Lincoln National Life Insurance Co. v. Snyder, et al., No. 09-888-SLR (D. Del, 7/15/2010)

Facts: Around November 2005, Landon Strauss, an insurance agent, approached Harry Wisner, who was then 76 years old, to apply for a life insurance policy with the intention of later selling the contract to stranger-investors. Wisner established a Trust to purchase the policy andnamed his wife as the beneficiary of the Trust. Wisner then submitted a formal application to Lincoln National for $18.5 million in insurance, naming the Trust as the proposed owner and beneficiary.

On the Application, both Wisner and the Trustee answered “no” in response to the question asking if they had been involved in any discussion about the possible sale or assignment of the policy to the secondary market. Strauss, the agent, also declared on the Application that he had not been involved in any discussion regarding the sale/assignment of the policy to the secondary market. The end of the Application contained an acknowledgment clause that stated that the signatories were aware that any material false statements or misrepresentations on the application could result in a loss of coverage under the policy.

The Trust paid all the premiums on the policy until Wisner’s death in 2008, at the age of 79. After the Trust filed a claim for Wisner’s death, Lincoln National initiated a contestable death claim investigation. The claims investigation revealed that the beneficial interest in the Trust had been sold to an unknown party before Wisner’s death and that Wisner’s earned and unearned income did not support the representations made in the Application. Lincoln National later filed suit to find the Wisner Policy void ab initio or voidable due to: (1) lack of insurable interest, (2) illegal procurement under applicable law and (3) material misrepresentations in the Application. Lincoln National also sought compensatory and punitive damages and retention of some or all of the premiums paid by the Trust, due to the alleged fraud of the defendants.

The Trust filed a motion to dismiss the complaint for failure to state a cause of action, asserting, among other things, that the policy was not void/voidable due to lack of an insurable interest, Lincoln National was deemed to have full knowledge of the alleged misrepresentations, and Lincoln National could not simultaneously seek to rescind the contract and seek damages on the contract at the same time.

Ruling: The Court denied all of the motions to dismiss, except for the claim that Lincoln National could not simultaneously seek to rescind the contract and seek damages on the contract. In particular, the Court held that Lincoln National’s complaint sufficiently alleged that a STOLI arrangement was in place at the time of the procurement of the policy, and thus Lincoln National could proceed with its claim that the contract was void due to lack of an insurable interest. The Court also refused to impute Strauss’s knowledge of the STOLI agreement to Lincoln National despite the agency relationship because Strauss’s own interests were adverse to Lincoln’s.

This article is an excerpt from the August 2010 Central Intelligence – click here for the full edition.