Case Title: Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A.

Citation: 

Docket Number: 

State: new-jersey

Court: New Jersey Supreme Court

Date: 2019-06-04T00:00:00Z

Document:
SYLLABUS

This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the
Clerk for the convenience of the reader. It has been neither reviewed nor approved by the
Court. In the interest of brevity, portions of an opinion may not have been summarized.

         Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A.
                               (A-49-17) (080669)

Argued January 29, 2019 -- Decided June 4, 2019

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.
                                             1
       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
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
                                               3
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)
                                              4
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.

                                              5
       SUPREME COURT OF NEW JERSEY
             A-
49 September Term 2017
                       080669

                 Sun Life Assurance
                 Company of Canada,

                Plaintiff-Respondent,

                          v.

               Wells Fargo Bank, N.A.,
              as Securities Intermediary,

                Defendant-Appellant.

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

       Argued                       Decided
   January 29, 2019               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,
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.,
                           1
            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).

        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

                                         2
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.

                                          3
      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.

                                        4
      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

                                        5
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

                                        6
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

                                         7
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

1
  States have the authority to regulate insurance under the McCarran-Ferguson
Act. 15 U.S.C. § 1012; see also Johnson & Johnson v. Dir., Div. of Taxation,
 30 N.J. Tax 479, 494 (2018).
                                         8
frequent association of life insurance with gambling and other disreputable

practices prompted governments to prohibit its practice without exception.”

Id. at 14-15.

      In England, life insurance “was legally unrestricted [until] well into the

eighteenth century.” Id. at 17. By then, it had “bec[o]me so much a mode of

gambling (for people took the liberty of insuring any one’s life, without

hesitation, whether connected with him, or not, . . . ) that it at last became a

subject of Parliamentary discussion.” Id. at 22 (quoting James Allan Park, A

System of the Law of Marine Insurances 490 (1787)). From those discussions,

“the first appreciable regulation of life insurance” emerged, along with the

concept that the policyholder must have “a financial interest (a so-called

'insurable interest’) in [the] life or event” to be insured. Ibid. Section One of

the Life Assurance Act of 1774 provided that

            no insurance shall be made by any person or persons,
            bodies politick or corporate, on the life or lives of any
            person, or persons, or on any other event or events
            whatsoever, wherein the person or persons for whose
            use, benefit, or on whose account such policy or
            policies shall be made, shall have no interest, or by way
            of gaming or wagering.

            [ 14 Geo. 3 (1774 c. 48), https://www.legislation.
            gov.uk/apgb/Geo3/14/48?view=plain.]

A contract without an insurable interest would be “null and void.” Ibid. “The

goal of the 1774 Act . . . was to allow people to get the benefits of life
                                         9
insurance while eliminating the betting on human life it encouraged.” Susan

Lorde Martin, Life Settlements: The Death Wish Industry, 
64 Syracuse L.

Rev. 91, 94-95 (2014).

        The same limitation -- the insurable interest requirement -- was adopted

in the United States as well. See Peter Nash Swisher, The Insurable Interest

Requirement for Life Insurance: A Critical Reassessment, 
53 Drake L. Rev.

477, 482-83 (2005). By the nineteenth century, even in states where insurable

interest statutes had not yet been enacted, “in most cases either the English

statutes [were] considered as operative, or the older common law [was]

followed.” Conn. Mut. Life Ins. Co. v. Schaefer,