Sun Life Assurance Company of Canada v. Wells Fargo Bank NA (080669) (Statewide)

SYLLABUS

This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the
Clerk for the convenience of the reader. It has been neither reviewed nor approved by the
Court. In the interest of brevity, portions of an opinion may not have been summarized.

Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A.
(A-49-17) (080669)

Argued January 29, 2019 -- Decided June 4, 2019

RABNER, C.J., writing for the Court.

In New Jersey and elsewhere, no one can procure insurance on a stranger’s life
and receive the benefits of the policy. Betting on a human life in that way, with the hope
that the person will die soon, not only raises moral concerns but also invites foul play.
For those reasons, state law allows a policy to be procured only if the benefits are payable
to someone with an “insurable interest” in the person whose life is insured. N.J.S.A.
17B:24-1.1(b).

In April 2007, Sun Life Assurance Company of Canada received an application
for a $5 million insurance policy on the life of Nancy Bergman. The application listed a
trust as the sole owner and beneficiary of the policy. Ms. Bergman’s grandson signed as
trustee. The other members of the trust were all investors, and all strangers to Ms.
Bergman. The investors paid most if not all of the policy’s premiums.

Sun Life received an inspection report that listed Ms. Bergman’s annual income as
more than $600,000 and her overall net worth at $9.235 million. In reality, her income
was about $3000 a month, and her estate was later valued at between $100,000 and
$250,000. Although Ms. Bergman represented that she had no other life insurance
policies, five policies were taken out on her life in 2007, for a total of $37 million.

Sun Life issued the policy on July 13, 2007. At the time, the trust was the sole
owner and beneficiary. The policy had an incontestability clause that barred Sun Life
from challenging the policy -- other than for non-payment of premiums -- after it had
been “in force during the lifetime of the Insured” for two years. About five weeks after
the policy was issued, the grandson resigned as trustee and appointed the investors as
successor co-trustees. The trust agreement was amended so that most of the policy’s
benefits would go to the investors, who were also empowered to sell the policy.

More than two years later, the trust sold the policy and the investors received
nearly all of the proceeds from the sale. Wells Fargo Bank, N.A. eventually obtained the
policy in a bankruptcy settlement and continued to pay the premiums.
1
 After Nancy Bergman passed away in 2014, Wells Fargo sought to collect the
policy’s death benefit. Sun Life investigated the claim, uncovered the discrepancies
noted above, and declined to pay. Instead, Sun Life sought a declaratory judgment that
the policy was void ab initio, or from the beginning. Wells Fargo counterclaimed for
breach of contract and sought the policy’s $5 million face value; if the court voided the
policy, Wells Fargo sought a refund of the premiums it paid.

The United States District Court for the District of New Jersey partially granted
Sun Life’s motion for summary judgment. The court found that New Jersey law applied
and concluded “that this was a STOLI [(stranger-originated life insurance)] transaction
lacking insurable interest in violation of [the State’s] public policy. . . . As such, it should
be declared void ab initio.” The court also granted Wells Fargo’s motion to recover its
premium payments, reasoning that “Wells Fargo is not to blame for the fraud here” and
that “[a]llowing Sun Life to retain the premiums would be a windfall to the company.”

Both parties appealed. Finding no dispositive New Jersey case law, the United
States Court of Appeals for the Third Circuit certified two questions of law to this Court:

1. Does a life insurance policy that is procured with the intent to benefit persons
without an insurable interest in the life of the insured violate the public policy
of New Jersey, and if so, is that policy void ab initio?

2. If such a policy is void ab initio, is a later purchaser of the policy, who was not
involved in the illegal conduct, entitled to a refund of any premium payments
that they made on the policy?

HELD: The Court answers both parts of the first certified question in the affirmative: a
life insurance policy procured with the intent to benefit persons without an insurable
interest in the life of the insured does violate the public policy of New Jersey, and such a
policy is void at the outset. In response to the second question, a party may be entitled to
a refund of premium payments it made on the policy, depending on the circumstances.

1. The Court reviews the history of wagering concerns associated with life insurance and
the development of the insurable interest requirement in response to those concerns. In
New Jersey, the Legislature adopted the current insurable interest requirement in 1968.
The Legislature expressly imposed an insurable interest requirement and thus superseded
dated case law holding that a policy could be valid without an insurable interest. N.J.S.A.
17B:24-1.1(a) outlines situations in which an individual has an insurable interest, as well
as circumstances under which a corporation or a nonprofit or charitable entity has an
insurable interest in the lives of its employees, officers, or others. Critical to the
questions presented in this case, section (b) of N.J.S.A. 17B:24-1.1 bars procurement of a
life insurance policy payable to someone who lacks an insurable interest in the life of the
insured. (pp. 8-13)
2
2. Just as all New Jersey insurance policies must be based on an insurable interest, they
must also contain an incontestability clause. See N.J.S.A. 17B:25-4 (“There shall be a
provision that the policy . . . shall be incontestable, except for nonpayment of premiums,
after it has been in force during the lifetime of the insured for a period of 2 years from its
date of issue.”). Incontestability clauses, however, are not a bar to all defenses. A
majority of courts have held that the lack of an insurable interest can be asserted as a
defense even after a policy has become incontestable. As the Delaware Supreme Court
has explained, “if a life insurance policy lacks an insurable interest at inception, it is void
ab initio because it violates . . . clear public policy against wagering. It follows,
therefore, that if no insurance policy ever legally came into effect, then neither did any of
its provisions, including the statutorily required incontestability clause.” PHL Variable
Ins. Co. v. Price Dawe 2006 Ins. Tr., 28 A.3d 1059, 1067-68 (Del. 2011). (pp. 14-16)

3. Although life insurance policies must be payable to a person with an insurable interest
when they are procured, policies can be sold later on -- including to individuals who
would not have been able to buy the policy originally because they lacked an insurable
interest. In New Jersey, life insurance policies may be sold subject to the regulatory
scheme outlined in the Viatical Settlements Act, N.J.S.A. 17B:30B-1 to -17. Aside from
limited exceptions, the law bars policyholders from entering into a viatical or life
settlement contract -- and thus transferring the policy benefit to a stranger -- for two years
from the date the policy was issued. N.J.S.A. 17B:30B-10(a). STOLI policies are a
subset of life settlements in which a life settlement broker persuades a senior citizen to
take out a life insurance policy for a cash payment or some other current benefit arranged
with a life settlement company. Generally, an investor funds a STOLI policy from the
outset, which makes it possible to obtain a policy with a high face value. STOLI
arrangements thus present a significant legal problem: the investors have no insurable
interest in the life of the insured. As a result, the transactions pose questions in light of
New Jersey’s policy against wagering, which finds expression in the State Constitution
and in statutory provisions. (pp. 16-22)

4. The first part of question one asks whether “a life insurance policy that is procured
with the intent to benefit persons without an insurable interest in the life of the insured
violate[s] the public policy of New Jersey.” Consider a policy that strangers financed or
caused to be procured for Mary’s life. When the policy is issued, Mary’s daughter is the
named beneficiary or the trustee of an irrevocable trust that owns the policy. The trust
thus has an insurable interest at the time the contract for the policy is made. But the
strangers actually have a side agreement with Mary or her daughter to transfer control of
the trust, the beneficial interest in the policy, or ownership of the policy, at a later time.
In short, the outside investors who funded the policy effectively control it from the start.
It would elevate form over substance to suggest that the policy satisfies the insurable
interest requirement. The policy is a cover for a wager on Mary’s life by a stranger. It
therefore violates public policy. STOLIs commonly involve life insurance policies
procured and financed by investors -- strangers -- who have no insurable interest in the
3
life of the insured yet, from the outset, are the ultimate intended beneficiaries of the
policy. That type of arrangement runs afoul of New Jersey’s insurable interest
requirement and counters the principle underlying the requirement: the individual with
an insurable interest must have an interest in the continued life of the insured rather than
in his early death. The Court explains why, contrary to Wells Fargo’s assertions, sections
(c) and (d) of the insurable interest statute do not call for a different result and notes that
an incontestability provision does not bar a challenge to a STOLI policy. (pp. 23-28)

5. Imagine Mary’s daughter procured the above policy, paid the premiums for a few
months, and then transferred her role as trustee, or the ownership or beneficial interest in
the policy, to strangers in exchange for reimbursement and compensation. Suppose as
well that Mary’s daughter intended to do so from the start. That arrangement likewise
might be little more than a cover for a wager on Mary’s life, and it raises questions about
the manner in which the policy was procured. A number of considerations could affect
the validity of the policy: the nature and timing of any discussions between the purchaser
and the strangers; the reasons for the transfer; and the amount of time the policy was
held; among other factors. Courts cannot devise a bright-line rule for the type of
transaction this second hypothetical presents. The area is best addressed by the
Legislature and the Division of Banking and Insurance (DOBI). (pp. 28-30)

6. Thirty states have enacted anti-STOLI legislation to date. Two model acts have been
designed to stop STOLIs. Anti-STOLI legislation has been proposed multiple times in
New Jersey. From 2009 through 2014, ten bills were introduced. None were passed or
enacted. Despite suggestions by Wells Fargo, it is difficult to discern the Legislature’s
intent from bills it has not passed. (pp. 30-32)

