The U.S. District Court for the middle district of Pennsylvania denied Principal Life Insurance Co.’s bid to have policies declared null and void because they were allegedly part of a stranger-originated life insurance (STOLI) scheme.
Principal Life Insurance Co. vs. Mark DeRose and Matthew DeRose , trustees, and First Priority Bank rejected in part a ruling by a magistrate judge that an insurance interest existed in the case, making way for a ruling that allows for the policies.
The court did adopt the magistrate judge’s recommendation to deny the trustees’ and First Priority’s motions for summary judgment on the issue of whether Principal can declare the policies void or voidable because of misrepresentations made on the application. The court also adopted the magistrate judge’s recommendation to deny the defendants’ motions for summary judgment on the issue of damages.
The life insurance industry has had several court wins against STOLI where fraud is found in the transfer of the policy. And while the rest of the secondary market – namely life settlements – is quick to distance its products from STOLI, the secondary market continues to suffer from dampened investor enthusiasm. The life settlement industry notes that any comparison made between life settlements and STOLI is merely a smear from the primary insurance market, which sees life settlements as unwanted competition. The primary life industry, meanwhile, considers life settlements dangerous and a gateway to insurance transactions with no legitimate insurable interest.