Florida has recently adopted amendments to its Viatical Settlement Act.
One of the new provisions, Section 626.9911 (9), defines a prohibited stranger-originated life insurance practice as:
(9) “Stranger-originated life insurance practice” means an act, practice, arrangement, or agreement to initiate a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the insured. Stranger-originated life insurance practices include, but are not limited to:
(a) The purchase of a life insurance policy with resources or guarantees from or through a person who, at the time of such policy’s inception, could not lawfully initiate the policy and the execution of a verbal or written arrangement or agreement to directly or indirectly transfer the ownership of such policy or policy benefits to a third party.
(b) The creation of a trust or other entity that has the appearance of an insurable interest in order to initiate policies for investors, in violation of insurable interest laws and the prohibition against wagering on life.
The NCOIL Model Act, Section 2(Y), defines STOLI as follows:
‘Stranger-Originated Life Insurance’ or ‘STOLI’ is a practice or plan to initiate a life insurance policy for the benefit of a third party investor who, at the time of policy origination, has no insurable interest in the insured. STOLI practices include but are not limited to
cases in which life insurance is purchased with resources or guarantees from or through a person, or entity, who, at the time of policy inception, could not lawfully initiate the policy himself or itself, and where, at the time of inception, there is an arrangement or agreement, whether verbal or written, to directly or indirectly transfer the ownership of the policy and/or the policy benefits to a third party.
Trusts, that are created to give the appearance of insurable interest, and are used to initiate policies for investors, violate insurable interest laws and the prohibition against wagering on life.
STOLI arrangements do not include those practices set forth in Section 2L(2) of this Act.[Emphasis added].
Quite clearly, the new Florida statutory provision was modeled after the NCOIL STOLI definition. However, conspicuously absent from the Florida provision are the specific exceptions to the STOLI definition included in the NCOIL Model Act which are enumerated in the NCOIL Model Act cross-reference cited and highlighted above.
Why those exceptions were not included in the Florida statute is somewhat of a mystery. However, one such exception is
A premium finance loan, as defined herein, or any loan made by a bank or other licensed financial institution, provided that neither default on such loan nor the transfer of the policy in connection with such default is pursuant to an agreement or understanding with any other person for the purpose of evading regulation under this Act.
Most certainly a legitimate premium finance loan by a lender at the inception of life insurance policy’s issuance secured by the life insurance policy falls within the strict, literal definition of Florida’s now outlawed and criminalized stranger-originated life insurance practice. Under Florida’s insurable interest statute, Section 627.404, business entity lenders do not typically have an insurable interest or have any requirement to have one because they are merely lenders, not buyers of an ownership or beneficiary interest in the life insurance policy securing their loans, so although the borrower/owner has an insurable interest in his own life, the lender that advances the premiums and has a collateral interest in the policy does not, and the lender’s insurable interest is the focus of the inquiry for the new Florida anti-STOLI provision, not the owner/insured’s.
Thus, this is an example of the ‘awkward’ situation that, although there is insurable interest at the policy’s inception, under the Florida anti-STOLI provision, an insurer can still challenge a policy post-contestability period and deny payment of the death benefit. The life insurance policy is void, not for lack of insurable interest, but because the policy was issued in connection with a prohibited STOLI practice. See Sections 626.99289 and 626.99291 for which there are no exceptions as there are under the NCOIL Model Act.