Last week the Delaware Supreme Court ruled that insurers can contest life policies that pay investors when the subject of the policy dies.
According to two opinions filed on Sept. 20, the federal court in Wilmington asked the state high court to interpret Delaware’s law for honoring stranger-originated life insurance (STOLI) policies. The insurers in the two cases claimed the life insurance policies were void because the beneficiaries were part of a scheme in which investors paid the premiums.
The court ruled that “under Delaware common law, if a life insurance policy lacks an insurable interest at the inception,” it violates state rules against wagering and must be invalidated.
In coming to its decision, the court noted that the British Life Assurance Act of 1774 prohibited the practice of wagering on strangers’ lives. Additionally, in 1881, the U.S. Supreme Court called stranger-originated policies provided a “sinister counter interest in having the life come to an end.”
The Delaware Supreme Court decision stemmed from two cases filed since 2009 that involve $6 million and $9 million policies from two subjects who have died. The two lawsuits are ongoing.