In 2007, Sun Life received an application for a $5 million life insurance policy on Nancy Bergman, a retired school teacher.[1] The purchaser was an Irrevocable Trust, naming Bergman as the sole owner and beneficiary on the policy, however the policy was funded through stranger investors who intended to sell the trust on the secondary market, or to collect the benefit upon the Insured’s death.[2] The trust sold the policy to SLG Life Settlements and then they sold it to a company named LTAP. LTAP took out a loan with Wells Fargo to fund the premium payments on the policy.[3] LTAP went into bankruptcy and was ordered to transfer the policy to Wells Fargo, creating a security interest in the policy.[4] Upon Insured’s death Wells Fargo sought to collect on the policy, however Sun Life declined payment and sought declaratory judgment that the Policy was void ab initio[5], after an investigation revealed that the policy was a “STOLI” scheme in nature, which is a violation of public policy.[6] The Court had to decide whether the policy was a STOLI transaction, which was to be voided ab initio, and whether Wells Fargo was entitled to a refund of premium payments.

The Court found that the policy was a STOLI transaction lacking insurable interest in violation of public policy under New Jersey law, and therefore should be declared void ab initio.[7] New Jersey courts and the Third Circuit had not addressed whether the immediate transfer of a life insurance policy to an individual without an insurable interest would void a policy.[8] The Court reasoned that the investors under the trust intended to sell the policy or prosper from the Insured’s death (admittedly by the Investors themselves[9]) creating a ‘wager’ arrangement that is unenforceable in New Jersey.[10] The Court looked to determinative facts, such as who paid the premiums, what the purpose and intentions of the investors were, and if anyone other than those who had invested in the Policy would be distributed any funds.[11] Further, defendants argued that there was an incontestability clause in the policy that disallowed Sun Life from contesting pay out except for non-payment of premiums.[12] The Court ruled that the incontestability provision in the policy did not bar suit against the STOLI policy because the policy itself was void.[13] Ultimately, the court sided with Sun Life on the issue as to whether this policy was a STOLI transaction and void ab initio. The Court went on to analyze whether Wells Fargo was owed a refund for their premium payments towards the policy.

The court ruled that the equitable remedy for a void STOLI policy in this circumstance was to refund the premium payments back to Wells Fargo. New Jersey does not permit parties to recoup funds exchanged as the result of a wagering transaction[14] and that paying the premiums back “would have the perverse effect of reducing the defrauders’ risk relative to honest policyholders…”[15] However, the court stated that withholding the premium payments from Wells Fargo would be misplaced because “the defrauders would not be obtaining a refund; Wells Fargo, which did not commit any fraud, would be refunded.”[16] In an effort to maintain fairness, the court ordered that Sun Life refund the premiums paid by Wells Fargo for the life insurance policy, as allowing Sun Life to retain the paid premiums would result in a “windfall” in favor of the corporation.[17]

[1] Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., CV14-5789(PGS)(LHG), 2016 WL 5746352, at *1 (D.N.J. Sept. 30, 2016).

[2] Id. at *1.

[3] Id. at n.1.

[4] Id. at n.1.

[5] “The term ‘void ab initio’ means ‘[a] contract is null from the beginning if it seriously offends law or public policy, in contrast to a contract which is merely voidable at the election of one of the parties to the contract.’ ” Bunky, Inc. v. Hammel, 2005 WL 3772487, at *7 (N.J. App. Div. Feb. 17, 2006).

[6] Sun Life. at *1.

[7] Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., 080669, 2019 WL 2345444, at*21 (N.J. June 4, 2019).

[8] However, the Supreme Court’s ruling in Grogsby v. Russell, 222 U.S. 149 (2011) stated that an insurable interest is necessary because “[a] contract of insurance upon a life in which the [policy owner] has no interest is a pure wager that gives the [policy owner] a sinister counter interest in having the life come to an end.” Id. at 154-55. See PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1075 (Del. 2011).

[9] Sun Life. at *10.

[10] “No person shall procure or cause to be procured any insurance contract upon the life, health or bodily safety of another individual unless the benefits under that contract are payable to the individual Insured or his personal representative, or to a person having, at the time when that contract was made, an insurable interest in the individual Insured.” N.J.S.A. § 17B:24-1.1(b).

[11] Sun Life. at *10-11.

[12] Id. at 2.

[13] “A void contract is a contract that is of no legal effect, so that there is really no contract in existence at all. A contract may be void because it is technically defective, contrary to public policy, or illegal.” D’Agostino v. Maldonado, 216 N.J. 168, 194, n. 4 (2013) (internal quotations omitted).

[14] See N.J. Stat. Ann. § 2A:40-3; Nemtin v. Zarin, 577 F. Supp. 1135, 1147 (D.N.J. 1983).

[15] Wuliger v. Mfgs. Life Ins. Co., 567 F.3d 787, 797-98 (6th Cir. 2009).

[16] Sun Life. at *12.

[17] Id. at *12.