7. According to DOBI, absent an insurable interest, a life insurance policy is a “pure
gamble” in violation of N.J.S.A. 17B:24-1.1 and “the anti-gambling provisions of both
the New Jersey Constitution and New Jersey statutes.” DOBI’s views are entitled to
considerable weight in this area, which falls within its field of expertise. (pp. 32-33)

8. The Court reviews cases from other jurisdictions that have considered similar
questions. Notably, three jurisdictions that found that STOLI policies passed muster
under the states’ then-existing laws -- all three have since adopted anti-STOLI legislation
-- interpreted statutory provisions that either limited the duration of an insurable interest
requirement to when the policy took effect or explicitly permitted the immediate transfer
of policies. New Jersey statutory law does not permit the immediate transfer of a life
insurance policy to people or entities that lack an insurable interest. (pp. 33-41)

9. The Court stresses that it does not suggest that life settlements in general are contrary
to public policy. Valid life insurance policies are assets that can be sold. An established
secondary market exists for the sale of valid policies -- at least two years after they are
issued or earlier in certain cases -- to investors who lack an insurable interest. (pp. 41-42)
4
10. The first certified question poses a supplemental inquiry: If the policy procured
violates New Jersey’s public policy, is it void ab initio? When an insurance policy
violates public policy, it is as though the policy never came into existence. The policy
would be void from the outset. (pp. 42-43)

11. The second certified question asks, “If such a policy is void ab initio, is a later
purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund
of any premium payments that they made on the policy?” The traditional rule -- that
courts leave the parties to a void contract as they are rather than assist an illegal contract
-- has evolved over time. Under the more modern view, equitable factors can be
considered to determine the proper remedy. The Court reviews several decisions in
which such factors were considered by courts assessing STOLI policies and observes that
the fact-sensitive approach adopted in those cases is sound. To decide the appropriate
remedy, trial courts should develop a record and balance the relevant equitable factors.
Those factors include a party’s level of culpability, its participation in or knowledge of
the illicit scheme, and its failure to notice red flags. Depending on the circumstances, a
party may be entitled to a refund of premium payments it made on a void STOLI policy,
particularly a later purchaser who was not involved in any illicit conduct. The Court
notes that the District Court considered equitable principles and fashioned a compromise
award but does not comment on the award itself. (pp. 43-48)

JUSTICES LaVECCHIA, PATTERSON, FERNANDEZ-VINA, SOLOMON, and
TIMPONE join in CHIEF JUSTICE RABNER’s opinion. JUSTICE ALBIN did
not participate.

5
 SUPREME COURT OF NEW JERSEY
A-49 September Term 2017
080669

Sun Life Assurance
Company of Canada,

Plaintiff-Respondent,

v.

Wells Fargo Bank, N.A.,
as Securities Intermediary,

Defendant-Appellant.

On certification of questions of law from the
United States Court of Appeals for the Third Circuit.

Argued Decided
January 29, 2019 June 4, 2019

Julius A. Rousseau, III, of the New York and North
Carolina bars, admitted pro hac vice, argued the cause for
appellant (Arent Fox, attorneys; Julius A. Rousseau, III,
and Eric Biderman, on the briefs).

Charles J. Vinicombe argued the cause for respondent
(Cozen O’Connor, attorneys; Charles J. Vinicombe,
Michael J. Miller, and Sarah E. Kalman, on the briefs).

Raymond R. Chance, III, Assistant Attorney General,
argued the cause for amicus curiae State of New Jersey
Department of Banking and Insurance (Gurbir S. Grewal,
Attorney General, attorney; Melissa H. Raksa, Assistant
Attorney General, of counsel; and James A. Carey, Jr.,
1
 Deputy Attorney General, and Adam B. Masef, Deputy
Attorney General, on the brief).

Joseph D. Jean submitted a brief on behalf of amicus
curiae Institutional Longevity Markets Association
(Pillsbury Winthrop Shaw Pittman, attorneys).

Michael M. Rosensaft submitted a brief on behalf of
amicus curiae Life Insurance Settlement Association
(Katten Muchin Rosenman, attorneys).

CHIEF JUSTICE RABNER delivered the opinion of the Court.

In New Jersey and elsewhere, no one can procure a life insurance policy

on a stranger’s life and receive the benefits of the policy. Betting on a human

life in that way, with the hope that the person will die soon, not only raises

moral concerns but also invites foul play. For those reasons, state law allows a

policy to be procured only if the benefits are payable to someone with an

“insurable interest” in the person whose life is insured. N.J.S.A. 17B:24 -

1.1(b). The beneficiary can be the insured herself, a close relative, a person,

corporation, or charity with certain financial ties to the insured, or select

others. N.J.S.A. 17B:24-1.1(a).

This case arises out of certified questions of law from the United States

Court of Appeals for the Third Circuit. We consider whether the swift transfer

of control over a life insurance policy and its benefit, from a named

2
beneficiary who had an insurable interest to investors who did not, satisfies

New Jersey’s insurable interest requirement.

Here, a group of investors paid for a life insurance policy through a

trust. The insured was a stranger to them. When the policy was issued, the

insured’s grandson was the beneficiary. About five weeks later, the trust was

amended and the strangers who invested in the policy became its beneficiaries.

In short, the insurable interest requirement appeared to have been satisfied at

the moment the policy was purchased, but the plan from the start was to

transfer the benefits to strangers soon after the policy was issued.

The policy in question is known as a “STOLI” -- a stranger-originated

life insurance policy. Because such policies can be predatory and may involve

fraud, other states have adopted legislation that bars them. We now consider

STOLI policies as a matter of first impression.

We find that STOLI policies run afoul of New Jersey’s insurable interest

requirement and are against public policy. It would elevate form over

substance to conclude that feigned compliance with the insurable interest

statute -- as technically exists at the outset of a STOLI transaction -- satisfies

the law. Such an approach would upend the very protections the statute was

designed to confer and would effectively allow strangers to wager on human

lives.

3
 In response to the certified questions, we find that STOLI policies are

against public policy and are void ab initio, that is, from the beginning. We

also note that a party may be entitled to a refund of premium payments

depending on the circumstances. Among other relevant factors, courts should

consider a later purchaser’s participation in and knowledge of the original

illicit scheme.

I.

We draw the following facts from the opinions of the Third Circuit and

the United States District Court for the District of New Jersey.

A.

In April 2007, Sun Life Assurance Company of Canada received an

application for a $5 million insurance policy on the life of Nancy Bergman.

The application listed the Nancy Bergman Irrevocable Trust dated 4/6/2007 as

the sole owner and beneficiary of the policy. Nancy Bergman signed the

application as the grantor of the trust, and her grandson, Nachman Bergman,

signed as trustee. The trust had four additional members. All of them were

investors, and all were strangers to Ms. Bergman. The investors deposited

money into the trust account to pay most if not all of the policy’s premiums.

The original trust agreement provided that any proceeds of the policy would be

paid to Nachman Bergman.

4
 Ms. Bergman was a retired middle school teacher. Sun Life received an

inspection report that listed her annual income as more than $600,000 and her

overall net worth at $9.235 million. In reality, her income was about $3000 a

month from Social Security and a pension, and her estate was later valued at

between $100,000 and $250,000.

Although Ms. Bergman represented that she had no other life insurance

policies, five policies were taken out on her life in 2007 from various

insurance companies, including Sun Life, for a total of $37 million.

Sun Life issued the $5 million policy in question on July 13, 2007. At

the time, the trust was the sole owner and beneficiary. The policy had an

incontestability clause that barred Sun Life from challenging the policy --

other than for non-payment of premiums -- after it had been “in force during

the lifetime of the Insured” for two years.

On August 21, 2007, about five weeks after the policy was issued,

Nachman Bergman resigned as trustee and appointed the four investors as

successor co-trustees. The trust agreement was amended so that most of the

policy’s benefits would go to the investors; they were also empowered to sell

the policy on their own.

More than two years later, in December 2009, the trust sold the policy to

SLG Life Settlements, LLC, for $700,000. The investors received nearly all of

5
the proceeds from the sale. Afterward, a company named LTAP acquired the

policy for a brief period, and Wells Fargo Bank, N.A. obtained it in a

bankruptcy settlement in or about 2011. Wells Fargo continued to pay the

premiums. It claims to have paid $1,928,726 through a combination of direct

premium payments and loans to LTAP to pay premiums.

B.

After Nancy Bergman passed away in 2014 at age 89, Wells Fargo

sought to collect the policy’s death benefit. Sun Life investigated the claim,

uncovered the discrepancies noted above, and declined to pay. Instead, Sun

Life filed an action in the District Court and sought a declaratory judgment

that the policy was void ab initio as part of a STOLI scheme. Wells Fargo

counterclaimed for breach of contract and sought the policy’s $5 million face

value; if the court voided the policy, Wells Fargo sought a refund of the

premiums it paid and funded.

