The Tortured Policyholders Department

A recently filed case in Delaware involving Apollo poses an interesting twist on prior STOLI litigation.

Just like Taylor Swift's new album, there are way too many songs, and the music has played on for way longer than anyone imagined. The long reach of stranger-originated life insurance (STOLI) continues almost 20 years after some of these policies were placed, impacting investors, insurance companies, and the insureds that participated in these transactions. ?Bloomberg reported on a recently filed case against Apollo, and a host of intermediaries, where plaintiff alleges, among other things, that “Defendants then went to great lengths to move those proceeds through a complex maze of purported trusts and other entities to thwart Delaware law.”

I reviewed the complaint, and its exhibits, for this case and here is what I found: plaintiff claims that various Apollo entities assisted by financial intermediaries, including Wells Fargo, conspired to create an intricate web of transactions and entities to avoid insurable interest rules and allow investors to obtain a policy on the life of Martha Barotz with no insurable interest. ?What seems to make this case different than the hundreds of STOLI cases that have been litigated over the last 20 years, is the plaintiff and the fact the death benefits have been paid by Pheonix Home Life to the investors, apparently through what have become known as stealth trusts. Stealth trusts were alleged to have been created to give the appearance of an ILIT for the benefit of the family but were designed to funnel economic benefit to investors. See the diagram below taken from the plaintiff's complaint, which outlines the alleged relationships between the entities.

The plaintiff estate of the insured is attempting to recover the death benefit from the fund created by Apollo. The case was brought in Delaware, originally considered a very favorable jurisdiction for non-recourse premium financed transactions. Many STOLI schemes purposefully situated entities to hold these policies in Delaware. In related litigation focusing on the trust, a separate court has already granted an award to the estate against the trust involved, but in that case, the economic benefit of the policies had already been transferred to investors in an Apollo entity.?? Since the heyday of STOLI in 2004-2008, the law has changed substantially in Delaware, much to the credit of attorneys from Faegre Drinker Biddle & Reath and now Cozen O’Connor who established precedent in cases requiring strong evidence of insurable interest.? ?Cozen O'Connor represents the plaintiff Estate of Martha Barotz in the newly filed case.

People have asked me, how are the premium financed IUL policies of today the same and how are they different from the premium financed STOLI cases of 20 years ago:

How is IUL premium financing today similar to premium financed STOLI policies?

• A small number of insurance companies have purposely chosen to participate in huge transactions involving external financing that they will likely come to regret.
• Both concepts involve external loans to pay premiums that had to last for decades but are impacted by changes in the credit markets, including higher rates or loans called on short notice.
• Both involve agents and other intermediaries who bore no risk in the transactions but stood to make huge amounts of money for poor advice in placing policies.
• Both will ultimately torture policyholders, some of whom have purchased real insurance for real needs, using real money as carriers pass on the impact of poor results to policyholders that diverge from illustrations.?

How is IUL premium financing today different from premium financed STOLI policies?

• STOLI premium financed policies, including the one alleged to be at issue in the newly filed Barotz case generally involve non-recourse loans to the insured.? IUL premium financed policies are full recourse with other collateral being pledged in addition to the policy. The policyholder bears all the risk. ?
• Because of the non-recourse nature of STOLI there was a question of who would lose, the investors or the insurance companies (history has shown the insurance companies and the investors both lost big).
• With STOLI premium financed policies there was often a violation of the law and fraud in their application about who really owned the policy.? IUL premium financing may be stupid, but it is not illegal for a client to borrow millions of dollars with full recourse to buy a complex opaque policy that he or she doesn’t understand, only to end up in the tortured policyholders department.

Agree or disagree? Feel free to comment.