Seventh Circuit Slams STOLI Scheme, Permits Insurer To Retain Premium and Recover Attorneys' Fees

Last week, the United States Court of Appeals for the Seventh Circuit issued an opinion affirming summary judgment in favor of Ohio National Life Assurance Corporation in a STOLI-related case.  The 14-page opinion authored by Judge Richard Posner rejected the notion that courts should examine only the form of a life insurance transaction, rather than the substance of the transaction, in determining whether a policy was supported by an insurable interest at inception.

The underlying lawsuit concerned the validity of various life insurance policies that were procured at the direction of the defendants, who solicited elderly individuals, particularly African-Americans, to apply for life insurance with the intent to transfer the beneficial interest in each respective policy to one or more of the defendants.  The opinion found that African-Americans in particular were targeted by those conspiring to procure the policies because African-Americans had statistically shorter life spans.  According to the court, the insureds were not involved in the procurement of the policies other than having “lent” their names and signatures to the applications.  The court held that this scheme was intentionally concealed from Ohio National through, among other things, the use of life insurance trusts as the owners of the policies.  Within weeks to months of issuance and unbeknownst to Ohio National, the beneficial interests in the trust-owners of the subject policies were transferred to the defendants and subsequently to investors in the secondary market.  The court explained that the defendants and the investors paid all premiums on the policies in the name of the trust-owners.

The Seventh Circuit agreed with the district court’s conclusion that the subject policies were illegal.  The Seventh Circuit was particularly persuaded by the “wrinkle” in the use of insurance trusts as a vehicle “to conceal from Ohio National the fact that [the defendants] rather than the insured controlled the policy and that [the defendants] plan to sell it as an investment.”  Op. at 3.  The Seventh Circuit further acknowledged “the unseemliness of gambling on when a person will die.”  Op. at 6.  Finding that the insureds maintained no control whatsoever over the policies from the outset, Op at 8, the court noted that the insureds instead merely served as “the defendants’ puppets.”  Op. at 9.

The Seventh Circuit also affirmed the district court’s decision to permit Ohio National to retain the premiums it received in connection with the subject policies.  The court held that the defendants (other than Defendant Egbert) were to blame for the illegal contracts and therefore had no right to recoup the premiums they paid.  The court explained that “allowing recoupment would, by reducing the cost, increase the likelihood of unlawful activity.”  Op. at 13.

The court further held that Ohio National was entitled to damages to cover the attorneys’ fees incurred in the underlying litigation.  The court acknowledged that prevailing parties ordinarily cannot recoup litigation expenses from the losing party.  But the court explained that “[b]y voiding the policies [Ohio National] accelerated its defense against the claims that the investors were bound to make when the insureds died.”  Op. at 11.  Ohio National’s efforts to void the policies rather than “litigate with the purchasers of the insurance policies upon the death of the insureds” operated as affirmative conduct to protect its interests.  According to the court, Ohio National’s damages therefore included the reasonable expenses of the underlying litigation, including attorneys’ fees.