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Conflicting Statutes and Validity of STOLI Policies Certified to Florida Supreme Court

Conflicting Statutes and Validity of STOLI Policies Certified to Florida Supreme Court

Pruco Life Ins. Co. v. Wells Fargo Bank, N.A., 780 F.3d 1327 (11th Cir. 2015)

ERISA and Life Insurance News
(September 14, 2015)

Pruco sought to invalidate two stranger-originated life insurance policies several years after they were issued.  On appeal, the Eleventh Circuit consolidated the two cases, because they involved conflicting Florida statutes.

Pruco relied on a Florida statute requiring a person who procures life insurance to have an insurable interest in the life of the insured at the inception of the policy.  Fla. Stat. § 627.404 (2008).  Undermining Pruco's argument, however, was another Florida statute requiring all insurance policies to include a clause providing that the policy is incontestable after it has been "in force" for two years.  Fla. Stat. § 627.455 (1982).  The cases were decided by two federal district courts, which issued conflicting decisions.

In one case, the court held that the STOLI policy was void ab initio because it violated the insurable interest statute.  Pruco Life Ins. Co. v. Brasner, 2011 WL 134056 (S.D. Fla. Jan. 7, 2011).  A contract that is void ab initio is one that never existed, the court reasoned.  Thus, the two-year incontestability provision required by § 627.455 never took effect, because the incontestability period applies only to an insurance policy that has been "in force."  With no party having a valid insurable interest, the court concluded that the policy was never "in force," and the two-year contestability period was not an obstacle to Pruco's effort to invalidate the policy. 

In the other case, the court took a different view, concluding that Pruco's tardy insurable-interest claim was barred by the incontestability provision required by § 627.455.  Pruco Life Ins. Co. v. U.S. Bank, 2013 WL 4496506, at *2, *5 (S.D. Fla. Aug. 20, 2013).  The court likened § 627.455 to a statute of limitations that applies regardless of the basis of any challenge to the validity of the policy.

In reviewing cases from other jurisdictions, the Eleventh Circuit noted that the Brasner decision represents the majority view that a statute requiring an insurable interest at a policy's inception takes precedence over a statute making a policy immune from challenge after a designated period of time.  See, e.g., W. Reserve Life Assur. Co. of Ohio v. ADM Assocs., LLC, 737 F.3d 135, 143 (1st Cir. 2013); PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1067 n.18 (Del. 2011).

However, there exists support for the minority view as well.  Courts in New York and Michigan have held that the lack of an insurable interest renders an insurance policy merely voidable, not void ab initioSee New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74 (1989); Bogacki v. Great-West Life Assur. Co., 234 N.W. 865, 865-67 (Mich. 1931); cf. Equitable Life Assur. Soc. of U.S. v. Poe, 143 F.3d 1013, 1019-20 (6th Cir. 2013) (acknowledging that Michigan strictly construes incontestability clauses).

Determining that Florida law embraces both the public policy that prohibits an insurance company from contesting a policy after the contestability period has expired, as well as the public policy that an insurable interest is necessary for an insurance policy to be valid, the Eleventh Circuit certified the issue to the Supreme Court of Florida.

H. Sanders Carter
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Andrea K. Cataland
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Kenton J. Coppage
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