Kramer v. Phoenix Life Ins. Co. - New York Court of Appeals Holds STOLI Arrangements Satisfy NY Insurable Interest Requirements

Kramer v. Phoenix Life Ins. Co. - New York Court of Appeals Holds STOLI Arrangements Satisfy NY Insurable Interest Requirements

 By Stephan Leimberg and Howard Zaritsky

In a case certified to it by the U.S. Court of Appeals for the Second Circuit, the highest court in New York held in a 5-2 decision that New York's insurable interest rules didn't prohibit an insured from buying a policy on his or her own life and thereafter immediately transferring the policy to a person who has no insurable interest, even if the insured never intended to provide insurance protection for himself or herself or for a person with an insurable interest.

Kramer v. Phoenix Life Ins. Co. was the subject of a front-page Wall Street Journal article in early 2010, and has been closely watched in the insurance industry. The case involves $56.2 million of life insurance acquired by a prominent Manhattan attorney, Arthur Kramer, from three carriers: Phoenix, Lincoln and Transamerica. Shortly after the policies were issued, Kramer sold them to investors.


The highest court in New York, in a case certified to it by the U.S. Court of Appeals for the Second Circuit, has held that the New York insurable interest rules do not prohibit an insured from buying a policy on his or her own life and thereafter immediately transferring the policy to a person who has no insurable interest, even if the insured never intended to provide insurance protection for himself or herself or for a person with an insurable interest.


In many ways, this is a typical STOLI case, with many of the usual STOLI facts, though with pretty big numbers.

The complaint alleged that the decedent, Arthur Kramer, a prominent New York attorney, acquired over $56 million in life insurance on his own life, with the express intent of immediately assigning the beneficial interests to unrelated investors.  The complaint alleged that the principal of Lockwood Pension Services, Inc. ("Lockwood Pension"), approached Arthur about participating in a STOLI ("stranger owned life insurance") a/k/a SOLI arrangement in or about 2003, and they began implementing the plan in June, 2005.

Arthur established the two irrevocable life insurance trusts ("the June trust" and the August trust and named his adult children as beneficiaries. Kramer funded the June trust with Transamerica Occidental Life Insurance Co. policies having a total death benefit of approximately $18,200,000.  He funded the August trust with $28 million in Phoenix Life insurance and provided the August Trust with an additional $10 million in coverage from Lincoln Life & Annuity Co. of New York.

As planned and directed by Kramer, the originally named beneficiaries of the two trusts then promptly assigned their beneficial interests to Tall Tree Advisors, Inc. ("Tall Tree") or Life Products Clearing, LLC (Life Products), neither of which had an insurable interest in the life of the insured.  It was specifically alleged that both trust agreements were prepared by counsel for Lockwood Pension, and that neither Arthur nor his children ever paid premiums on the policies.

Arthur Kramer died in January 2008. His widow and personal representative, Alice, refused to turn over copies of the death certificate to the investors holding beneficial interests in the policies. 

As personal representative of her husband's estate, Alice then sued in the United States District Court for the Southern District of New York, seeking to have the death benefits from these insurance policies paid to her, rather than to the investors, on the grounds that the policies were obtained in violation of the New York insurable interest rules.  The defendants are the insurance companies that issued the policies, the trustees of the two trusts, and the various insurance brokers/investors.

Then everyone got seriously litigious, and the trial lawyers broke out the plans for their new vacation houses and private jets. The trustee and Life Products filed counterclaims seeking to have the proceeds of the Lincoln policy awarded to them.  Lifemark claimed to be a good faith purchaser for value, and it sought to have the Phoenix Life policy proceeds paid to it. 

Phoenix Life and Lincoln Life brought claims against Lockwood for breach of contract and also sought a declaratory judgment declaring that the policies are void and that they are not required to pay policy proceeds to anyone.


The U.S. District Court for the Southern District of New York granted motions to dismiss many of the claims. But it denied Lockwood's motion to dismiss the insurers' claims. The court stated that, based on the facts that had been alleged:

Lockwood breached provisions of the New York Insurance Law in that he caused to be procured directly or through assignment or other means, a contract of insurance upon the life of the decedent [Kramer] for the benefit of strangers who did not have an insurable interest in his life at the time the policy was obtained.

The court also permitted Alice, Life Products, and the trustee's declaratory judgment claims, counterclaims, and cross claims to go forward. The District Court certified its order to allow for an interlocutory appeal to the Second Circuit, noting that:

...there is indeed substantial ground for difference of opinion on the application of New York Insurance Law to SOLI arrangements of this type" and that many of the claims turned on interpretation of the New York insurable interest statute.  The Second Circuit certified the question at issue to the New York Court of Appeals.


New York's insurance law defines an insurable interest as:

"in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection" or, for others, a "lawful and substantial economic interest in the continued life, health or bodily safety of the person insured." 

The New York statute also notes, however, that an insured may always procure a policy on his or her own life, stating:

"Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated."

On the other hand, the statute addresses the procurement of a policy indirectly by a person without an insurable interest, stating that:

"No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured".

