The plaintiff was an investment trust that purchased life insurance contracts. It brought the instant action seeking damages for the insurer’s alleged breach of nine lapsed life insurance policies on three different individuals with a collective face value of over $80 million.
It was undisputed that all nine policies were pieces of a “Stranger Originated Life Insurance” or “STOLI” transaction. Although purchasing life insurance with the intent of selling it to strangers became illegal in 2009, these transactions were legal at the time the policies in this case were issued.
The insurer issued the nine policies to trusts held in the names of the three insureds and the insureds paid the initial premiums required to obtain the policies (approximately $5.5 million). Thereafter, the insurer received two subsequent payments on one of the policies in the total amount of about $250,000, but no further premium payments were made on any of the nine policies. As set forth under the policy terms, the policies entered into the Grace Period before lapsing due to non-payment.
The first issue the court decided arose because the policies changed hands several times both before and after their lapse through assignments. The insurer argued that the plaintiff lacked standing because the various assignments of the nine policies were ineffective due to lack of notice to the insurer as required under the policy. The policy allowed for assignment but required satisfactory written notice to the insurer. The policy terms were unambiguous in stating that an assignment was effective upon notice and because in several of the cases there was no written requests in the record, the court found that the plaintiff lacked standing to bring the claims under several of the policies.
The next issue the court decided was whether the plaintiff’s breach by non-payment of premiums was excused by the insurer’s breach in overstating the premium amounts required to keep the policy in force. But the court found that the Grace Period provision does not require the insurer to include any minimum payment amounts in the Grace Notice, it merely obligated the insurer to send the notice. The court held that “This Court declines to grant summary judgment on actual breach because the plaintiff noticed the overstated Grace Notices, taped phone calls in which the policy owner’s representative stopped short of offering contractually sufficient payment, and then filed suit without ever attempting to tender a premium.”
Finally, the court addressed the breach of the covenant of good faith and fair dealing claim, finding that a material issue of fact existed.
In support of the claim, the plaintiff offered “deposition testimony, telephone call transcripts, and internal [insurer] documents suggesting that these policies were placed on a ‘watch list’ targeted for lapse, and that representatives were instructed to insist on the minimum payments demanded in the Grace Notices even after Allianz realized the amounts were overstated.” The court noted that the record also raised issues of fact that cut against the plaintiff’s position—“namely, the question of whether [the insurer’s] alleged breach caused the policy owners to stop paying premiums. The factfinder could infer from the record that the investors knew they were entitled to pay less than [ ] demanded, but instead chose to let the policies lapse and preserve their lawsuit.” The insurer asserted that the plaintiff’s policies were targeted, but only as part of a statutory compliance effort aimed at suspected STOLI transactions and that the overstatements in the Grace Notices were honest mistakes.
Jakobovits v. Alliance Life Insurance Company of North America
U.S. District Court, S.D. New York, July 18, 2017