The District Court partially granted Sun Life’s motion for summary

judgment. The court found that New Jersey law applied and concluded “that

this was a STOLI transaction lacking insurable interest in violation of [the

State’s] public policy. . . . As such, it should be declared void ab initio.” The

court also granted Wells Fargo’s motion to recover its premium payments.

The court reasoned that “Wells Fargo is not to blame for the fraud here” and

6
that “[a]llowing Sun Life to retain the premiums would be a windfall to the

company.”

Wells Fargo appealed the determination that the policy was void, and

Sun Life cross-appealed the order to refund the premiums.

The Third Circuit noted that “[n]o New Jersey state court has

considered” the issues at the heart of this case: “whether STOLI arrangements

violate the public policy of New Jersey, and if they do, whether the affected

insurance policies are rendered void ab initio.” The circuit court also observed

that “[i]f the Policy is declared void ab initio, then the nature of the remedy

available to the parties is another unresolved question of New Jersey law.”

To resolve those “difficult question[s] of New Jersey public policy” and

law, the Third Circuit certified two questions of law to this Court:

(1) Does a life insurance policy that is procured with
the intent to benefit persons without an insurable
interest in the life of the insured violate the public
policy of New Jersey, and if so, is that policy void ab
initio?

(2) If such a policy is void ab initio, is a later purchaser
of the policy, who was not involved in the illegal
conduct, entitled to a refund of any premium payments
that they made on the policy?

We accepted both questions pursuant to Rule 2:12A-5. 236 N.J. 581

(2018). We also granted leave to appear as amici curiae to the Department of

7
Banking and Insurance (DOBI), the Institutional Longevity Markets

Association (ILMA), and the Life Insurance Settlement Association (LISA).

II.

To provide context for the discussion that follows, we review at the

outset certain relevant statutes and concepts.

A.

Life insurance is “[a]n agreement between an insurance company and the

policyholder to pay a specified amount to a designated beneficiary on the

insured’s death.” Black’s Law Dictionary 1010 (9th ed. 2009); see also

N.J.S.A. 17B:17-3. The Life and Health Insurance Code, at Title 17B of the

New Jersey Statutes, regulates this area of law today.1

Life insurance has been around for more than 500 years. From its

earliest days, there have been concerns about who can purchase a policy on the

life of another. See Geoffrey Clark, Betting on Lives: The Culture of Life

Insurance in England, 1695-1775 13-14 (1999). In 1419, for example, the

Venetian Senate outlawed wagers on the Pope’s life and nullified many

speculative bets about “how long the reigning pope would live.” Id. at 14.

Elsewhere in Europe in the fifteenth through seventeenth centuries, “[t]he

1
States have the authority to regulate insurance under the McCarran-Ferguson
Act. 15 U.S.C. § 1012; see also Johnson & Johnson v. Dir., Div. of Taxation,
30 N.J. Tax 479, 494 (2018).
8
frequent association of life insurance with gambling and other disreputable

practices prompted governments to prohibit its practice without exception.”

Id. at 14-15.

In England, life insurance “was legally unrestricted [until] well into the

eighteenth century.” Id. at 17. By then, it had “bec[o]me so much a mode of

gambling (for people took the liberty of insuring any one’s life, without

hesitation, whether connected with him, or not, . . . ) that it at last became a

subject of Parliamentary discussion.” Id. at 22 (quoting James Allan Park, A

System of the Law of Marine Insurances 490 (1787)). From those discussions,

“the first appreciable regulation of life insurance” emerged, along with the

concept that the policyholder must have “a financial interest (a so-called

‘insurable interest’) in [the] life or event” to be insured. Ibid. Section One of

the Life Assurance Act of 1774 provided that

no insurance shall be made by any person or persons,
bodies politick or corporate, on the life or lives of any
person, or persons, or on any other event or events
whatsoever, wherein the person or persons for whose
use, benefit, or on whose account such policy or
policies shall be made, shall have no interest, or by way
of gaming or wagering.

[14 Geo. 3 (1774 c. 48), https://www.legislation.
gov.uk/apgb/Geo3/14/48?view=plain.]

A contract without an insurable interest would be “null and void.” Ibid. “The

goal of the 1774 Act . . . was to allow people to get the benefits of life
9
insurance while eliminating the betting on human life it encouraged.” Susan

Lorde Martin, Life Settlements: The Death Wish Industry, 64 Syracuse L.

Rev. 91, 94-95 (2014).

The same limitation -- the insurable interest requirement -- was adopted

in the United States as well. See Peter Nash Swisher, The Insurable Interest

Requirement for Life Insurance: A Critical Reassessment, 53 Drake L. Rev.

477, 482-83 (2005). By the nineteenth century, even in states where insurable

interest statutes had not yet been enacted, “in most cases either the English

statutes [were] considered as operative, or the older common law [was]

followed.” Conn. Mut. Life Ins. Co. v. Schaefer, 94 U.S. 457, 460 (1877). As

a result, the Supreme Court explained, “[a] man cannot take out insurance on

the life of a total stranger, nor on that of one who is not so connected with him

as to make the continuance of the life a matter of some real interest to him.”

Ibid.

The existence of an insurable interest distinguished valid life insurance

policies from “mere wager policies.” Ibid. The Court later addressed the

complexity and importance of the requirement in Warnock v. Davis, 104 U.S.

775, 779 (1882). As the Court explained,

[i]t is not easy to define with precision what will in all
cases constitute an insurable interest, so as to take the
contract out of the class of wager policies. . . . But in
all cases there must be a reasonable ground, founded
10
 upon the relations of the parties to each other, either
pecuniary or of blood or affinity, to expect some benefit
or advantage from the continuance of the life of the
assured. Otherwise the contract is a mere wager, by
which the party taking the policy is directly interested
in the early death of the assured. Such policies have a
tendency to create a desire for the event. They are,
therefore, independently of any statute on the subject,
condemned, as being against public policy.

[Ibid. (emphases added).]

In New Jersey, the Legislature adopted the current insurable interest

requirement in 1968. L. 1968, c. 318, § 1. More than a century earlier, the

pre-1948 New Jersey Supreme Court 2 opined that a policy would be valid

without such an interest, Trenton Mut. Life & Fire Ins. Co. v. Johnson, 24

N.J.L. 576, 584 (Sup. Ct. 1854), even though it found the policyholder did

have an insurable interest in the life of the insured, id. at 582, 586-87.

Because New Jersey did not have a statute similar to England’s Life Assurance

Act of 1774, the court based its decision on its view of the common law. The

court found no insurable interest requirement under the common law. Id. at

583-84. The United States Supreme Court, however, reached a different

2
Prior to the 1948 Constitution, the New Jersey Supreme Court was an
intermediate appellate court; its rulings were subject to review by the Court of
Errors and Appeals, the State’s highest court at the time. Carla Vivian Bello &
Arthur T. Vanderbilt II, New Jersey’s Judicial Revolution: A Political Miracle
32 (1997); William M. Clevenger, The Courts of New Jersey: Their Origin,
Composition and Jurisdiction 29-32 (1903).
11
conclusion in 1877. See Schaefer, 94 U.S. at 460 (noting that “the law of

England prior to the Revolution of 1688” was that policies without an

insurable interest were “void, as against public policy”).

The current statutory scheme appears at N.J.S.A. 17B:24-1.1. The

Legislature expressly imposed an insurable interest requirement and thus

superseded dated case law like Johnson. See United States v. Texas, 507 U.S.

529, 534 (1993) (noting that a statute can “abrogate a common-law principle”

if it “‘speak[s] directly’ to the question addressed by the common law”

(quoting Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978))); see

also Fu v. Fu, 160 N.J. 108, 121 (1999).

N.J.S.A. 17B:24-1.1(a) outlines three situations in which an individual

has an insurable interest:

(1) An individual has an insurable interest in his own
life, health and bodily safety.

(2) An individual has an insurable interest in the life,
health and bodily safety of another individual if he has
an expectation of pecuniary advantage through the
continued life, health and bodily safety of that
individual and consequent loss by reason of his death
or disability.

(3) An individual has an insurable interest in the life,
health and bodily safety of another individual to whom
he is closely related by blood or by law and in whom he
has a substantial interest engendered by love and
affection. An individual liable for the support of a child

12
 or former wife or husband may procure a policy of
insurance on that child or former wife or husband.

The statute also specifies circumstances under which a corporation, N.J.S.A.

17B:24-1.1(a)(4), or a nonprofit or charitable entity, id. § (a)(5), has an

insurable interest in the lives of its employees, officers, or others.

Critical to the questions presented in this case, section (b) of N.J.S.A.

17B:24-1.1 bars procurement of a life insurance policy payable to someone

who lacks an insurable interest in the life of the insured:

No person shall procure or cause to be procured any
insurance contract upon the life, health or bodily safety
of another individual unless the benefits under that
contract are payable to the individual insured or his
personal representative, or to a person having, at the
time when that contract was made, an insurable interest
in the individual insured.

Sections (c) and (d) of N.J.S.A. 17B:24-1.1 address violations of the

insurable interest statute from different perspectives. Specifically, N.J.S.A.

