Update (12/17/2013): Another recent District of Minnesota “STOLI” decision, attached here. U.S. District Court Judge Ann D. Montgomery (D. Minn.) gets it entirely right, in my view. These complicated cases can be easily analogized to an illegal gamble where the gambler wins big and goes to court to force payment on the illegal bet. It’s illegal. The Court will not compel the pay-out. But does the gambler at least get the return of his initial bet? If the “gambling operation” had reason from the start to know that its operation was shady, it would seem that its retaining the bet would be “unjust enrichment.” So held the court. Perhaps a jury will ultimately decide whether the life insurance company’s slippery business is simply too lubricious for the company to hold onto the STOLI insurance premiums.
Original Post (9/17/2013): Some workers spend much of their lives in protective gear because they work around poisonous slime, carcinogens, or other physically threatening materials.
There is no hope, however, for those among us who have to work should-to-shoulder with sleaze on occasion. “After some days,” an experienced trial lawyer once told me, “you just have to go home and have a hot shower and a stiff drink…”
My sympathy to the U.S. District Court for the District of Minnesota and the lawyers involved in PHL Variable Insurance Company v. 2008 Christa Joseph Irrevocable Trust, et al. After reading about some of the characters in that recent trial bench trial in Judge Patrick J. Schiltz’s (D. Minn.) findings of fact and conclusions of law, I had to scrub my brain with lava soap and air it out on the back deck in the sun for a few hours. (It still smells a little funny.)
It appears that folks who apparently pawned their moral compasses years ago got into the business of STOLI’s (“stranger originated life insurance policies”).
STOLI’s, apparently, are a kind of investment, you might say, where strangers buy life insurance policies on strangers (elderly, preferred) and the STOLI originators name themselves beneficiaries on the life insurance policies. To make the deal work, however, this simple model must be concealed from the insurer who issues the policy. To make the deal worthwhile, you have to have the life insurance policy be for a substantial amount of money. To get a multi-million dollar policy (with six-figure premiums), you might need to inflate your stranger’s net worth on the insurance application.
Even better, of course, if you have multiple layers for straw men (and women) along with a myriad of intermediaries and brokers, each of whom may be complicit in varying degrees but none of whom will “own” the big picture or feel responsible, morally or otherwise, for the deal.
One witness, the Court held, was “one of the most dishonest the Court has seen.” Another inadvertently called the older people who were signed up for STOLI’s his “target[s]” when testifying at trial before correcting himself.
On the other hand, let’s not go too far overboard with self-congratulations and back-patting for our vast moral superiority. Judge Schiltz’s opinion notes that the career path one of these wrong-doers looks like this: security guard, lifeguard, swim instructor, and, most recently, a parking valet. In other words, we’re talking about someone who, for whatever reason, has not been very successful financially. Here was his chance to make some relatively serious money and who, really, is the victim of this gimmick? An insurer whose underwriting, Judge Schiltz noted, “left a lot to be desired…”