The Florida Supreme Court Pruco advisory opinion, Wells Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So. 3d at 1203 & 1206-07, to the United States Eleventh Circuit Court of Appeals held that an insurer may not challenge the validity of a Florida life insurance policy, even on lack of insurable interest under Section 627.404 or STOLI grounds, after the expiration of Florida’s two-year contestability period provided in Section 627.455 – Florida Statutes.
In Pruco the Florida Supreme Court determined that the policies at issue were stranger initiated life insurance policies (STOLI) policies that nevertheless satisfied the Florida insurable interest statute. “Accordingly, under the plain language of [the two-year contestability period statute] a policy that has the required insurable interest at its inception, even where the interest is created as a result of a STOLI scheme, is incontestable after two years.” The Supreme Court continued to say that even though it “might be wise public policy [to remove the two-year bar], that decision is for the Florida Legislature, not this Court”.
At the time of the Pruco decision, Florida statutory law did not define a STOLI scheme or practice. However, in the recent amendment to the Florida Viatical Settlement Act, STOLI practices are now defined. See Section 626.99289.
In the legislative final bill analysis, the writer for the Florida House of Representatives wrote, “In response to the Pruco case from the Florida Supreme Court, the bill creates ss. 626.99289 and 626.99291, F.S., in order to create a STOLI-policy exception to the two year contestability period established by s. 627.455, F.S.”
Note particularly that this is a STOLI exception and not an insurable interest exception.
So what are we left with? A life insurance policy that satisfies the Florida insurable interest requirements nevertheless may be challenged, and the payment of any death benefit otherwise due under that policy may be denied, by a life insurance company after the expiration of the two-year contestability period if the life insurance company establishes the policy was obtained by a now broadly defined “stranger-originated life insurance practice”.
This development may remove any legal burden on a life insurance company to conduct due diligence at the time of policy issuance or during the first two years after the life insurance policy has been issued, despite what might be referred to as ‘red flags’ known to the life insurance company but not acted upon, an issue on which the life insurance industry has been losing in several recent court decisions (See, e.g., U.S. Bank N.A. v. Sun Life Assurance Co. of Canada, case number 16-1049, in the U.S. Court of Appeals for the Seventh Circuit.)