Watch the full video at https://www.youtube.com/watch?v=3nU4wgZ0xbg and at https://rumble.com/v1jf39j-stoli-fraud-victims-and-return-of-premium.html
Insurance acquired as part of a STOLI scam has never existed as a matter of law
IGeronta Funding, a Delaware Statutory Trust v. Brighthouse Life Insurance Companyno. 380, 2021, Supreme Court of Delaware (August 25, 2022), the Supreme Court was asked to decide whether premiums paid on policies declared void ab initio in the absence of insurable interest should be returned. The trial court agreed with Brighthouse and relied on the Restatement (Second) of Contracts (“Restatement”) to determine whether Geronta was entitled to restitution. Specifically, the court held that Geronta can recover under Section 198 of the Restatement (“Section 198”) if it could prove excusable ignorance or that it was not equally at fault.
Applying this test, the court held that Geronta was only entitled to a refund of the premiums it paid after alerting Brighthouse that the policy in question was invalid.
RELEVANT FACTS AND BACKGROUND
On July 11, 2007, the fictitious Mansour Seck Irrevocable Life Insurance Trust (“Seck Trust”) applied to MetLife Investors USA Insurance Company (Brighthouse’s predecessor) for a $5 million universal life insurance policy insuring the life of a fictitious man identified as Mansour. Seck (“the policy”), with a birthday of January 1, 1933. Seck was identified as a French national residing at 170 Academy Street, Jersey City, New Jersey.
After confirming that its procedures and guidelines were met, MetLife issued the policy on or about July 24, 2007.
Pape Seck’s arrest and prosecution
In 2010, Pape Seck was the subject of numerous press releases from the State of New Jersey and other insurance industry publications; they stated that Pape Michael Seck, an insurance agent in New York City, had been arrested and charged with fraudulent insurance schemes. Pape Seck pleaded guilty to two counts of insurance fraud regarding fraudulent applications for Mansour Seck.
Disputes and Supreme Court rulings
On April 4, 2018, Brighthouse filed suit seeking a judicial declaration that the policy was invalid ab initio in the absence of an insurable interest and arguing that it is entitled to retain all premiums paid on the policy. Geronta filed an answer agreeing that the policy was invalid ab initioand a counterclaim, alleging that it was entitled to a refund of all premiums paid, except for the premiums paid by the original owner of the policy.
In its opinion, the district court declared the policy invalid ab initio. The court denied Geronta’s request for rescission and rescission, holding that rescission is not available if a contract is void because there is no agreement to “terminate.” After trial, the Superior Court ruled that Geronta was only entitled to a refund of the premiums it paid after it informed Brighthouse that the policy was void for lack of insurable interest.
ANALYSIS
Overview of potential remedies for a policy void ab initio due to lack of insurable interest
An insurance contract for a life in which the insured has no interest is a pure gamble that gives the insured an unfortunate counter-interest in bringing life to an end. A court may never enforce invalid contracts ab initio, regardless of the intentions of the parties. So when an agreement is invalid ab initio Contrary to public policy, the courts will not usually enforce an indemnity to any extent against either party. In other words, the courts will usually leave the parties where they find them.
Was termination possible?
Termination would result in any premiums paid being refunded by applying equitable principles and returning both parties to the position they were in before the contract was entered into. Life insurance policies of foreign origin (“STOLI”), such as that of Monsour Seck, when canceled would claim the premiums back from the insurer to the investor. However, since the policy was void, revocation was not available.
Refund
Restitution is a substantive law where liability is not based on tort or contract but on the unjust enrichment of the defendant. Compensation has been awarded under two separate approaches: (1) a fault-based analysis based on considerations specific to voided policies; ab initio for lack of an insurable interest and (2) the recalculation.
Reimbursement under a fault-based analysis based on considerations specific to policies declared void ab initio for lack of insurable interest
Most courts considering this issue have adopted a fault-based analysis to determine whether premiums paid for an illegal or void policy should be refunded.
Generally, when an illegal contract is voided, the parties will be left where they are without a refund of the money paid for illegal services. But there is an exception for the case where the person who made the payments is not to blame for the illegality. The insurers were the clear victims of the STOLI scheme, as was Geronta who bought the insurance.
If the downstream investor was as at fault as, or more than, the insurer, the court should leave the parties where it found them, so that the insurer can keep the premiums. If the downstream investor was innocent or if the insurer was more culpable, the court should refund the premiums.
The restoration (other) of contracts
Restatement Section 198 establishes two exceptions to the general rule—when a party is (1) excusably ignorant and (2) not equally at fault with the party from whom he seeks relief.
The Supreme Court adopted a fault-based analysis, framed under Restatement, that considers issues specific to voided policies ab initio against public policy due to lack of insurable interest as the proper test to determine whether premiums should be refunded.
The Supreme Court noted that a fault-based analysis encourages insurers to speak up when the circumstances indicate that a policy is void for lack of an insurable interest because they will not be able to retain premiums if they remain silent after being questioned, and they may also be liable for interest payments.
Thus, when analyzing a viable legal theory seeking as a remedy refund of premiums paid on voided policies ab initio absent an insurable interest, the Delaware courts are now required to analyze the exceptions described in sections 197, 198, and 199 of the Restatement and determine whether any of these exceptions permit repayment of the premiums. A court must decide whether:
- there would be a disproportionate forfeiture if the premiums are not repaid;
- the plaintiff is excusably ignorant;
- the parties are not equally at fault;
- the party applying for reimbursement has not been guilty of serious misconduct and withdrew before the invalidity of the insurance became effective; or
- the person seeking reinstatement has not committed serious misconduct, and reinstatement would put an end to the situation which is contrary to the public interest.
The parties’ fault and general considerations determine which party is entitled to the premiums paid on an invalid policy ab initio in the absence of an insurable interest.
The Supreme Court failed to consider whether either party had notice that the policy was invalid
Here, before purchase:
- Geronta, in consultation with Leadenhall, made the deliberate decision to look superficially at Seck Policy by focusing solely on whether it was active.
- Geronta purposefully ignored the possibility that some of the unexplored policies in the bulk purchase might have been impossible to implement.
- Geronta’s due diligence regarding Seck Policy was extremely limited.
The Supreme Court also concluded that Brighthouse was not at fault because Geronta failed to show that Brighthouse had actual knowledge of the invalid nature of the policy. In other words, the court found that Brighthouse had not actual knowledge of the illegality of the policy.
Section 198 and the in pari delicto cases from section III.Abi focuses on whether a party had either actual knowledge or request documents of the invalidity of the insurance. Because the court failed to consider whether Bighthouse was on the merits of the policy’s invalidity.
The Supreme Court remanded the case for the Superior Court to reconsider its findings of fact in light of this court’s articulated test and specifically directed the court to consider whether either party had notice of the invalidity of the policy and reversed the court’s determinations regarding entitlement to premiums and remanded the case in in accordance with its opinion.
By waiting two years after the fake insured’s policy was taken out, the fraudsters defeated the insurer’s ability to cancel the policy on the grounds that a life insurance policy cannot be contested. But since Mansour Seck did not exist the policy was not real, it was a gamble and a fraud, the criminal invested a lot of money, sold the risk to another and profited from the crime only to have the victim sell again until Geronta found himself paying a premium of an annulment. In order to do justice, the Delaware Supreme Court has provided a way to determine who is free of fraud and who is not when determining who gets the premium back, if any.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com.
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