How to Fight a STOLI Scheme: Court Rulings Offer Clues

Life, Annuity, and Retirement Solutions   |   July 8, 2014
Download Download   
Share Share Page

Two recent court decisions provide potential road maps for insurers in the fight against Stranger-Originated Life Insurance (STOLI) schemes. Ohio Nat’l Life Assurance Corp. v. Davis involved a STOLI scheme so obvious that four of the five policies at issue were allowed to lapse or were no longer contested. However, the defendant resisted Ohio National’s summary judgment claim that the fifth policy was void at inception, arguing that the insured bought the policy at his own behest and could keep the insurance if he desired. In response, Ohio National successfully argued to the Northern District of Illinois that the insured never owned the death benefit because the date of his policy application was later than the date he transferred his interest in his life insurance trust to defendants.

In Vasquez v. ReliaStar Life Insurance Co., ReliaStar, suspecting a STOLI scheme, rescinded a policy based on misrepresentations of fact in the application. The owner-beneficiary trust argued that these misrepresentations were not material because they did not "affect the risk assumed" by the insurer: namely, her health or death. The Texas Court of Appeals disagreed, concluding that the real risk assumed by an insurer is the risk it will have to pay death benefits, so any information provided in the policy application that impacted whether the insurer decided to provide coverage, and how much, could be material. ReliaStar proved that all information in the policy application fit this description by relying on its financial underwriting guidelines as well as testimony from its underwriters.

These cases suggest that, in the fight against STOLI, insurers should pay careful attention to the timeline of events surrounding the policy application and trust ownership, and that their underwriting guidelines should specify how the policy application information impacts coverage decisions.

©2021 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications


The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.