17B:24-1.1(c) allows “the individual insured, or his executor or administrator”

to “maintain an action to recover” any benefits paid “under any contract made

in violation of” the insurable interest requirement. And N.J.S.A. 17B:24 -

1.1(d) protects an insurer’s good faith reliance “upon all statements,

declarations and representations made by an applicant for insurance relating to

the insurable interest of the applicant.” No published opinions by this Court or

the Appellate Division interpret New Jersey’s insurable interest statute.
13
 B.

Just as all New Jersey insurance policies must be based on an insurable

interest, they must also contain an incontestability clause. See N.J.S.A.

17B:25-4 (“There shall be a provision that the policy . . . shall be

incontestable, except for nonpayment of premiums, after it has been in force

during the lifetime of the insured for a period of 2 years from its date of

issue.”). Forty-three states require incontestability clauses in life insurance

policies, and they are “found in almost all policies.” 2 Harnett & Lesnick, The

Law of Life and Health Insurance § 5.07 (Matthew Bender, rev. ed. 2018).

New Jersey was in line with standard industry practice when it adopted a two-

year period after which policies cannot be contested except for nonpayment of

premiums. See id. § 5.07(2); see also N.J.S.A. 17B:25-4.

Like statutes of limitations, incontestability clauses create incentives for

insurers to challenge questionable policies in a timely manner, rather than

continue to collect premiums and complain “only when called upon to pay.”

See Harrison v. Provident Relief Ass’n of Wash., D.C., 126 S.E. 696, 701 (Va.

1925); see also 17 Couch on Insurance § 240:5 (3d ed. 2018).

Incontestability clauses, however, are not a bar to all defenses. See 2

Harnett & Lesnick § 5.07(5) (cataloguing common defenses and decisions on

both sides of the incontestability issue). For example, “it has generally been

14
held that an insurance policy violative of public policy or good morals cannot

be enforced simply because the incontestability period has run.” Tulipano v.

U.S. Life Ins. Co., 57 N.J. Super. 269, 277 (App. Div. 1959) (collecting cases);

see also Martin, Life Settlements, 64 Syracuse L. Rev. at 104 (“[T]he

Delaware Supreme Court, and a majority of other courts that have decided

cases on the inviolability of incontestability clauses, held that the

incontestability period is contingent on the existence of a valid contract.”

(footnote omitted)).

A majority of courts have held that the lack of an insurable interest can

be asserted as a defense even after a policy has become incontestable. See,

e.g., PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr., 28 A.3d 1059, 1067-

68 (Del. 2011); Beard v. Am. Agency Life Ins. Co., 550 A.2d 677, 691 (Md.

1988); see also 17 Couch on Insurance § 240:82 (“The majority of

jurisdictions follow the view that an incontestable clause does not prohibit

insurers from resisting payment on the ground that the policy was issued to

one having no insurable interest -- such a defense may be raised despite the

fact that the period of contestability has expired.”); 8 New Appleman on

Insurance Law Library Edition § 83.09 (2018) (“Nearly every jurisdiction that

has addressed the issue holds that a policy lacking an insurable interest is void

15
and is not rendered valid by an incontestability provision.”). As the Delaware

Supreme Court has explained,

if a life insurance policy lacks an insurable interest at
inception, it is void ab initio because it violates
Delaware’s clear public policy against wagering. It
follows, therefore, that if no insurance policy ever
legally came into effect, then neither did any of its
provisions, including the statutorily required
incontestability clause. . . . As a result, the
incontestability provision does not bar an insurer from
asserting a claim on the basis of a lack of insurable
interest.

[Price Dawe, 28 A.3d at 1067-68 (footnotes omitted).]

C.

Although life insurance policies must be payable to a person with an

insurable interest when they are procured, policies can be sold later on --

including to individuals who would not have been able to buy the policy

originally because they lacked an insurable interest. As Justice Oliver Wendell

Holmes, Jr., wrote in Grigsby v. Russell, 222 U.S. 149, 156 (1911), “[s]o far as

reasonable safety permits, it is desirable to give to life policies the ordinary

characteristics of property. . . . To deny the right to sell except to persons

having [an insurable] interest is to diminish appreciably the value of the

contract in the owner’s hands.”

In New Jersey, life insurance policies may be sold subject to the

regulatory scheme outlined in the Viatical Settlements Act, N.J.S.A. 17B:30B-
16
1 to -17. In general, a viatical settlement is “[a] transaction in which a

terminally or chronically ill person sells the benefits of a life-insurance policy

to a third party” at a discounted value “in return for a lump-sum cash

payment.” Black’s Law Dictionary 1497 (9th ed. 2009). The seller or insured

is called the “viator.” Ibid.

“The viatical settlements industry was born in the 1980s in response to

the AIDS crisis.” Life Partners, Inc. v. Morrison, 484 F.3d 284, 287 (4th Cir.

2007). Particularly in the early days of the crisis, when “victims usually died

within months of diagnosis,” many AIDS sufferers needed money for

treatment. Ibid. Because of their short life expectancies, “investors were

willing to purchase . . . life insurance policies.” Ibid. The market for viatical

settlements later expanded to include policies for the elderly and people with

diseases other than AIDS. Id. at 287-88.

The imbalance in power between people in desperate need of funds and

more sophisticated investors willing to buy life insurance policies led to the

regulation of viatical settlements. See id. at 288. The New Jersey Legislature

passed a viatical settlements law in 1999, L. 1999, c. 211, “to protect

particularly vulnerable persons from aggressive or fraudulent business tactics,”

Governor’s Statement on Signing S. 1515 (Sept. 17, 1999). The Legislature

repealed the law in 2005 and replaced it with “a broader regulatory scheme” --

17
the Viatical Settlements Act, L. 2005, c. 229. See Sponsor’s Statement to S.

1940 37 (Oct. 4, 2004).

The Act defines a “viatical settlement contract” as

a written agreement establishing the terms under which
compensation or anything of value will be paid, which
compensation or value is less than the expected death
benefit of the policy, in return for the viator’s
assignment, transfer, sale, devise or bequest of the
death benefit or ownership of any portion of the
policy. . . . A viatical settlement contract includes an
agreement with a viator to transfer ownership or change
the beneficiary designation at a later date regardless of
the date that compensation is paid to the viator.

[N.J.S.A. 17B:30B-2.]

The definition also includes financing agreements but expressly excludes

“written agreement[s] between a viator and a person having an insurable

interest in the insured’s life.” Ibid.

A key provision of the Act limits the potential for abuse. Aside from

limited exceptions, the law bars policyholders from entering into a viatical

settlement contract -- and thus transferring the policy benefit to a stranger --

for two years from the date the policy was issued. N.J.S.A. 17B:30B-10(a).

The statute reads as follows:

a. It is a violation of this act for any person to enter
into a viatical settlement contract within a two-year
period commencing with the date of issuance of the
insurance policy unless the viator certifies [that] . . . :

18
 (1) The policy was issued upon the viator’s
exercise of conversion rights arising out of a
group or individual life insurance policy. . . ;

(2) The viator submits independent evidence to
the viatical settlement provider that within the
two-year period: (a) the viator or insured was
terminally ill or chronically ill; or (b) the viator
or insured disposed of his ownership interests in
a closely held corporation [subject to certain
limitations]; or (c) both.

[Ibid.]

Thus, under section 10(a), a policyholder may not “assign[], transfer, s[ell],

devise or beque[ath] . . . the death benefit or ownership of any portion of the

policy” to someone without an insurable interest in the life of the insured,

N.J.S.A. 17B:30B-2, for a period of two years, unless the policyholder

exercised conversion rights, id. § 10(a)(1), or the policyholder or insured was

terminally or chronically ill, disposed of ownership interests in a closely held

corporation, or both, id. § 10(a)(2).

Over time, and as the market expanded, “the industry changed its name

and description from ‘viatical settlements’ to ‘life settlements.’” Susan Lorde

Martin, Betting on the Lives of Strangers: Life Settlements, STOLI, and

Securitization, 13 U. Pa. J. Bus. L. 173, 185-87 (2010). STOLI policies --

once again, short for stranger-originated life insurance policies -- are a subset

of life settlements.

19
 In a traditional life settlement, “investors purchase existing life

insurance policies from insureds who no longer need the insurance to protect

their families in the event of their deaths.” Id. at 187. In a STOLI

arrangement, by contrast, “a life settlement broker persuades a senior

citizen . . . to take out a life insurance policy” -- not to protect the person’s

family but for a cash payment or some other current benefit arranged with a

life settlement company. Ibid. A key “difference between non-STOLI and

STOLI policies,” as the Second Circuit has explained, “is simply one of timing

and certainty; whereas a non-STOLI policy might someday be resold to an

investor, a STOLI policy is intended for resale” before it is issued. United

States v. Binday, 804 F.3d 558, 565 (2d Cir. 2015).

