Sapers & Wallack
Bulletins: AALU Washington Reports
Settlement Reached in Stalsberg v. New York Life in Apparent Stranger-Originated Life Insurance (STOLI) Case
November 24, 2008
Litigants Lonnie R. Stalsberg (the insured’s son and trustee of his life
insurance trust) and New York Life Insurance Company (“NY Life”) reached a
settlement of their lawsuit (Stalsberg v. New York Life Insurance Company which was
filed in the U.S. District Court in Utah, 2:07-cv-29) in which NY Life sought to rescind
a policy on Ralph Stalsberg’s (the insured’s) life because of alleged lack of an
insurable interest. Stalsberg, age 81, had taken out the policy, which was paid for with
premium financing arranged by Coventry Capital I, LLC (Coventry), with the admitted
intent by Stalsberg of selling the policy after its 2-year contestability period.
The factual assertions in this Washington Report are based on representations made by NY Life in
its Memorandum In Support Of Its Motion For Summary Judgment. NY Life issued a policy in the face
amount of $3.5 million on the life of Mr. Ralph Stalsberg (“Stalsberg”), a resident of Utah, based upon its
understanding that the intended owners and beneficiaries of that policy were persons having an insurable
interest in his life, i.e., his children, through a life insurance trust of which Stalsberg’s son was the trustee. The NY Life policy was one of a number of policies (with a total death benefit of $14 million) for which
Stalsberg simultaneously applied.
Stalsberg, however, had been approached (prior to his application to NY Life) by a life insurance
broker who was selling a program designed by Coventry. Stalsberg allegedly was led to believe that he
could generate a profit on the sale of a life insurance policy insuring his life without having to pay any
premiums on the policy. Stalsberg borrowed all of the money needed to pay the premiums through a non-
recourse loan arranged by Coventry from LaSalle Bank National Association. The loan allegedly carried,
according to NY Life, “an exorbitant, above-market interest rate” of 14.70%, and was secured solely by the
Policy. The loan was scheduled to mature 26 months from inception. The Note and Security Agreement
provide that the Stalsberg Trust could satisfy all of its obligations under the agreement simply by
relinquishing all right, title and interest in the Policy.
Stalsberg admitted in a deposition that he intended to sell the Policy “between 24 and 26 months”
after its issuance, at which point the loan would be repaid, financial investors (who had no insurable interest
in Stalsberg’s life under Utah law) would be the sole beneficiaries of the Policy, and Stalsberg would hope
to make a small profit on the sale of a speculative interest in his life.
As part of the loan transaction, Coventry was paid an origination fee of at least $4,307. An amount
of $354,514.84 was paid in premiums to NY Life, out of which approximately $190,000 was paid in
commissions to the brokers who sold the Policy to the Stalsberg. More than half of all of the commissions
paid on the Stalsberg Policy were paid to one or more entities that passed the money through to Coventry.
NY Life’s motion states that, in total, Coventry was paid commissions on the Stalsberg Policy in excess of
$100,000.
These facts appear to describe a typical “STOLI” (Stranger-Originated Life Insurance) transaction -
i.e., a transaction in which life insurance is initiated directly or indirectly by strangers who fund (or arrange
for the funding of) premium payments for their own investment purposes often in circumvention of the
intent of state insurable interest laws. STOLI investors typically obtain policies or interests in them after
the expiration of the contestability period. (See our Bulletins Nos. 08-87, 08-13, 06-127 and 05-60.)
NY Life, which rescinded the Policy after discovering the Coventry program behind it, argued in its
motion that the foregoing facts “establish the existence of a sham transaction that was designed to give the
formal appearance of complying with the insurable interest requirement, while in substance completely
violating it.” NY Life argued that the Court should hold that the Stalsberg Policy violates the insurable
interest requirement, and that NY Life validly rescinded the Policy.
The Utah Department of Insurance also submitted a brief in support of NY Life’s position, arguing
that purchasing a policy with intent to sell from the outset violates Utah’s insurable interest rule, even in the
absence of a binding, up-front agreement to sell. The Department of Insurance also asserted that the Utah
Viatical Settlements Act, which allows policies to be sold after two years, could not be interpreted to
validate a policy that was purchased for the express purpose of transferring it after two years to someone
without an insurable interest. It further asserted that to countenance such transactions would violate not
only the Utah’s insurable interest statute but the State’s constitutional prohibition against gaming, as well.
In a 2006 publication, the Utah Department further stated its position that “[t]o determine if an insurable
interest exists, the department will look at the entire transaction and will not limit its review to only that part of the
transaction that relates to applying for the life insurance policy.”
The Stalsberg case did not proceed to trial, as the parties formally settled their dispute last month.
Stalsberg agreed, in what appears to be a total concession, that NY Life could rescind the policy and NY
life agreed to return the premiums paid.
Any AALU member who wishes to obtain a copy of New York Life’s Memorandum In Support Of
tion For Summary Judgment may do so through the following means: (1) use hyperlink above next to
“Major References,” (2) log onto the AALU website at www.aalu.org and enter the Member Portal with your
social security number and select Current Washington Report for linkage to source material or (3) email Ray
Harmon at harmon@aalu.org and include a reference to this Washington Report.
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