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

Summary

A Senate Commerce Committee statement to the Senate on Senate Bill No. 1914, State of New Jersey, dated July 23, 2020, reporting the bill favorably. The bill supplements the "Viatical Settlements Act" to address stranger-originated life insurance, or "STOLI," which the statement describes as a policy bought for the benefit of a third party with no insurable interest in the life of the insured. It defines and prohibits STOLI practices, lets a life insurer contest such a policy at any time and makes related arrangements void and unenforceable at the outset. Violations carry civil penalties of up to $10,000 per violation, and the statement says the bill is intended to codify a recent New Jersey Supreme Court holding in a case involving Sun Life and Wells Fargo Bank.

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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-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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