We also note that a party may be entitled to a refund of premium payments depending on the circumstances. Among other relevant factors, courts should consider a later purchaser's participation in and knowledge of the original illicit scheme.

         I.

         We draw the following facts from the opinions of the Third Circuit and the United States District Court for the District of New Jersey.

         A.

         In April 2007, Sun Life Assurance Company of Canada received an application for a $5 million insurance policy on the life of Nancy Bergman. The application listed the Nancy Bergman Irrevocable Trust dated 4/6/2007 as the sole owner and beneficiary of the policy. Nancy Bergman signed the application as the grantor of the trust, and her grandson, Nachman Bergman, signed as trustee. The trust had four additional members. All of them were investors, and all were strangers to Ms. Bergman. The investors deposited money into the trust account to pay most if not all of the policy's premiums. The original trust agreement provided that any proceeds of the policy would be paid to Nachman Bergman.

         Ms. Bergman was a retired middle school teacher. Sun Life received an inspection report that listed her annual income as more than $600, 000 and her overall net worth at $9.235 million. In reality, her income was about $3000 a month from Social Security and a pension, and her estate was later valued at between $100, 000 and $250, 000.

         Although Ms. Bergman represented that she had no other life insurance policies, five policies were taken out on her life in 2007 from various insurance companies, including Sun Life, for a total of $37 million.

         Sun Life issued the $5 million policy in question on July 13, 2007. At the time, the trust was the sole owner and beneficiary. The policy had an incontestability clause that barred Sun Life from challenging the policy --other than for non-payment of premiums -- after it had been "in force during the lifetime of the Insured" for two years.

         On August 21, 2007, about five weeks after the policy was issued, Nachman Bergman resigned as trustee and appointed the four investors as successor co-trustees. The trust agreement was amended so that most of the policy's benefits would go to the investors; they were also empowered to sell the policy on their own.

         More than two years later, in December 2009, the trust sold the policy to SLG Life Settlements, LLC, for $700, 000. The investors received nearly all of the proceeds from the sale. Afterward, a company named LTAP acquired the policy for a brief period, and Wells Fargo Bank, N.A. obtained it in a bankruptcy settlement in or about 2011. Wells Fargo continued to pay the premiums. It claims to have paid $1, 928, 726 through a combination of direct premium payments and loans to LTAP to pay premiums.

         B.

         After Nancy Bergman passed away in 2014 at age 89, Wells Fargo sought to collect the policy's death benefit. Sun Life investigated the claim, uncovered the discrepancies noted above, and declined to pay. Instead, Sun Life filed an action in the District Court and sought a declaratory judgment that the policy was void ab initio as part of a STOLI scheme. Wells Fargo counterclaimed for breach of contract and sought the policy's $5 million face value; if the court voided the policy, Wells Fargo sought a refund of the premiums it paid and funded.

         The District Court partially granted Sun Life's motion for summary judgment. The court found that New Jersey law applied and concluded "that this was a STOLI transaction lacking insurable interest in violation of [the State's] public policy. . . . As such, it should be declared void ab initio." The court also granted Wells Fargo's motion to recover its premium payments. The court reasoned that "Wells Fargo is not to blame for the fraud here" and that "[a]llowing Sun Life to retain the premiums would be a windfall to the company."

         Wells Fargo appealed the determination that the policy was void, and Sun Life cross-appealed the order to refund the premiums.

         The Third Circuit noted that "[n]o New Jersey state court has considered" the issues at the heart of this case: "whether STOLI arrangements violate the public policy of New Jersey, and if they do, whether the affected insurance policies are rendered void ab initio." The circuit court also observed that "[i]f the Policy is declared void ab initio, then the nature of the remedy available to the parties is another unresolved question of New Jersey law."

         To resolve those "difficult question[s] of New Jersey public policy" and law, the Third Circuit certified two questions of law to this Court:

(1) Does a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate the public policy of New Jersey, and if so, is that policy void ab initio?
(2) If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?

         We accepted both questions pursuant to Rule 2:12A-5. 236 N.J. 581 (2018). We also granted leave to appear as amici curiae to the Department of Banking and Insurance (DOBI), the Institutional Longevity Markets Association (ILMA), and the Life Insurance Settlement Association (LISA).

         II.

         To provide context for the discussion that follows, we review at the outset certain relevant statutes and concepts.

         A.

         Life insurance is "[a]n agreement between an insurance company and the policyholder to pay a specified amount to a designated beneficiary on the insured's death." Black's Law Dictionary 1010 (9th ed. 2009); see also N.J.S.A. 17B:17-3. The Life and Health Insurance Code, at Title 17B of the New Jersey Statutes, regulates this area of law today.[1]

         Life insurance has been around for more than 500 years. From its earliest days, there have been concerns about who can purchase a policy on the life of another. See Geoffrey Clark, Betting on Lives: The Culture of Life Insurance in England, 1695-1775 13-14 (1999). In 1419, for example, the Venetian Senate outlawed wagers on the Pope's life and nullified many speculative bets about "how long the reigning pope would live." Id. at 14. Elsewhere in Europe in the fifteenth through seventeenth centuries, "[t]he frequent association of life ...


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