Generally, an investor funds a STOLI policy from the outset, which

makes it possible to obtain a policy with a high face value. See Martin,

Betting on the Lives of Strangers, 13 U. Pa. J. Bus. L. at 188. The investor

may lend the insured “the money to pay the premiums for” the period of

incontestability, typically two years. Ibid. It is also common for an insured to

buy the policy in the name of a trust and name a “spouse or other loved one as

the trust beneficiary.” Ibid. In such arrangements,

[i]f the insured dies within [the contestability] period,
his spouse, as beneficiary of the insurance trust, will get
the death benefit (the free insurance), pay back the loan
plus interest from the proceeds, and often pay the
20
 broker up to fifty percent of the benefit received. If the
insured lives beyond two years or the contestability
period, then the life settlement company buys the
beneficial interest in the insurance trust, paying the
insured a lump sum percent of the face value of the
policy . . . . The life settlement company or its investors
will continue to pay the premiums on the policy, and
when the insured dies, they will get the death benefit.
Clearly, the sooner the insured dies, the greater the
company’s profit.

[Ibid. (footnotes omitted).]

STOLI arrangements thus present a significant legal problem: the

investors have “no insurable interest in the life of the insured.” Ibid. As a

result, the transactions pose questions in light of New Jersey’s policy against

wagering. See Binday, 804 F.3d at 565 (“A STOLI policy is one obtained by

the insured for the purpose of resale to an investor with no insurable interest in

the life of the insured -- essentially, it is a bet on a stranger’s life.”); see also

Grigsby, 222 U.S. at 156 (noting that “cases in which a person having an

interest lends himself to one without any as a cloak to what is in its inception a

wager have no similarity to those where an honest contract is sold in good

faith”).

D.

New Jersey’s anti-wagering policy is anchored in Article 4, Section 7,

Paragraph 2 of the State Constitution, which bars the Legislature from

authorizing gambling on its own aside from specific exceptions. Under
21
subsections (A) through (F), the Legislature can authorize particular games of

chance run by charitable, religious, and certain other groups; state lotteries;

gambling in Atlantic City; and other specified kinds of wagering. See N.J.

Const. art. IV, § 7, ¶ 2. Voter approval is required for gambling of any other

kind, see ibid., including wagers on a stranger’s life.

The Legislature, in turn, directly barred gambling. See N.J.S.A. 2A:40-1

(declaring gaming transactions unlawful); N.J.S.A. 2A:40-3 (declaring void all

agreements that violate N.J.S.A. 2A:40-1).

The above provisions are relevant expressions of public policy that

inform our analysis of the statutes at the center of this appeal. Moreover, the

insurable interest requirement is consistent with and helps enforce the

Constitution’s prohibition on gambling. By ensuring full compliance with the

insurable interest statute, we can avoid an outcome that might run afoul of the

Constitution.

III.

Sun Life relies heavily on New Jersey’s anti-wagering provisions and

argues that the policy in question is nothing more than a wager because it

lacked an insurable interest. As a result, Sun Life contends, the policy never

took effect and may now be challenged because the incontestability clause

likewise never took effect.

22
 Wells Fargo counters that allowing the sale of life insurance policies is

also a matter of public policy -- one that the Legislature has regulated through

the insurable interest statute and the Viatical Settlements Act. Wells Fargo

asserts that the policy in this case fully complied with the insurable interest

requirement at the policy’s inception, and that, even if it did violate the

Viatical Settlements Act, it could be challenged on that basis only for a period

of two years.

We consider those arguments in the context of the Third Circuit’s first

question.

A.

The first part of question one asks whether “a life insurance policy that

is procured with the intent to benefit persons without an insurable interest in

the life of the insured violate[s] the public policy of New Jersey.”

If a third party without an insurable interest procures or causes an

insurance policy to be procured in a way that feigns compliance with the

insurable interest requirement, the policy is a cover for a wager on the life of

another and violates New Jersey’s public policy. In such a case, the plain

23
language reading of the statute that Wells Fargo advances can lead to absurd

results.3

1.

Consider a policy that strangers financed or caused to be procured for

Mary’s life. When the policy is issued, Mary’s daughter is the named

beneficiary or the trustee of an irrevocable trust that owns the policy. The

trust thus has an insurable interest at the time the contract for the policy is

made. See N.J.S.A. 17B:24-1.1(a). But the strangers actually have a side

agreement with Mary or her daughter to transfer control of the trust, the

beneficial interest in the policy, or ownership of the policy, at a later time. In

short, the outside investors who funded the policy effectively control it from

the start.

If the investors cause the daughter to transfer her interest to them a

month, a day, or an hour after the policy is issued, it would elevate form over

substance to suggest that the policy satisfies the insurable interest requirement.

At most, there is only feigned compliance with the requirement that an

3
Statutes cannot “be construed to lead to absurd results. All rules of
construction are subordinate to that obvious proposition.” State v.
Provenzano, 34 N.J. 318, 322 (1961). “[W]hen ‘a literal interpretation would
create a manifestly absurd result, contrary to public policy,’ courts may
consider the law’s overall purpose for direction.” Sussex Commons Assocs.,
LLC v. Rutgers, 210 N.J. 531, 541 (2012) (quoting Hubbard ex rel. Hubbard v.
Reed, 168 N.J. 387, 392 (2001)).
24
insurable interest exist “at the time when [the] contract was made.” See

N.J.S.A. 17B:24-1.1(b). In reality, Mary and her daughter satisfy the

requirement in name alone. The policy is a cover for a wager on Mary’s life

by a stranger. It therefore violates public policy.

STOLIs commonly involve life insurance policies procured and financed

by investors -- strangers -- who have no insurable interest in the life of the

insured yet, from the outset, are the ultimate intended beneficiaries of the

policy. In other words, in a classic STOLI situation, a stranger who hopes the

insured will die soon causes the policy to be procured and collects the death

benefit. That type of arrangement runs afoul of New Jersey’s insurable

interest requirement and the statute’s purpose. It also counters the principle

underlying the requirement: the individual with an insurable interest “must

have an interest in the continued life of the insured rather than in his early

death.” Ohio Nat’l Life Assurance Corp. v. Davis, 803 F.3d 904, 907 (7th Cir.

2015); see also Warnock, 104 U.S. at 779 (noting that because of “the relations

of the parties,” someone with an insurable interest “expect[s] some benefit or

advantage from the continuance of the life of the assured” (emphasis added)).

Contrary to Wells Fargo’s assertions, sections (c) and (d) of the

insurable interest statute do not call for a different result. N.J.S.A. 17B:24-

1.1(c) addresses the recovery of moneys already paid under a contract that

25
violates the insurable interest requirement. It creates a cause of action for the

insured or her estate after a death benefit has been paid. Section (d) insulates

insurers from liability when they rely on an applicant’s statements about her

insurable interest. Neither section allows for enforcement of a policy that

lacks an insurable interest. Nor do the sections contain language that suggests

they are the exclusive remedies when the absence of an insurable interest

arises after two years.

Sections (a)(4) and (a)(5) of N.J.S.A. 17B:24-1.1 also inform the

meaning and scope of the insurable interest requirement. Section (a)(4)

expressly allows corporations to insure their directors, officers, employees,

and others. Section (a)(5) similarly enables nonprofit or charitable entities to

insure their directors and others, including their supporters. Under (a)(5), a

director, supporter, or other insured must either sign the application for

insurance, which names the charitable entity as the owner and beneficiary, or

“subsequently transfer ownership of the insurance to the entity.”

Those detailed sections were added to the insurable interest statute in

1991. L. 1991, c. 369. The Sponsor’s Statement noted that “the principle of

insurable interest was founded on the idea that the person purchasing the

policy should have such a real and substantial interest in the property or person

insured as would prevent the policy from being a mere wager on the insured

26
event.” Sponsor’s Statement to A. 4957 2 (L. 1991, c. 369). The statement

added, however, that “[o]ver the years, many states have expanded the concept

of insurable interest for the purpose of life and health insurance to reflect

current trends in investment and the development of innovative insurance

products,” and that the time had come to broaden New Jersey’s definition of

insurable interest in part “to afford New Jersey residents greater access to the

myriad policy and investment options already available in other states.” Id. at

2-3.

Notably, despite the pro-investment aim of the 1991 amendments, the

Legislature did not modify or loosen the insurable interest requirement beyond

the particular areas that sections (a)(4) and (a)(5) address. Both sections

reveal that when the Legislature meant to expand the insurable interest

requirement to allow transfers that would satisfy the requirement, the

Legislature acted with precision and care.

Finally, we note that an incontestability provision does not bar a

challenge to a STOLI policy. As discussed earlier, insurance contracts that are

contrary to public policy cannot be enforced despite an incontestability clause.

See Tulipano, 57 N.J. Super. at 277 (collecting cases); see also Martin, Life

Settlements, 64 Syracuse L. Rev. at 104. If a policy never came into effect,

neither did its incontestability clause; the clause thus cannot stand in the way

27
of a claim that the policy violated public policy because it lacked an insurable

interest. See Price Dawe, 28 A.3d at 1067-68; 17 Couch on Insurance

§ 240:82; 8 New Appleman on Insurance Law § 83.09.

2.

