Senate Commerce Committee Statement - Assembly Bill No. 1263, State of New Jersey (July 23, 2020)

Summary

Senate Commerce Committee Statement to Assembly, No. 1263, State of New Jersey, dated July 23, 2020, reporting Assembly Bill No. 1263 favorably. The bill supplements the "Viatical Settlements Act," P.L.2005, c.229, to address stranger-originated life insurance, or "STOLI," which the statement describes as a practice in which a life insurance policy is purchased for the benefit of a third party who has no insurable interest in the life of the insured. The statement says the bill prohibits any person from engaging in any act, practice or arrangement that constitutes stranger-originated life insurance and lets a life insurer contest a policy on that ground at any time. It states that violators would be subject to civil penalties of up to $10,000 per violation.

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     SENATE COMMERCE COMMITTEE

                     STATEMENT TO

                ASSEMBLY, No. 1263

 STATE OF NEW JERSEY
                       DATED: JULY 23, 2020

     The Senate Commerce Committee reports favorably Assembly Bill
No. 1263.
     This bill supplements the “Viatical Settlements Act,”
P.L.2005, c.229 (C.17B:30B-1 et seq.), to address concerns regarding
stranger-originated life insurance, or “STOLI,” as it is sometimes
called. STOLI is a practice in which a life insurance policy is
purchased for the benefit of a third party who, at the time of policy
issuance, has no insurable interest in the life of the insured. The long-
standing legal principle of insurable interest generally requires that a
person applying for a life insurance policy must have an interest in the
continued life of the insured. This is most often because the insured is
a blood relative or because an economic relationship exists between
the parties. Since it has long been illegal and void as a wager on
human life to seek to obtain insurance on a stranger, modern STOLI
schemes have endeavored to hide the offensive ownership of the
policy from insurers at inception and from viatical settlement
companies when the policy is sought to be sold. STOLI transactions
also often include acts of fraud in the application for new insurance,
such as the applicant misrepresenting their net worth or the amount of
in force insurance they have. STOLI practices include, but are not
limited to, cases in which life insurance is purchased with resources or
guarantees from or through a person or entity who, at the time of
policy inception, could not lawfully initiate or procure the policy
themselves and where, at the time of inception, there is an
arrangement, verbal or written, to directly or indirectly transfer the
ownership of the policy or policy benefits to a third party. Not only
are STOLI schemes harmful because they circumvent insurable
interest laws, they can also limit an insured’s ability to purchase life
insurance later if he has used up his capacity for insurance on the
STOLI arrangement.
     Specifically, the bill provides a definition of stranger-originated
life insurance and explicitly states that stranger-originated life
insurance is not a viatical settlement contract. The bill prohibits
establishing trusts created to give the appearance of insurable interest
and that are used to initiate or procure policies for investors.
     The bill prohibits any person from directly or indirectly engaging
in any act, practice or arrangement that constitutes stranger-originated
life insurance. The bill provides that a life insurer may contest a policy
on the grounds that it was obtained by a stranger-originated life
                                  2

insurance practice, as defined by the bill, at any time, notwithstanding
the existing statutory provision that limits contestability of a life
insurance policy once it has been in force during the lifetime of the
insured to a period of two years from the date of issue. The bill further
provides that a contract, agreement, arrangement, or transaction,
including, but not limited to, a financing agreement or any other
arrangement or understanding entered into, whether written or verbal,
for the furtherance or aid of a stranger-originated life insurance
practice is void and unenforceable at the outset.
     The Commissioner of Banking and Insurance may seek an
injunction in a court of competent jurisdiction and may apply for
temporary and permanent orders that the commissioner determines are
necessary to restrain any person from committing a violation of the
bill. Any person damaged by the acts of a person in violation of the
bill may bring a civil action against the person committing the
violation in a court of competent jurisdiction. The commissioner may
issue a cease and desist order for a violation of the bill’s provisions or
an order adopted by the commissioner. If the commissioner finds that
an activity in violation of the bill presents an immediate danger to the
public that requires an immediate final order, the commissioner may
issue an emergency cease and desist order reciting with particularity
the facts underlying the findings.
     In addition to the penalties and other enforcement provisions of the
bill, any person who violates the bill shall be subject to civil penalties
of up to $10,000 per violation and the commissioner's order may
require a person found to be in violation of the bill to make restitution
to persons aggrieved by the violations. Additionally, a violation shall
be considered an unfair trade practice pursuant to N.J.S.17B:30-1 et
seq. and shall be subject to the penalties contained in N.J.S.17B:30-17.
     A recent decision of the New Jersey Supreme Court, Sun Life
Assur. Co. vs. Wells Fargo Bank, N.A., 238 N.J. 157 (2019),
reaffirmed the long-standing tenet that a life insurance policy procured
with the intent to benefit persons without an insurable interest in the
life of the insured violates public policy of the State, and further held
that such a policy is void at the outset. This bill is intended to codify
that holding, and to provide appropriate penalties for violations arising
from stranger-originated life insurance practices.


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