Principal Life v. Mosberg - STOLI on the Rocks

Principal Life v. Mosberg - STOLI on the Rocks

 By Stephan Leimberg and Howard Zaritsky

The story below concerns yet another case of  "STOLI ON THE ROCKS."

EXECUTIVE SUMMARY:

A U.S. District Court held that insurable interest was lacking in the purchase of a life insurance policy and that it was therefore void from inception.  Principal Life asserted -- and the Court agreed -- that the Loshin Trust which purchased and owned a policy on the insured's life - lacked an insurable interest on the inception date of coverage.

FACTS:

This case involves a Principal Life insurance policy on the life of Lorraine Loshin. Mrs. Loshin was contacted in 2004 or 2005, by her niece's husband, Reuven Tabor, about purchasing life insurance.

Although Mrs. Loshin had no interest in obtaining life insurance at that time, she authorized Tabor to collect her personal information and to submit insurance applications on her behalf. After Tabor's visit, Eli Rubenstein called Mrs. Loshin and informed her that Mr. Tabor had suggested he call her regarding life insurance.

Prior to that call, Mrs. Loshin did not know Rubenstein. With Mrs. Loshin's consent, Rubenstein secured an insurance policy (The First Policy) on her life and the insurance company wired a loan to Mrs. Loshin's bank account.

Mrs. Loshin believes the First Policy was issued in February 2006, but Rubenstein never gave her a copy of the First Policy. Mrs. Loshin does not know the premium for the First Policy, has never paid the premium, and does not know who pays the premium.

After the First Policy was issued, Mr. Rubenstein contacted Mrs. Loshin about purchasing a second life insurance policy. Mrs. Loshin and  Rubenstein agreed that she would never pay any premium for the policy and that, if the insurance policy were sold, she would receive ten percent of the proceeds.

Three men brought some documents to Mrs. Loshin's home, which she signed. She did not discuss the documents with the three men but assumed they were necessary to secure the second insurance policy. Mrs. Loshin believed her children would be the beneficiaries of the second policy.

Over a year later, on August 13, 2007, Eli Deutsch, submitted an application to Principal Life for an insurance policy on Mrs. Loshin's life The Application listed the Lorraine Loshin Family Trust as the owner of any policy Principal Life might issue.

Interestingly, Mrs. Loshin:

•        Did not know Mr. Deutsch,

•        Did not authorize him to act on her behalf,

•        Testified that her signature on the Application is forged and misspells her name.

Principal Life subsequently issued the Loshin Trust a $14 million life insurance policy on Mrs. Loshin. The annual premium - which Mrs. Loshin has never paid - is $ 558,740.

Mrs. Loshin likely could not have paid the annual premium for the Loshin Policy because her annual income, including her husband's, is only $36,400.

Mr. Rubenstein prepared the documents for the Loshin Trust but Mrs. Loshin never authorized Mr. Rubenstein -- or anyone else -- to create the Loshin Trust. In fact, Mrs. Loshin never retained Mr. Rubenstein as her attorney for any matter.

The Loshin Trust documents contain numerous irregularities:

•        the documents, which purport to bear Mrs. Loshin's signature, were notarized in Kings County, New York, by Stuart Robin -- but Mrs. Loshin does not know Mr. Robin, and she has not been in Kings County in at least 20 years;

•        the signature purporting to be that of Mrs. Loshin is forged and misspells her name

•        the street name for Mrs. Loshin's home address is misspelled

•        Mrs. Loshin has never met or spoken with the trustee for the Loshin Trust -- Mr. Mosberg -- nor did she authorize Mr. Mosberg to act on her behalf and

•        the address for the Loshin Trust is 5055 Collins Avenue, Miami Beach, Florida, but Mrs. Loshin is unfamiliar with this address and has not been to Miami Beach in 60 years.

Principal Life moved for summary judgment on its request for a declaratory judgment that the Loshin Policy is void.

COMMENT:

Principal Life asserted the Loshin Policy is void for two independent reasons:

•        the Loshin Trust had no insurable interest in Mrs. Loshin at the inception of the Policy; and

•        the Application for the Loshin Policy contained material misrepresentations.

INSURABLE INTEREST:   

"In Florida, public policy demands that the beneficiary of an insurance policy covering either life or property have an insurable interest in the life or property insured."[i]

If the beneficiary does not have an insurable interest, the policy is a wagering contract -- and therefore void.[ii]

Florida law[iii] codifies the insurable interest requirement. It provides no person shall procure or cause to be procured or effected an insurance contract on the life or body of another individual unless the benefits under such contract are payable to the individual insured or his or her personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured.

