CJA and associates 419 412i section 79 scam audits lawsuits focus on "stranger-originated life insurance" or "STOLI"-- in which a life insurance policy is originated primarily or solely for the purpose of resale. They chronicle how the clash of the insurable interest requirement and the evolving secondary life insurance market have led to the rise of STOLI lawsuits. They also analyze the myriad of legal issues that STOLI and stranger-originated annuity transactions raise. The authors write:
IV. THE RISE OF STOLI LAWSUITS
A. Salient Issues
Between 2005 and 2010, over 150 STOLI lawsuits were filed, predominantly by life insurers, although in a few cases policyholders or family members of the insureds initiated the actions. Most complaints made by insurers that alleged a policy was the product of a STOLI transaction sought to rescind the policy to avoid paying the death benefit. The insurers contended that because the ultimate policyholder did not have an insurable interest in the life of the insured at the time the policy was issued, the policy was void or voidable ab initio. Many of these cases also sought policy rescission based on alleged misrepresentations or fraud in the policy's application. Other salient issues at play in the litigations include the effects of the states' incontestability laws, whether the party or parties challenging a policy based on absence of insurable interest have legal standing, the role of premium financing, the obligation of an insurer to return premiums paid for a rescinded policy and questions of conflicts of law.
The critical issue the courts have had to examine in determining whether an insurable interest existed at the policy's inception involves the insured or policy owner's state of mind and the extent to which he or she anticipated the possibility of selling the policy at some future time. Since, in most instances, the policy owner will have died and cannot be examined in court, evidence of intent to sell must necessarily be inferred from the nature, timing and substance of communications between the policy owner, the insured and third parties regarding the potential resale of the policy or the beneficial interest in a life insurance trust.
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C. Fraud Alleged as a Practically Necessary Element to STOLI Cases
Every STOLI case resulting in a reported opinion has alleged some element of fraud by the policyholder or insured, or both, in addition to claiming that a policy is void for lack of insurable interest. Usually, the alleged fraud consists of false statements made in the life insurance application. These misstatements primarily relate to the financial wherewithal of the proposed insured, namely either or both of his financial net worth and/or annual income and earnings, or misrepresentations about the proposed insured's health or medical condition. To date, no life insurer has filed a single STOLI suit in which only an insurable interest violation has been alleged, i.e., there have been no pure STOLI lawsuits yet. Insurers, while using the STOLI rhetoric pervasively in their complaints, strategically rely on financial or medical fraud in their STOLI rescission cases knowing that such fraud in the procurement of life insurance, which existed well before the creation of the term STOLI and the advent of the secondary life insurance market, is usually easier to prove than is an insurable interest violation claim based upon the intent of a policyholder and/or other parties to purchase a policy solely for purposes of its resale.
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V. Stranger-Originated Annuity Transactions
A. Characteristics and Objectives of the Transactions
One of the hottest topics for the life insurance and annuity industry in 2010 was stranger- originated annuity ("STOA") transactions. Similar to STOLI transactions, STOA transactions involve producers and/or investors who offer individuals a cash payment in exchange for their permission to be named as the annuitant or measuring life on an application for an annuity contract, which specifies a third party having no relationship to the annuitant (i.e., the investor) as the contract beneficiary. Generally, the individual annuitant is in poor health and is not expected to live beyond the first anniversary of the policy purchase. The investor or financing entity pays the premiums for issuance of the contract. When the annuitant dies, the third-party beneficiary, not the annuitant's family, receives the death benefit, which can be substantial. As with sales of STOLI policies, many feel that purchases of variable annuities in such circumstances, in which the named annuitant receives a small share of the contract benefits while unrelated parties initiate the purchase and receive the lion's share of those benefits, are abusive
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