Court Awards Return of All Premium and Prejudgment Interest After Jury Verdict in Favor of Life Insurance Investor’s Promissory Estoppel Claim

The case dragged on for three years, culminating in a jury trial in 2019. The end result was a mixed bag for both the insurer and the investor.

The case arose from a $10 million life insurance policy issued in 2006 on the life of a 71-year-old woman. The investor purchased the policy in 2009 and designated US Bank as securities custodian. The insured died in November 2016, and US Bank filed a claim under the policy. Sun Life responded by filing suit against US Bank in January 2017, seeking to have the policy declared void ab initio on the grounds that it was the product of fraud, lacked an insurable interest, and constituted an illegal wager. Sun Life also named as a defendant the agent who had facilitated the issuance of the policy, Lindsay Spalding-Jagolinzer, alleging asserting claims of fraud, breach of contract, and negligent misrepresentation against her. US Bank counterclaimed, alleging that Sun Life had breached the policy, as well as the Massachusetts Consumer Protection Act and the duty of good faith. US Bank also alleged in the alternative that, even if Sun Life succeeded in having the policy declared invalid, the promissory estoppel doctrine should apply to prevent Sun Life from reaping the windfall that would result if it were allowed to keep millions of dollars in premium without having to pay the resulting claim.

The parties cross-moved for summary judgment, and agreed that the “fundamental issue of whether the [policy] … is void ab initio can be resolved by this Court, as a matter of law.” Sun Life’s motion sought a declaration that the policy was void as an illegal wager that lacked an insurable interest at inception, while US Bank sought a judgment that the policy was valid and that Sun Life had breached it. Applying Delaware law established by the seminal decision in PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059 (Del. 2011), the court ruled in Sun Life’s favor, holding in a March 2019 decision that the policy was “void ab initio as an illegal wager”, and that Sun Life thus “did not breach its contract by failing to pay out the claim.” See 369 F.Supp.3d at 601. The court reached this result by primarily concluding that the third parties involved in the origination of the policy (i.e., the agent and the premium finance firms involved) had not acted in good faith, and the insured lacked an insurable interest in the policy. Shortly before the summary judgment decision was issued, the broker – one of those third parties that the court found to have acted in bad faith – settled.

The summary judgment ruling and the broker’s dismissal from the case left US Bank’s bad faith and promissory estoppel claims as the only issues for the jury. After a seven-day trial, the jury issued a verdict in favor of US Bank on promissory estoppel but rejected the bad faith claim. In a December 30, 2019, post-trial order, the court addressed both parties’ attempts to dramatically change the verdict, by rejecting Sun Life’s request to reverse the verdict and US Bank’s request for expectation damages on the verdict. An award of expectation damages would have meant that US Bank would be entitled to the full $10 million face value of the policy, thereby effectively undoing the court’s prior decision voiding the policy. The court did, however, settle on a middle ground: it ordered Sun Life to return all of the premiums that it had collected on the policy, not just those paid by US Bank, and to pay prejudgment interest. Those premiums totaled $1,923,068, and the parties were ordered to meet and confer to agree on the amount of prejudgment interest. In a January 7, 2020 submission, the parties agreed that the interest totaled $1,130,286, resulting in a total damages award of $3,053,354. That amount was entered as a judgment on January 14, 2020, two weeks shy of the three year anniversary of the case.

The result presents complications for Sun Life in its quest to make life difficult for the secondary market in general, and purchasers of STOLI policies in particular. The judge found that “both sides are to blame for the situation in which they find themselves,” and noted that Sun Life’s hands were “not spotless” because the policy had been on a Sun Life list of suspected STOLI policies since at least 2009. Thus, Sun Life “knew (or should have known) that it could invalidate STOLI policies even after the two-year incontestability period,” but instead made a “strategic decision” not to pursue the matter. In other words, Sun Life continued to accept premiums for years on a policy that it almost certainly knew it could seek to have invalidated when a claim was submitted. That fact appears to have troubled the jury, as well as the judge, who concluded that to “leave the parties where the Court found them” by allowing Sun Life to retain premiums it collected even while concealing its intent to disavow the policy would unjustly enrich Sun Life.

The case appears to represent the first time that an insurer has been ordered to return all of the premium paid on a judicially invalidated STOLI policy. The result is more favorable than those achieved by investors in other STOLI cases, including another in federal court in Florida styled Sun Life Assur. Co. of Canada v. US Bank Nat. Assoc. There, the court applied Delaware law in declaring a policy void as STOLI, but ordered Sun Life to return only the premiums that had been paid by the owner of the policy at the time the claim was filed. (The court also did not award prejudgment interest, although that aspect of the ruling was reversed by the 11th Circuit Court of Appeals.) In a New Jersey action, also styled Sun Life Assur. Co. of Canada v. Wells Fargo Bank, N.A., the trial court (applying New Jersey law) similarly held that the current holder of the policy was only entitled to a return of the premiums that it had paid, and not those that had been paid by prior holders. The main difference between those outcomes and the recent Delaware result was the fact that the latest case was heard by a jury, not a judge.

The Florida and New Jersey approach will often result in dramatically different outcomes than the one achieved in the latest Delaware case, particularly if the final holder of the policy had purchased it a short time before the claim was filed. The Florida and New Jersey results – total rescission of the policy without a corresponding total return of the premium – creates the potential for turmoil in the secondary market for life insurance policies. Allowing insurers to return only the premiums paid by the current holder serves no discernable purpose: it will serve to both punish innocent purchasers and create windfalls for insurers, who will be incentivized to target policies with recent changes in the custodian.

The latest result is another reminder of the highly unsettled state of the law pertaining to STOLI policies, and the inconsistency in outcomes even between cases where the same state’s law is ostensibly applied. In three cases with the same caption and the same core issues, three meaningfully different results were reached.