On March 30, 2020, in a case captioned Sun Life Assurance Company of Canada v. Wells Fargo Bank, N.A., Judge Philip Reinhard of the United States District Court for the Northern District of Illinois issued a decision reaffirming Illinois’ reputation as unfriendly to life settlements. On a motion for summary judgment, Judge Reinhard held that a policy issued under Coventry’s nonrecourse premium finance program was void ab initio—even where the policy was issued to the insured’s trust—where Coventry had preexisting origination agreements pursuant to which another entity had agreed to purchase such policies. However, Judge Reinhard also suggested that a securities intermediary may be able to recover premiums paid on behalf of the current beneficial owners.
This case involves a $5 million policy issued by Sun Life Assurance Company of Canada (“Sun Life”) on the life of Robert Corwell. Corwell first learned about the opportunity to obtain life insurance policies with an eye towards selling them for a profit from Frank Nelsen, an Illinois insurance producer (Nelsen is also a defendant but did not participate in the summary judgment briefing). After learning about this potential opportunity, and after obtaining a separate $5.5 million policy from Security Life of Denver (“SLOD”) that he sold for over $178,000, Corwell submitted an application to Sun Life for the $5 million policy at issue here. While filling out the application, Corwell did not disclose his intent to use nonrecourse premium financing to pay his premiums, even though the form specifically asked this question. He also did not disclose that he had taken out the SLOD policy. The application listed the purpose of the policy as “estate planning.”
Corwell’s application was accepted and the policy was issued to a borrower trust with the insured’s wife as the initial beneficiary. Coventry Capital I, LLC (“Coventry Capital”) arranged for a nonrecourse premium finance loan, and the borrower trust paid the policy’s premiums with the proceeds from that loan from inception until the policy was relinquished 32 months later to Coventry Capital. Four months later, in August 2009, the policy was sold to Coventry First LLC (“Coventry First”, and with Coventry Capital, “Coventry”), an entity related to Coventry Capital, on behalf of AIG Life Settlements, LLC (“AIG”). Coventry First and AIG had previously entered into two similar Life Policies Origination Agreements (“LPOA”) in 2006 and 2008 that required Coventry First to sell and AIG to buy any life insurance policy originated by Coventry First that met certain criteria. The LPOAs applied to Corwell’s policy.
Wells Fargo Bank, N.A. (“Wells Fargo”) then became securities intermediary on behalf of AIG, the policy’s new beneficial owner. Wells Fargo paid premiums on the policy until the insured’s death on June 25, 2017, on behalf of AIG, then Blackstone, and then Vida Capital—the beneficial owner of the policy at the insured’s death.
After the insured’s death, Wells Fargo submitted a claim for payment of the death benefit. Sun Life refused to pay the death benefit and instead sued. Sun Life sought to have the policy declared void ab initio as an illegal wager on human life (Count I) and as lacking an insurable interest (Count II). Wells Fargo counterclaimed for breach of contract, vexatious and unreasonable delay in paying a claim under 215 ILCS 5/155, and restitution seeking return of premiums paid under an unjust enrichment theory. Sun Life moved for summary judgment on its declaratory judgment claims and on Wells Fargo’s counterclaims.
This decision was the first time an Illinois court—or a court applying Illinois law—addressed the validity of a life insurance policy financed through this type of premium finance program. Consistent with Illinois law (and its general unfriendliness to investors in life insurance policies), the Court looked beyond form and found that the transaction was designed to circumvent the law against wagering on the life of a stranger. Judge Reinhard applied a four-factor test to reach his decision, looking at (i) who controlled the transaction; (ii) who paid the premium; (iii) whether the policy was acquired in good faith; and (iv) whether—beyond the form of the transaction—Corwell was merely a cover to conceal a wager on his life.
Judge Reinhold first held that Corwell—not Coventry—controlled the transaction because Corwell had sole power over the borrower trust. The Court also found that Corwell—the insured—was paying the premiums through the nonrecourse loan and that a nonrecourse premium finance loan “does not in and of itself mean that the lender procured the policy rather than made a legitimate loan to the purchaser to finance it.” Next, the Court held that Corwell obtained the policy in bad faith because his application falsely represented the purpose of the insurance to be estate planning. The evidence showed that Corwell intended to sell the policy for a profit. Corwell also concealed his intention to use premium financing and his prior life insurance policy when filling out his application. But for this concealment, the Court reasoned, Sun Life would not have issued the policy. However, the Court found that these misrepresentations were outside the contestability period, and there was nothing per se illegal about using a nonrecourse loan to pay the premiums and then selling the policy as an investment.
The Court then looked beyond the form of the transaction to determine if Corwell was merely a cover to conceal Coventry’s wager on Corwell’s life. The Court found that Coventry provided Corwell a cost-free way to sell an asset—his insurability—to another. In particular, the Court found the existence of the LPOAs to be determinative as to this issue—while nonrecourse loans are not per se unavailable for purchasing life insurance, the Court found that Coventry funded the loan via nonrecourse debt as a key part of its plan to create an insurance policy eligible for sale to AIG. This led the Court to conclude that this transaction’s intent was to circumvent Illinois’ law against wagering on the life of strangers and was therefore void ab initio. The Court granted Sun Life summary judgment on its claims seeking a declaration that the policy was void ab initio and an illegal wager on human life. It also granted summary judgment for Sun Life on Wells Fargo’s breach of contract claim and—because Sun Life’s refusal to pay the death benefit on an ab initio contract was reasonable—on Wells Fargo’s claim under 215 ILCS 5/155. On the one hand, the decision appears to be consistent with other recent STOLI decisions in Illinois. Yet it also appears to be inconsistent with the reasoning in Ohio National Life Assurance Corp. v. Davis, 803 F.3d 904 (7th Cir. 2015) in which the Seventh Circuit, applying Illinois law, observed that nonrecourse premium financing would not render a policy STOLI where, as the court found here, the insured owned and controlled the policy before selling it.
The Court also denied Sun Life’s motion for summary judgment on Wells Fargo’s remaining unjust enrichment claim, leading to one potential upside in this decision. Vida Capital—who purchased a beneficial interest in the life insurance policy—had done its due diligence and knew that it might be purchasing a lawsuit. However, there was no evidence that Vida Capital believed the policy was invalid, and no evidence that Vida was complicit in the issuance of the policy. The Court therefore held that Wells Fargo could recover premiums paid on behalf of Vida Capital if it succeeded at trial. This potential recovery was limited, however, to only the premiums paid on behalf of the current beneficial owner of the policy. Even though Wells Fargo, in its capacity as securities intermediary, had paid all the premiums for several years, the Court saw no reason why Vida Capital should be allowed to recover premiums paid by Wells Fargo on behalf of AIG or Blackstone.
Ultimately, this decision extends Illinois’ unfriendly law towards life settlements to policies originated via premium finance programs. This decision also means that investors will continue to face significant litigation risk on life settlement policies governed by Illinois law. However, the decision at least suggests that the current beneficial owner of the policy will likely be able to recover the premiums it paid on the policy. Unfortunately, an entity that acquired a beneficial interest in the policy somewhat recently may not see a huge benefit to this, even where the premiums were all paid by the same securities intermediary. The Court here looked behind the securities intermediary to determine who was actually responsible for paying the premiums and denied the current beneficial owner’s request for the return of premiums paid by past beneficial owners.
