369 F. Supp. 3d 601
D. Del.2019Background
- Sun Life sought a declaratory judgment that a $10 million life policy on Harriet Sol was void ab initio as an illegal wager/STOLI and lacked an insurable interest at inception; U.S. Bank is the current policy owner and claimant.
- Sol was elderly and (per record evidence) financially strained; Spalding (agent) solicited the policy and certified the application stating Sol’s net worth/income.
- Premiums were paid via non-recourse premium financing arranged by Coventry and LaSalle through a series of trusts (Insurance Trust, Family Trust, Sub-Trust); the Sub-Trust/Trusts were nominally funded and the loan was non-recourse.
- The loan terms and structure made repayment practically dependent on selling the policy on the secondary market; a bridge loan and eventual sale occurred, and the policy later came into U.S. Bank’s possession.
- Sun Life had flagged Coventry-related premium-finance arrangements as potential STOLI, investigated after Sol’s death, refused payment, and sued; cross-motions for partial summary judgment were filed and decided on the record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Policy had an insurable interest at inception | The insured did not procure the policy; premiums were funded by non-recourse third-party financing and the insured lacked a true obligation/ability to repay, so the policy is a wager and void. | Sol (or trusts) procured the policy; there was an obligation to repay the loan and beneficiaries were persons with insurable interest, so the policy is valid. | Court: No insurable interest at inception; policy void ab initio as an illegal wager. |
| Whether an insured can be treated as procuring a policy when financed by non-recourse loan | Sun Life: Non-recourse financing creates no real obligation to repay; borrowing must impose an obligation to repay to show procurement. | U.S. Bank: The contractual loan obligation (and repayment history/structure) shows procurement by insured or trusts. | Court: Non-recourse loan and practical inability to repay mean insured did not procure policy; prior authorities support this. |
| Whether naming family beneficiaries (insurable interest by blood) cures a STOLI arrangement | Sun Life: Technical compliance with §2704(c)(1) cannot save a transaction that in substance is a wagering scheme; good-faith procurement is required. | U.S. Bank: Beneficiaries were Sol’s family, so statutory insurable interest existed and policy is enforceable. | Court: Technical naming does not cure a wagering scheme; third parties lacked good faith, so beneficiaries’ nominal insurable interest does not validate the policy. |
| Whether the absence of a prearranged purchaser (i.e., third party did not itself plan to acquire the policy) defeats STOLI finding | Sun Life: Whether third parties planned to acquire the policy is irrelevant; structure and intent show STOLI regardless of who ultimately bought it. | U.S. Bank: Because Coventry never acquired this specific policy, this was not a STOLI scheme as in other cases. | Court: Absence of prearranged purchaser is not dispositive; legality should not turn on who ultimately acquired the policy. |
Key Cases Cited
- PHL Variable Ins. Co. v. Price Dawe, 28 A.3d 1059 (Del. 2011) (Delaware Supreme Court: insurable-interest requirement prevents STOLI; courts must scrutinize procurement and require good-faith procurement).
- Principal Life Ins. Co. v. Lawrence Rucker, 869 F. Supp. 2d 556 (D. Del. 2012) (insured may borrow to pay premiums if obligation to repay is genuine; factual dispute there distinguished this case).
- DV Realty Advisors LLC v. Policemen's Annuity and Ben. Fund of Chicago, 75 A.3d 101 (Del. 2013) (good-faith determination is a legal issue bearing on contract validity).
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (summary judgment standard — genuineness of factual disputes judged by whether reasonable jury could find for nonmovant).
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) (moving party bears burden to show absence of genuine issue of material fact on summary judgment).