In other words, state law requires the benefits of a life insurance policy to be payable to (a) the insured, (b) the insured's personal representative, or (c) a person having an insurable interest in the insured at the time the policy is issued.

Here, the benefits from the Loshin Policy are payable to the Loshin Trust - which is not the insured, not the insured's personal representative, and is therefore void unless the Loshin Trust is a "person having ... an insurable interest in" Mrs. Loshin.[iv]

Note that under Florida law, a trust can be a "person" with an insurable interest in an insured, but only if:

1.     "the insured is the grantor of the trust," the insured is "an individual closely related by blood or law to the grantor," or the insured is "an individual in whom the grantor otherwise has an insurable interest"; and

2.     the policy proceeds "are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured."[v]

The Loshin Trust does not have an insurable interest in Mrs. Loshin because it fails to meet the first requirement:

•        Mrs. Loshin did not create and therefore is not the grantor of the Loshin Trust:

•        Mrs. Loshin did not authorize Mr. Rubenstein, or anyone else, to create a trust for her;

•        She did not sign the Loshin Trust documents and does not know the notary;

•        The Loshin Trust documents misspell Mrs. Loshin's address;

•        Mrs. Loshin does not know Mr. Mosberg, the trustee; and

•        Mrs. Loshin is unfamiliar with the Loshin Trust's address in Miami Beach.

Mrs. Loshin -- the person insured under the Loshin Policy -- had nothing to do with creating the Loshin Trust and therefore cannot be the grantor.

There was no evidence (and Mosberg did not assert) that the grantor (whoever he or she is) either is closely related to Mrs. Loshin or otherwise has an insurable interest in Mrs. Loshin.

Since the Loshin Trust does not have an insurable interest in Mrs. Loshin[vi] the Loshin Policy is void.[vii]

The Court, in response to Mosberg's claim that Mrs. Loshin is the grantor of the Loshin Trust, responded that

"Mr. Mosberg does not explain how Mrs. Loshin, who was not involved in creating the Loshin Trust, could possibly be the grantor. Given that the Loshin Trust is entirely a product of fraud, Mr. Mosberg's suggestion defies logic."

MATERIAL MISREPRESENTATIONS:

Since the Loshin Policy was held to be void for lack of an insurable interest, the Court concluded it did not need to address the remaining arguments concerning the misrepresentations in the Application.

It granted summary judgment and held the Loshin Policy is void.

LISI has written about STOLI often (Log into LISI and type in STOLI in the Search Archives box). Some of the more recent cases are:

•        PHL Variable Insurance Company v. Morello - STOLI Policy Rescinded (Estate Planning Newsletter #1625)

•        Ashkenazi v. AXA Equitable Life - Policies Procured by Fraud (Estate Planning Newsletter #1603)

•        Lincoln National Life's Suit To Rescind Policies on STOLI Claim Denied (Estate Planning Newsletter #1502)

•        Wuliger - STOLI Policy Voidable by Insurer (Estate Planning Newsletter # 1473) 

If you'd like more in-depth coverage of STOLI, drop me a note at steve@leimbergservices.com and I'll send you my Heckerling, NYU, and ALI-ABA articles.

Howard Zaritsky and I have also written a very comprehensive and extensive (148 pages) commentary on insurable interest in our book, TAX PLANNING WITH LIFE INSURANCE: ANALYSIS AND FORMS - 2ND EDITION (800 950 1216).

CITE AS: LISI Estate Planning Newsletter #1666 (June 28, 2010) at http://www.leimbergservices.com   Copyright 2010 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission.

Obtain a Free Download of Principal Life Insurance Company v. Michael Mosberg.

CITES:

Principal Life Insurance Company v. Michael Mosberg, et al., Case No. 09-22341-CIV-ALTONAGA/Brown, U.S. District Court for the Southern District of Florida, Miami Division, 2010 U.S. Dist. LEXIS 61054.

CITATIONS:


[i] Life Ins. Co. of Ga. v. Lopez, 443 So. 2d 947, 950 (Fla. 1983).

[ii] See id.; see also Oceanus Mut. Underwriting Ass'n (Bermuda) Ltd. v. Fuentes, 456 So. 2d 1230, 1231-32 n.4 (Fla. 3d DCA 1984).

[iii] Florida Statute Section 627.404.

[iv] FLA. STAT. § 627.404(1).

[v] FLA. STAT. § 627.404(2)(b)(5).

[vi] Florida Stat Sec. section 627.404(2)(b)(5).

[vii] FLA. STAT. § 627.404(1); Lopez, 443 So. 2d at 950.