In the prior example, strangers funded the policy at the outset. Other

situations might also raise concerns. Imagine, for example, that Mary’s

daughter procured the above policy, paid the policy premiums for a few

months, and then transferred her role as trustee, or the ownership or beneficial

interest in the policy, to a group of strangers in exchange for full

reimbursement and some compensation. Suppose as well that Mary’s daughter

intended to do so from the start. That arrangement likewise might be little

more than a cover for a wager on Mary’s life for the benefit of strangers, and it

raises questions about the manner in which the policy was procured. The

transfer could also result in a challenge under the Viatical Settlements Act,

N.J.S.A. 17B:30B-13.

A number of considerations could affect the validity of the policy: the

nature and timing of any discussions between the purchaser and the strangers;

the reasons for the transfer; and the amount of time the policy was held; among

other factors.

28
 If the purchaser and investors discussed an arrangement in advance, a

third party without an insurable interest may have caused the policy to be

procured -- even if no firm agreement had yet been finalized. See N.J.S.A.

17B:24-1.1(b) (stating that “[n]o person shall procure or cause to be procured”

a policy without an insurable interest) (emphasis added)).

Wells Fargo and LISA both stress that the Legislature could have -- but

did not -- impose a good faith intent requirement on the purchase of life

insurance policies. Nonetheless, if a person with an insurable interest takes

out a policy because he has an agreement to sell it to a third party, the

transaction could be as much of an attempt to circumvent the insurable interest

requirement as if a stranger had funded the policy at the outset. In either

event, the aim of the insurable interest requirement would be thwarted.4

Timing may also be a relevant factor. By way of comparison, the

Viatical Settlements Act restricts for two years the sale of lawfully purchased

policies to people who lack an insurable interest. N.J.S.A. 17B:30B-10(a).

The Act addresses a different set of circumstances -- typically, the sale of a life

insurance policy at a discount, by an elderly or ill person -- and the Legislature

4
But see PHL Variable Insurance Co. v. Bank of Utah, 780 F.3d 863, 865-66,
868 (8th Cir. 2015) (upholding a policy purchased by a 74-year-old retiree,
with guidance from an insurance agent, for the purpose of selling it on the
secondary market, and noting that the insured held the policy for two years
before he surrendered it to repay a loan).
29
imposed limits to guard against the abuse of vulnerable individuals. Likewise,

in the related context of this matter, the less time the policy owner held the

policy before transferring it to a stranger, the greater the likelihood the policy

violates public policy.

Courts cannot devise a bright-line rule for the type of transaction this

second hypothetical presents. The area is best addressed by the Legislature

and DOBI.

B.

Thirty states have enacted anti-STOLI legislation to date. See Ariz. Rev.

Stat. Ann. § 20-443.02(A); Ark. Code Ann. §§ 23-81-802(7)(A)(i)(j), 23-81-

816; Cal. Ins. Code §§ 10113.1(g)(B), 10113.3(s); Colo. Rev. Stat. § 10-7-

708(2); Conn. Gen. Stat. § 38a-465j(a)(1), (a)(2)(A)(i)(X); Fla. Stat.

§§ 626.99289, 626.99291; Ga. Code Ann. §§ 33-59-2(6)(A)(i)(X), 33-59-

14(a)(1); Haw. Rev. Stat. § 431C-42(1)(A)(x); Idaho Code § 41-1962(1); 215

Ill. Comp. Stat. 159/50(a); Ind. Code § 27-8-19.8-20.1; Iowa Code

§§ 508E.2(6)(a)(3), 508E.15(1)(a); Kan. Stat. Ann. §§ 40-5002(f)(5), 40-

5012a(a)(1); Ky. Rev. Stat. Ann. §§ 304.15-020(7)(a)(1)(k), 304.15-717(1)(d);

Me. Stat. tit. 24-A, §§ 6802-A(6)(A)(3), 6818(1)(A); Mass. Gen. Laws ch. 175,

§ 223A(a), (b)(1)(i)(J); Minn. Stat. § 60A.0784(2); N.H. Rev. Stat. Ann.

§ 408-D:12(I); N.Y. Ins. Law § 7815(c) (McKinney); N.D. Cent. Code §§

30
26.1-33.4-01(7)(a)(1)(j), 26.1-33.4-13(1)(a); Ohio Rev. Code Ann. § 3916.172;

Okla. Stat. tit. 36, §§ 4055.2(7)(e), 4055.13(A)(1); Or. Rev. Stat.

§ 744.369(10); 27 R.I. Gen. Laws §§ 27-72-2(9)(i)(A)(X), 27-72-14(a)(1);

Tenn. Code Ann. §§ 56-50-102(6)(A)(iii), 56-50-114(a)(1); Utah Code Ann.

§ 31A-36-113(2)(a)(iii); Vt. Stat. Ann. tit. 8, § 3844(a)(2); Wash. Rev. Code

§§ 48.102.006(8)(a)(ii), 48.102.140(1)(a); W. Va. Code §§ 33-13C-2(5)(F),

33-13C-14(a)(1); Wis. Stat. § 632.69(1)(g)(7), (15)(a); see also Neb. Rev.

Stat. § 44-1110(1)(c).

Two model acts have been designed to stop STOLIs. One bars any

person from “[e]nter[ing] into any practice or plan which involves STOLI[s].”

National Conference of Insurance Legislators (NCOIL), Life Settlements

Model Act §§ 2(H)(1)(a)(x), 13(A)(3), (readopted in March 2014), http://ncoil.

org/wp-content/uploads/2016/04/AdoptedLifeSettlementsModel.pdf. The

other generally bars viatical settlement agreements for five years, instead of

two. See National Association of Insurance Commissioners (NAIC), Viatical

Settlements Model Act § 11 (July 2009), https://www.naic.org/store/free/

MDL-697.pdf.

Anti-STOLI legislation has been proposed multiple times in New Jersey.

From 2009 through 2014, ten bills were introduced: S. 2747 (Apr. 27, 2009);

A. 3991 (June 4, 2009); A. 4196 (Nov. 23, 2009); S. 487 (Jan. 12, 2010); A.

31
371 (Jan. 12, 2010); A. 376 (Jan. 12, 2010); A. 234 (Jan. 10, 2012); A. 237

(Jan. 10, 2012); A. 1049 (Jan. 16, 2014); A. 1051 (Jan. 16, 2014). None were

passed or enacted.

Despite suggestions by Wells Fargo, it is difficult to discern the

Legislature’s intent from bills it has not passed. See Grupe Dev. Co. v.

Superior Court, 844 P.2d 545, 552 (Cal. 1993) (en banc); Entergy Gulf States,

Inc. v. Summers, 282 S.W.3d 433, 443 (Tex. 2009). Some legislators may

have thought that current law already barred STOLI policies under the

insurable interest statute and that the proposed laws were unnecessary; others

may have opposed the bills. Under the circumstances, we are unable to

determine what the Legislature meant when it did not act on proposed

legislation.

C.

The position of the Division of Banking and Insurance also offers a view

of the State’s present public policy toward STOLI policies. DOBI’s amicus

brief outlines the nature of a “STOLI scheme” and submits that “it is against

the public policy of New Jersey for a third party to procure a life insurance

policy from a life insurance company with the intent to benefit persons without

an insurable interest in the insured.” “A policy procured under such

circumstances,” DOBI explains, “violates the insurable interest requirement of

32
N.J.S.A. 17B:24-1.1.” Absent an insurable interest, according to DOBI, a life

insurance policy is a “pure gamble” in violation of N.J.S.A. 17B:24-1.1 and

“the anti-gambling provisions of both the New Jersey Constitution and New

Jersey statutes.”

DOBI’s views are entitled to considerable weight in this area, which

falls within its field of expertise. See In re Election Law Enf’t Comm’n

Advisory Op. No. 01-2008, 201 N.J. 254, 262 (2010); see also N.J.S.A. 17:1-1

(charging DOBI “with the execution of all laws relative to insurance”).

D.

Other courts have considered similar questions under related state laws.

In Davis, the Seventh Circuit found STOLI policies void at the outset

under Illinois law. 803 F.3d at 907-09.5 The STOLI scheme in the case

worked as follows: Defendant Davis persuaded people “to become the

nominal . . . buyers of” life insurance policies in exchange for “small amounts

of money.” Id. at 906. Along with another defendant who was an insurance

agent, Davis “targeted elderly people because of their diminished life

5
The court based its decision on “the common law of Illinois” but noted that
Illinois adopted anti-STOLI legislation after the relevant policies were issued.
Id. at 909.

33
expectancies and African-Americans because the average life expectancy of an

African-American is shorter than that of other Americans.” Ibid.

Once a policy was issued, defendants had the insured place it in an

irrevocable trust. Ibid. The trust was designated as the “policy’s owner and

beneficiary,” and Davis, a lawyer, served as trustee. Ibid. At the start, trust

documents also listed “either members of the insured’s family or the insured’s

other trusts” as beneficiaries. Id. at 907. Weeks or months later, “Davis

would have the nominal buyer of the policy . . . assign the beneficial interest in

the trust (and therefore in the policy) to a company owned by [a third]

defendant.” Ibid. That person “would make the initial premium payments . . .

but then resell the beneficial interest in the trust to an investor who hoped that

the insured would die soon” -- to be able to collect the proceeds of the policy.

