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

Summary

Statement of the Senate Commerce Committee, State of New Jersey, dated July 23, 2020, reporting favorably Assembly Bill No. 1263, which supplements the "Viatical Settlements Act," P.L.2005, c.229, to address stranger-originated life insurance, or "STOLI." The bill defines stranger-originated life insurance, states that it is not a viatical settlement contract and prohibits any person from engaging in any act, practice or arrangement that constitutes it. It lets a life insurer contest such a policy at any time and makes agreements in furtherance of the practice void and unenforceable at the outset. Violators are subject to civil penalties of up to $10,000 per violation. The statement says the bill is intended to codify a holding of the New Jersey Supreme Court, in a 2019 decision, that such a policy is void at the outset.

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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 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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