District Court Denies Payment Under a Stranger Initiated Life Insurance Policy

As we’ve discussed previously here and here, the law does not like stranger-originated life insurance policies (STOLIs). Partly, it is just unseemly — like gambling on a life. Partly, there is concern that the originator of the policy will have the insured whacked so that the originator/beneficiary can collect. The public policy concern with STOLIs is a bit odd. Yes, it might be gambling, but then so is all insurance to some degree, and we don’t really mind gambling so much any more. And yes, it might create an incentive to commit murder, but we have laws against murder, and that doesn’t stop people from murdering their loved ones, perhaps in order to collect life insurance, perhaps for other reasons. On the whole, I think strangers are much less likely to murder you than are your relatives.

Michael Binday owned an insurance brokerage firm in the early 2000s. In 2012, he and an insurance agent were indicted for using STOLIs to defraud insurers. The scheme was complex, and the court lays it out in detail. In short, Binday and his associates solicited life insurance to senior citizens in order to generate life expectancy reports which were used to attract funders. They then lent money to the funders. Mr. Binday’s cousin was designated the trustee to try to avoid the usual legal problems with creating STOLIs. The entity that loaned money to pay the premiums also had an option to acquire the insurance policies, and somewhere around 2009, that entity owned ninety percent of the STOLIs.

In 2007, Mr. Binday created the Jerry Freid Irrevocable Trust (the Trust) in connection with a life insurance policy sold to a man in his 70s, with Mr. Binday’s cousin as trustee. In 2011, Mr. Freid sold his interest in the policy to a lender. The trust agreement permitted Mr. Binday’s cousin to purchase life insurance on Freid’s life, and he did so, naming Mr. Freid’s daughter as the beneficiary. At the time, Mr. Freid had a net worth of no more than $500,000. But in 2008, a $4 million life policy was issued on Mr. Freid’s life. The opinion spends several mind-boggling pages detailing the transactions related to this policy. At the end of that trail of transactions was the Wells Fargo Bank (Wells Fargo), which came to have the policy on its books.

When Mr. Freid died in 2020, Wells Fargo notified the insurer and attempted to collect on the policy. The insurer refused to pay, having discovered that the policy had been procured by a third-party that lacked an insurable interest in Mr. Freid’s life. Dueling suits were filed in New Jersey and Nebraska.  The New Jersey action having. been stayed, in Wells Fargo Bank v. Ameritas Life Ins. Corp., the Nebraska Court applied New Jersey law to rule on the insurer’s motion for summary judgement.

New Jersey law is clear that STOLIs are void ab initio. The only matter for the court to determine was whether the policy at issue as in fact a STOLI. The Court determined that it was. That finding was made easier by Mr. Binday’s conviction in connection with a STOLI fraud scheme. The policy at issue “was procured using Binday’s STOLI scheme playbook.” Mr. Freid had no role in the transaction; the Trust engaged in a web of transactions that did not involve Mr. Freid in any way. The policy was designed to be re-sold, as were all of the policies that were part of the STOLI scheme. Moreover, the policy overstated Mr. Freid’s net worth by a factor of at least nine. Mr. Freid bought a house for $116,500. Around the same time, the annual premium on the policy, supposedly taken out the benefit of his beneficiaries, was $177,000. 

While Wells Fargo argued that other cases have found disputed issues of fact in connection with similar transactions, here there was no room for doubt here. This case undoubtedly involved a STOLI, and the Court awarded summary judgment in favor of the insurer.