Ibid.

Through those steps, “the defendants were trying to appear to comply

with the” insurable interest requirement. Ibid. As the court observed, “one

can’t take out a life insurance policy on a person unless one has an interest,

financial or otherwise, in the life of the insured rather than in his early death. ”

Id. at 908 (citing Grigsby, 222 U.S. at 155). In the STOLI scheme in question,

though, the circuit court found no such insurable interest:

The insureds merely lent their names to the insurance
applications, in exchange for modest compensation,
34
 and the defendants forthwith transferred control over
(effectively ownership of) the policies to themselves.
The defendants, who had no interest in the insureds’
lives (as distinct from their deaths), initiated, paid for,
and controlled the policies from the outset.

....

. . . The insureds’ family members . . . retained
beneficial interests in the policies only briefly and
never controlled the trusts. The insureds were the
defendants’ puppets and the policies were bets by
strangers on the insureds’ longevity.

[Id. at 908-09.]

In essence, the Seventh Circuit concluded that feigned compliance with the

insurable interest requirement is not enough.

The Supreme Court of Delaware reached a similar conclusion in Price

Dawe, 28 A.3d 1059. In that case, the Price Dawe 2006 Insurance Trust

purchased a $9 million life policy on Dawe’s life. Id. at 1063. A family trust

was the named beneficiary, and “Dawe was the beneficiary of the family

trust.” Ibid. PHL Variable Insurance Company (Phoenix) issued the policy.

Ibid. About two months later, an unrelated private investor “formally

purchased the beneficial interest of the Dawe Trust from the Family Trust.”

Id. at 1064. When Dawe died some three years later, and two competing

claims were made, Phoenix discovered the circumstances of the sale and

35
sought a declaratory judgment in United States District Court that the policy

was void. Id. at 1063-64.

The Delaware Supreme Court accepted and answered three certified

questions of law. The court first found that Phoenix could challenge the policy

for lack of an insurable interest despite an incontestability clause. Id. at 1065.

The second question asked “whether the statutory insurable interest

requirement is violated where the insured procures a life insurance policy with

the intent to immediately transfer the benefit to an individual or entit y lacking

an insurable interest.” Id. at 1068. The court found that it is not, “so long as

the insured procured or effected the policy and the policy is not a mere cover

for a wager.” Ibid.

The court based its decision on various provisions of Delaware’s

statutory code in light of the history and purpose of the insurable interest

requirement. Id. at 1071-76 (discussing Del. Code Ann. tit. 18, §§ 2704, 2705,

2708, and 2720). The opinion thus focused principally on who “procured” the

policy or “caused it to be procured,” and not on the insured’s subjective intent.

Id. at 1075-76 (construing Del. Code Ann. tit. 18, § 2704(a)). “To determine

who procured the policy,” the court “look[ed] at who pa[id] the premiums.”

Id. at 1075.

36
 The court also addressed STOLI policies and noted they “lack an

insurable interest and are thus an illegal wager on human life.” Id. at 1070.

Delaware’s insurable interest statute at section 2704(a), the court explained,

“requires more than just technical compliance at the time of issuance,” yet

“STOLI schemes are created to feign technical compliance with” the law. Id.

at 1074. “At issue is whether a third party having no insurable interest can use

the insured as a means to procure a life insurance policy that the statute would

otherwise prohibit. Our answer is no,” because of the insurable interest

requirement. Ibid.

The court applied the same line of thinking to a third question, which

concerned the use of trusts to effect the transfer of a policy. See id. at 1076-

78. The court observed that, “[i]n cases where a third party either directly or

indirectly funds the premium payments as part of a pre-negotiated arrangement

with the insured to immediately transfer ownership, the policy fails at its

inception for lack of an insurable interest.” Id. at 1078.

The United States District Court for the Eastern District of Tennessee

used similar reasoning to void a STOLI policy purchased through a trust and

funded by outsiders. Sun Life Assurance Co. v. Conestoga Tr. Servs., LLC,

263 F. Supp. 3d 695, 697, 699 (E.D. Tenn. 2017). The policy had been issued

before Tennessee’s anti-STOLI legislation took effect. Id. at 701 n.3. The

37
District Court noted that “Tennessee courts have held for over one hundred

years that life insurance taken out as a wager is void.” Id. at 701. The court

also found that “Tennessee prohibit[ed] STOLI policies through both statutory

and common law.” Ibid. The nominal use of a trust, the court explained, did

not satisfy the state’s insurable interest requirement. Id. at 702. The facts

instead revealed a scheme that improperly used a named insured “as a conduit

to acquire a policy” that investors “could not otherwise acquire.” Ibid.

Before the New York Legislature barred STOLI policies, the Court of

Appeals of New York “h[e]ld that New York law permits a person to procure

an insurance policy on his or her own life and immediately transfer it to one

without an insurable interest in that life, even where the policy was obtained

for just such a purpose.” Kramer v. Phoenix Life Ins. Co., 940 N.E.2d 535,

536-37, 539 n.5 (N.Y. 2010); see also N.Y. Ins. Law § 7815(c) (McKinney).

Kramer involved a challenge to “several insurance policies obtained by

[a] decedent . . . on his own life, allegedly with the intent of immediately

assigning the beneficial interests to investors who lacked an insurable interest

in his life.” 940 N.E.2d at 537. In considering a question certified by the

Second Circuit, the Court of Appeals explained that a specific provision in

New York law upheld the policies:

Any person of lawful age may on his own initiative
procure or effect a contract of insurance upon his own
38
 person for the benefit of any person, firm, association
or corporation. Nothing herein shall be deemed to
prohibit the immediate transfer or assignment of a
contract so procured or effectuated.

[Id. at 539 (emphasis added) (quoting N.Y. Ins. Law
§ 3205(b)(1) (McKinney)).]

New Jersey has no such statute.

Florida’s insurable interest statute similarly states that an “insurable

interest need not exist after the inception date of coverage.” Fla. Stat.

§ 627.404(1). Relying on that statute, the Florida Supreme Court declined to

find STOLI policies exempt from a two-year period of incontestability. Wells

Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So. 3d 1202, 1205-06 (Fla.

2016). Florida later enacted anti-STOLI legislation. Fla. Stat. §§ 626.99289,

626.99291.

California’s insurable interest statute also limits the duration of an

insurable interest: “[A]n interest in the life or health of a person insured must

exist when the insurance takes effect, but need not exist thereafter or when the

loss occurs.” See Cal. Ins. Code § 286. The United States District Court for

the Central District of California relied on that provision in rejecting a

challenge to several life insurance policies in Lincoln National Life Insurance

Co. v. Gordon R.A. Fishman Irrevocable Life Trust, 638 F. Supp. 2d 1170,

1170-71, 1177, 1179 (C.D. Cal. 2009). Similar to a STOLI transaction,

39
policies were purchased through a trust, which borrowed $2.8 million to cover

premiums and fees for two years; almost immediately, the policies were

assigned to the lender as security. Id. at 1174-76. The trust remained the

owner of the policies. Id. at 1179.

The court observed that the “[d]efendants may have found a loophole in

the law barring a STOLI finding.” Ibid. Although the financing scheme

“skirts close to the letter, and certainly can be viewed as violating the spirit, of

the law . . . the law as it presently exists allows this kind of insurance

arrangement.” Ibid. Like New York and Florida, California has now enacted

anti-STOLI legislation. See Cal. Ins. Code. §§ 10113.1(g)(B), 10113.3(s).

New Jersey statutory law does not permit the immediate transfer of a life

insurance policy to people or entities that lack an insurable interest. As noted

above, policyholders who lawfully procure life insurance policies cannot

transfer them through a viatical settlement agreement for two years, aside from

limited exceptions. See N.J.S.A. 17B:30B-10(a).

Nor does New Jersey have an analogue to Wis. Stat. 631.07(4), which

provides that “[n]o insurance policy is invalid merely because the policyholder

lacks insurable interest.” The Seventh Circuit relied on the statute when it

declined to declare a policy void under Wisconsin law. Sun Life Assurance

Co. of Can. v. U.S. Bank Nat’l Ass’n, 839 F.3d 654, 657-58 (7th Cir. 2016).

40
The circuit court noted that Wisconsin had “retain[ed] the common law

principle forbidding the purchase of a life insurance policy by one who lacked

an insurable interest” but had “changed the remedy from cancelling the policy

to requiring the insurer to honor its promise,” by paying someone equitably

entitled to the benefit. Id. at 656.

IV.

