Insurance – Life – STOLI Policy – Insured’s Options

Even though the insured agreed to buy insurance on his own life simply as a means of making money on the sale of the policy to a stranger, since the insured always had the option of retaining the policy, the policy was not an illegal wagering contract on human life.

The life insurance policy issued by plaintiff to the insured is legally valid and enforceable.

In 2005, after a friend made money selling a policy insuring the friend’s life, Dr. Gordon Trevathan, age 81, met with the same insurance producer who had arranged the policy and sale for his friend. That producer, Wesley Chesson, arranged for Dr. Trevathan to obtain a $2 million life insurance policy from the plaintiff-insurer. A company owned by Chesson, E&W, lent Dr. Trevathan the amount needed to pay the policy’s premiums for two years.

At the end of the first two years, Dr. Trevathan had three options: (1) surrender the policy to E&W in full satisfaction of the premium loan; (2) pay off the loan balance to E&W and continue to retain the policy for himself going forward; or (3) sell the policy and use the proceeds to satisfy the loan balance. As he had always intended to do, Dr. Trevathan chose the third option, and he made a profit of $205,173 after repaying his loan to E&W.

Having receiving $2.7 million in premiums on the $2 million policy, the insurer now seeks a declaration that the policy is void as an illegal wagering contract on human life, i.e., a “stranger-originated life insurance” (STOLI) policy.

Our Supreme Court has made clear that a life insurance policy is a form of property and that, once lawfully issued, it can be assigned or sold to any third party—for investment purposes or otherwise. Hardy v. Aetna Life Ins. Co., 152 N.C. 286 (1910).

Nevertheless, our Supreme Court has also held that in order for a life insurance policy to be lawfully issued, the party obtaining the policy must possess an insurable interest in the life of the named insured at the time of issuance; otherwise, the policy is void ab initio as an unlawful wagering contract. Trinity College v. Travelers’ Ins. Co., 113 N.C. 244 (1893).

Based on a review of Supreme Court precedent, the court finds that, under North Carolina law, where a policy is taken out by the insured on his own life, the following rule applies: The policy is void as a wagering contract only where there is evidence of an agreement—prior to the policy’s issuance—that the policy would be assigned to a third party and that the third party participated in that agreement. In other words, in order for such a policy to be deemed an unlawful wagering contract in this context, the ultimate assignee must have been a participant in (1) the sequence of events by which the policy was initially obtained, and (2) the agreement that the assignment would occur thereafter.

Here, as plaintiff concedes, there is no evidence in the record of any involvement whatsoever by LifeTrust, Advanced Settlements, Assured, or CSNL (the entities involved in the purchase of Dr. Trevathan’s policy) relating to the policy until 2007—which was well after the policy’s issuance in 2005. Thus, plaintiff is unable to satisfy the test articulated by our Supreme Court with regard to whether the policy is void as a wagering contract.

We note that Chesson would not have profited from Dr. Trevathan’s death and, in fact, continues to collect commissions each time the policy is renewed.

In the absence of legislation regulating STOLI policies, the court applies principles articulated by our Supreme Court and declares the policy on Dr. Trevathan’s life valid and enforceable.

Columbus Life Insurance Co. v. Wells Fargo Bank, N.A. (Lawyers Weekly No. 020-035-23, 30 pp.) (Mark Davis, J.) 2023 NCBC 35. Travis Joyce, Michael Broadbent, Philip Farinella, Isaac Binkovitz and Gregory Star for plaintiff; Zachary Buckheit, Matthew Houston, Lee Hogewood, Harry Davis and Robert Griffin for defendant. North Carolina Business Court