Insurer’s Loss in Wisconsin “STOLI” Action on Appeal to Seventh Circuit

In the continuing saga of the courts’ analyses of stranger-originated life insurance (“STOLI”) policies, the Seventh Circuit is set to hear oral argument in U.S. Bank, N.A. v. Sun Life Assur. Co. of Canada on September 30, 2016. The main issue on appeal inU.S. Bank is whether, under Wisconsin law, Sun Life breached the subject life insurance policy in failing pay to proceeds to U.S. Bank upon it presenting proof of the insured’s death to Sun Life. But the appeal also presents the question of whether an insurer acts in bad faith, as a matter of Wisconsin law, if the insurer seeks additional information concerning the circumstances surrounding policy issuance when the insurer has concerns about possible misrepresentations made in connection with the policy issuance.

In the proceedings below, Sun Life contended that a Wisconsin statute prohibiting illegal wagering contracts (Wis. Stat. § 895.055(1)) voided the $6 million life insurance policy, which was procured by an 81 year-old Wisconsin man in 2007, presumably for estate planning purposes. At the time the insured procured the policy, the insured’s trust was the beneficiary; however, the application indicated that the insured would be the source of funding for premium payments. In 2011, U.S. Bank, as “securities intermediary” was substituted as both the owner and beneficiary of the policy, and it continued making premium payments until the insured’s death in 2014. A total of more than $2.4 million in premium was paid on the policy from 2007 to 2011. Upon U.S. Bank’s presentment of a claim and the insured’s death certificate to Sun Life, Sun Life requested additional information concerning U.S. Bank’s involvement with the policy and the circumstances of the policy issuance. U.S. Bank did not respond to Sun Life’s requests and instead filed a lawsuit alleging breach of contract and bad faith by Sun Life.

In June 2015, the United States District Court for the Western District of Wisconsin (Judge William Conley) granted U.S. Bank summary judgment as to its breach of contract claim. In reaching its decision on the breach of contract issue, the district court found that the Wisconsin anti-wagering statute did not apply to the policy, as that statute has “never been used to deny payment of life insurance proceeds under Wisconsin law.” It also agreed with U.S. Bank’s argument that another Wisconsin statute (Wis. Stat. § 631.07(4)), which states than an insurance policy could not be found to be invalid merely because the policyholder lacks an insurable interest, applied and barred Sun Life’s “wagering-contract” defense. The district court also found that a Wisconsin statute enacted in 2010 to regulate STOLI policies in Wisconsin did not apply since the policy was issued in 2007. “Accordingly,” the court concluded, “while Sun Life has pointed to a number of facts suggesting that U.S. Bank was acting as a ‘securities intermediary’ to facilitate and, likely finance, the acquisition of STOLI agreements for interested, third-party investors, there is nothing in Wisconsin law that prohibited it from doing so at the time, and nothing that relieves Sun Life's obligation to pay out the proceeds of this life insurance policy upon proof of death.” See U.S. Bank N.A. v. Sun Life Assur. Co. of Can., No. 14-cv-562-wmc, 2015 U.S. Dist. LEXIS 75889, at *12-13 (W.D. Wis. June 10, 2015). The court subsequently granted U.S. Bank’s summary judgment on the objective prong of its bad faith claim (and on its statutory interest claim), finding that Sun Life “lacked any objectively reasonable basis for paying U.S. Bank’s claim timely[.]” See U.S. Bank N.A. v. Sun Life Assur. Co. of Can., No. 14-cv-562-wmc, 2015 U.S. Dist. LEXIS 146975, at *12 (W.D. Wis. Oct. 29, 2015).

In its brief in the Seventh Circuit (filed on June 13, 2016), Sun Life argued that the district court erred in interpreting Wisconsin law, such that, under the district court’s interpretation, Wisconsin law allows for life insurance to be used as a wager. More specifically, Sun Life argued that the district court created a “false conflict” between the Wisconsin anti-wagering statute (Wis. Stat. § 895.055(1)) and the Wisconsin insurable interest statute (Wis. Stat. § 631.07(4)) in finding that the insurable interest statute barred Sun Life’s wagering defense. Sun Life posited that the statutes could be read to support two conclusions: “[a] life insurance policy that lacks an insurable interest and is not also a wagering contract is valid; and [a] life insurance policy that is used as a wager, regardless of whether it is supported by an insurable interest, is void.” Sun Life also argued that the district court erred in finding that Sun Life acted in bad faith in seeking additional information concerning the origination of the policy. Sun Life pointed to both Wisconsin cases and cases in other jurisdictions declaring “STOLI policies procured under circumstances to those surrounding the [subject life insurance policy] void.”

In its response brief (filed on July 13, 2016), U.S. Bank argued that the district court’s decisions should be upheld, as Wisconsin law clearly states that an insurer cannot, after years of accepting premiums, “get off the hook” and not pay policy benefits simply by making a wagering defense. U.S. Bank further argued that the purpose and effect of the Wisconsin insurable interest statute (Wis. Stat. § 631.07(4)) was to encourage greater due diligence by the insurers beforeissuing life insurance policies and that there is no distinction between a wager policy and a lack of insurable interest, as Sun Life argued. In addition, U.S. Bank argued that the later-enacted Wisconsin STOLI statute did not have any effect on the Wisconsin insurable interest statute and the district court’s finding that it abrogated Sun Life’s wager defense. Finally, U.S. Bank argued that the district court properly held that Sun Life was liable for bad faith damages for failing to pay the claim in a timely manner without a “fairly debatable” coverage defense.

U.S. Bank, N.A. v. Sun Life Assur. Co. of Canada presents another opportunity for the Seventh Circuit to add to the continually-growing body of caselaw regarding STOLI policies. Given that Wisconsin enacted a statute specifically to address STOLI policies in 2010, it will be interesting to see how the Seventh Circuit addresses life insurance policies issued in Wisconsin prior to the effective date of the STOLI statute and how it addresses state statutes—such as Wisconsin’s anti-wagering and insurable interest statutes—that were not written specifically to target STOLI issues, as in this case. The Seventh Circuit’s decision will certainly provide persuasive authority for courts in other states and circuits facing similar situations and statutes in the future.