To be clear, we do not suggest that life settlements in general are

contrary to public policy. Valid life insurance policies are assets that can be

sold. See Grigsby, 222 U.S. at 156. An established secondary market exists

for the sale of valid policies -- at least two years after they are issued or earlier

in certain cases, see N.J.S.A. 17B:30B-10(a) -- to investors who lack an

insurable interest, see generally Peter Nash Swisher, Wagering on the Lives of

Strangers: The Insurable Interest Requirement in the Life Insurance

Secondary Market, 50 Tort Trial & Ins. Prac. L.J. 703, 724-29 (2015)

(discussing the nationwide development and regulation of the secondary

market). Today, billions of dollars worth of policies are sold annually in the

secondary market. Lincoln Nat’l Life Ins. Co. v. Calhoun, 596 F. Supp. 2d

882, 885 (D.N.J. 2009).

Typically, people procure and pay premiums on a policy to plan for the

future, but circumstances may change years later in ways that are distinct from

41
the previous hypotheticals. Some policyholders may no longer need life

insurance to protect a financially secure spouse or grown, self-supporting

children; other insureds might need immediate cash for medical care or another

urgent obligation. If the insureds stopped paying the premiums, they and their

beneficiaries “would get nothing.” See Martin, Betting on the Lives of

Strangers, 13 U. Pa. J. Bus. L. at 186. Instead, they can sell policies to

strangers on the secondary market for a percentage of the policy’s face value.

Provided the buyers continue to pay the premiums, they will eventually receive

the death benefit. Ibid.

Once again, policyholders in New Jersey, in certain cases, may also

transfer a policy within two years, in accordance with the Viatical Settlements

Act. N.J.S.A. 17B:30B-10(a).

In any of those circumstances, buyers need not have an insurable interest

in the life of the insured.

V.

The first certified question poses a supplemental inquiry: If the policy

procured violates New Jersey’s public policy, is it void ab initio? Wells Fargo

submits that when a fraud has been committed, “policies are merely voidable,

not void” from the outset, under New Jersey law. According to Wells Fargo,

42
that means that an “insurer may waive, or be estopped to raise, the fraud.” Sun

Life contends that a wagering policy is void ab initio.

When an insurance policy violates public policy, it is as though the

policy never came into existence. See D’Agostino v. Maldonaldo, 216 N.J.

168, 194 n.4 (2013) (“A void contract is ‘[a] contract that is of no legal effect,

so that there is really no contract in existence at all. A contract may be void

because it is technically defective, contrary to public policy, or illegal.”

(quoting Black’s Law Dictionary 374 (9th ed. 2009))); see also Vasquez v.

Glassboro Serv. Ass’n, Inc., 83 N.J. 86, 98 (1980) (“No contract can be

sustained if it is inconsistent with the public interest or detrimental to the

common good.”); Hebela v. Healthcare Ins. Co., 370 N.J. Super. 260, 270

(App. Div. 2004) (“[O]ur courts will decline to enforce an insurance policy,

like any other contract, if its enforcement would be contrary to public

policy.”).6

We note as well that “[t]he vast majority of courts today that have

interpreted STOLI contracts have held that such contracts are void ab initio

6
Wells Fargo suggests that, because the fire insurance statute once stated that
fire insurance policies would be void if the policyholder did not have sole and
unconditional ownership of the property insured, see Flint Frozen Foods, Inc.
v. Fireman’s Ins. Co. of Newark, 8 N.J. 606, 611-12 (1952), the Legislature
could have expressly said life insurance policies lacking an insurable interest
were void, had it so intended. That type of declaration is not needed if a
policy violates public policy.
43
from their inception.” Swisher, Wagering on the Lives of Strangers, 50 Tort

Trial & Ins. Prac. L.J. at 734.

The policy would be void from the outset.

VI.

The second certified question asks, “If such a policy is void ab initio, is

a later purchaser of the policy, who was not involved in the illegal conduct,

entitled to a refund of any premium payments that they made on the policy?”

Sun Life contends that it should be permitted to retain the premiums it

collected because, “upon a determination that a policy is an illegal, void ab

initio wagering policy” -- as distinct from a voidable policy that is rescinded --

“New Jersey law requires that the court simply leave the parties where it finds

them.” Wells Fargo argues that “if any insurance policy is canceled or

rescinded in the State of New Jersey, the insurer must return the premium.”

The traditional rule -- that courts leave the parties to a void contract as

they are rather than assist an illegal contract -- has evolved over time.

Williston discusses the more modern view and notes that equitable factors can

be considered to determine the proper remedy:

In some cases, rescission of an illegal transaction
and recovery of consideration are allowed where the
parties are said not to be in pari delicto.

The typical case in which this rule is applied is
when one party acts under compulsion of the other. The
44
 doctrine originated in cases in which a creditor, by
improper pressure, induced a debtor to enter into
transactions fraudulent as to other creditors; now,
generally, one who has been induced by fraud,
coercion, or undue influence to convey property in
fraud of creditors can rescind and recover it or its
proceeds despite the illegality. In some other types of
cases, the guilt of the parties is differentiated for other
reasons, such as one party’s lack of knowledge of the
other party’s illegal activities.

Probably no more exact principle can be laid
down than if a plaintiff, although culpable, has not been
guilty of moral turpitude, and the loss the plaintiff will
suffer by being denied relief is wholly out of proportion
to the requirements either of public policy or of
appropriate individual punishment, the plaintiff may be
allowed to recover back the consideration paid for an
illegal agreement.

[8 Williston on Contracts § 19:80 (4th ed. 2019)
(footnotes omitted).]

Williston notes situations in which the above doctrine has been applied

to permit recovery by the less culpable party: “the purchaser of the

consideration paid for securities sold in violation of securities acts”; “a

purchaser of poisonous intoxicating liquor or some other product that was

illegally sold”; and “money lost at gaming.” Ibid. Williston adds that the

principle has also “been extended by a number of courts to allow even

affirmative recovery in limited settings” but notes that, “simply because the

parties are not in equal fault, it does not mean that a court should automatically

enforce the agreement at the behest of the less guilty party.” Ibid.
45
 The Seventh Circuit applied a similarly nuanced approach in Davis after

it found the STOLI contracts in question were void. 803 F.3d at 910-11. The

court awarded the insurance company its attorney’s fees and the premiums

paid by all defendants except one investor, Egbert. Id. at 911. “Being to

blame for the illegal contracts,” the court reasoned, “the defendants have no

right to recoup the premiums they paid to obtain them; allowing recoupment

would, by reducing the cost, increase the likelihood of illegal activity.” Ibid.

As to Egbert, however, the court noted that “[h]e caused no harm,” “was

not involved in the conspiracy,” and “would not have paid the premiums” had

he known the policy was void. Ibid. Under the circumstances, it would “have

have been a windfall” for the company to keep the premiums he paid. Ibid.

As a result, the court relied on an exception to the general rule -- to leave the

parties where they are -- “for the case in which the party that made the

payments is not to blame for the illegality.” Ibid. The court concluded that

Egbert’s premium payments should be returned. Id. at 911-12.

In Conestoga, the Eastern District of Tennessee found that the sixth

assignee of a void STOLI policy was entitled to a refund of the premiums it

paid. 263 F. Supp. 3d at 697, 704. The court stressed that the assignee was

“not to blame for the fraud here” and based its holding on the “rule that an

assignee who has paid premiums in good faith is entitled to recover premiums

46
paid if the policy is later declared void because of the misconduct of others.”

Ibid. (collecting cases).

The United States District Court for the District of Nevada likewise

considered the relative culpability of the parties in a matter that involved a

“textbook STOLI arrangement.” See Carton v. B & B Equities Grp., LLC, 827

F. Supp. 2d 1235, 1239-40, 1247 (D. Nev. 2011). The court noted “[t]he

Insurers were the clear victims of the STOLI scheme.” Id. at 1247. The

original investors, in contrast, who “may have . . . been duped,” “were at least

on inquiry notice of the illicit scheme.” Ibid. The court pointed to several

“red flags [that] should have placed” them on notice. Ibid. “Because it would

be unjust” to reward the investors under those circumstances, the court

concluded they “failed to state a claim for unjust enrichment” and were not

entitled to a refund of the premiums they funded. Ibid.

In the context of a void STOLI policy, the fact-sensitive approach

outlined by Williston and adopted in the above cases is sound. To decide the

appropriate remedy, trial courts should develop a record and balance the

relevant equitable factors. Those factors include a party’s level of culpability,

its participation in or knowledge of the illicit scheme, and its failure to notice

red flags. Depending on the circumstances, a party may be entitled to a refund

47
of premium payments it made on a void STOLI policy, particularly a later

purchaser who was not involved in any illicit conduct.

We note that the District Court considered equitable principles and

fashioned a compromise award based on the record before it. We do not

comment on the award itself.

VII.

For the reasons set forth above, we answer both parts of the first

certified question in the affirmative: a life insurance policy procured with the

intent to benefit persons without an insurable interest in the life of the insured

does violate the public policy of New Jersey, and such a policy is void at the

outset. In response to the second question, we note that a party may be entitled

to a refund of premium payments it made on the policy, depending on the

circumstances.

JUSTICES LaVECCHIA, PATTERSON, FERNANDEZ-VINA,
SOLOMON, and TIMPONE join in CHIEF JUSTICE RABNER’s opinion.
JUSTICE ALBIN did not participate.

48