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

• Decision Date: 04 June 2019
• Docket Number: 080669,A-49 September Term 2017
• Citation: 238 N.J. 157,208 A.3d 839
• Parties: SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff-Respondent, v. WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant-Appellant.
• Court: New Jersey Supreme Court

238 N.J. 157

208 A.3d 839

SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff-Respondent,

v.WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant-Appellant.

A-49 September Term 2017

080669

Supreme Court of New Jersey.

Argued January 29, 2019

Decided June 4, 2019

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, Cherry Hill, 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, Trenton, 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).

CHIEF JUSTICE RABNER delivered the opinion of the Court.

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, 201 A.3d 1267 (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...