Senate Commerce Committee Statement - Senate Bill No. 1914, State of New Jersey (July 23, 2020)

Summary

A statement from the Senate Commerce Committee of New Jersey, No. 1914 to the Senate and dated July 23, 2020, on Senate Bill No. 1914, which it reports favorable. The bill defines stranger-originated life insurance and states that it is not a viatical settlement contract, prohibits trusts created to give the appearance of insurable interest, and says a contract or arrangement furthering such a practice is void and unenforceable at the outset. The Commissioner of Banking and Insurance may seek an injunction and issue a cease and desist order, and the statement says violators are subject to civil penalties of up to $10,000 per violation. The statement says a recent New Jersey Supreme Court decision stated that such a policy is void at the outset and that the bill is intended to codify that holding.

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     SENATE COMMERCE COMMITTEE

                    STATEMENT TO

                  SENATE, No. 1914

 STATE OF NEW JERSEY
                       DATED: JULY 23, 2020

    The Senate Commerce Committee reports favorable Senate Bill
No. 1914.
    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-
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originated life 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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