This left the court to decide whether an insured may buy a policy on his or her own life with the intention of immediately transferring it to a person who lacks an insurable interest.


The New York Court of Appeals (Justice Ciparrick) held that an insured could validly buy a policy on his or her own life, even if the insured had the intent promptly thereafter to transfer it to a person who lacked an insurable interest.  The court noted that the insurable interest requirement at common law distinguished an insurance contract from a wager on someone's life, and that an insurable interest traditionally is required only where a policy was "obtained by one person for his own benefit upon the life of another." 

The court stated, quoting an earlier opinion:

"When one insures his or her own life, the wagering aspect is overridden by the recognized social utility of the contract as an investment to benefit others. When a third party insures another's life, however, the contract does not have the same manifest utility and assumes more speculative characteristics which may subject it to the same general condemnation as wagers."

The court expressly rejected the idea that an individual who procures insurance on his or her own life with the intent of immediately assigning the policy to someone who has no insurable interest violates the statute, because the New York statute contains no such requirement. 

The plaintiffs had argued that:

1.     obtaining a policy with the intent to assign it to a party lacking an insurable interest violates the statute;

2.     obtaining a policy with the intent to assign it to a party lacking an insurable interest violates the common law rule that an insured could only assign a policy to one without an insurable interest if the policy was obtained "in good faith" compliance with the insurable interest rule, not as a means of circumventing it; and

3.     obtaining a policy on one's own life in accordance with a prior arrangement with a third party, as alleged in this case, is not acting on his or her own  initiative" within the meaning of the New York statute. 

The court focused on the wording of the New York statute that allows an insured acting on his or her own initiative to obtain a policy on his or her own life.  The court stated that this codified the common law rule that an insured has total discretion in naming a policy beneficiary, and that:

"[i]t is equally plain that a contract so procured or effectuated may be immediate[ly] transfer[ed] or assign[ed]", whether or not the assignee has an insurable interest. 

The court noted that restrictions on assignment would serve no purpose, because the insured can name anyone he or she wishes as the beneficiary.

The court stressed that the state statute and common law require an insurable interest only at the time the policy is obtained initially and that it does not require that the assignee have an insurable interest. 

The court stated:

"There is simply no support in the statute for plaintiff and the insurers' argument that a policy obtained by the insured with the intent of immediate assignment to a stranger is invalid. The statutory text contains no intent requirement; it does not attempt to prescribe the insured's motivations.  To the contrary, it explicitly allows for "immediate transfer or assignment" (Insurance Law ' 3205[b][1]).  This phrase evidently anticipates that an insured might obtain a policy with the intent of assigning it, since one who "immediately" assigns a policy likely intends to assign it at the time of procurement."

The court also found no defect in the acquisition of the policies in this case under the requirement that the policy be obtained on the insured's "own initiative."  The court held that this requirement only means that the decision to obtain the insurance be knowing, voluntary, and actually initiated by the insured. 

The court added that:

"In common parlance, to act on "one's own initiative" means to act "at one's own discretion: independently of outside influence or control" (Merriam  Webster's Collegiate Dictionary, 10th ed., 602 [1996]).  The key point is that the policy must be obtained at the insured's discretion.  As the dissent acknowledges, common sense dictates that some outside influence is acceptable advice from a broker or pension planner, for example.  The notion of obtaining insurance and the details of the insurance contract need not spring exclusively from the mind of the insured.  Rather, the insured's decision must be free from nefarious influence or coercion."

The court stated that support for its interpretation existed in the legislative history of the state statute, which showed that the statement that "[n]othing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated." was intended to address problems raised by a 1991 IRS private letter ruling that stated that there would be no insurable interest where the insured bought a life insurance policy intending to transfer it to charity.

The court recognized the tension between the law's distaste for wager policies and its sanctioning an insured's procurement of a policy on his or her own life for the purpose of selling it.  The court, in the exercise of what the majority apparently viewed as judicial restraint, stated that:

"It is not our role, however, to engraft an intent or good faith requirement onto a statute that so manifestly permits an insured to immediately and freely assign such a policy."


One judge (Justice Smith) disagreed strongly with the majority's conclusions, and stated that where an insured buys a policy on his or her own life for no other purpose than to facilitate a wager by someone with no insurable interest, the transaction is and should be unlawful. 

Justice Smith reviewed the background of STOLI, including the 1882 and 1911 U.S. Supreme Court opinions that declared such arrangements to be invalid as wagering policies.  Justice Smith quoted Justice Oliver Wendell Holmes' opinion in the later of these two cases, as stating that:

"A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end. . . .

But when the question arises upon an assignment, it is assumed that the objection to the insurance as a wager is out of the case. . . . The danger that might arise from a general license to all to insure whom they like does not exist.       Obviously it is a very different thing from granting such a general license, to allow the holder of a valid insurance upon his own life to transfer it to one whom he, the party most concerned, is not afraid to trust."

The dissent stated that the rule is, therefore, that while a third party without an insurable interest may not purchase a life insurance policy, an insured may do so and assign it to the third party, whether the third party has an insurable interest or not.  The dissent stated that these early cases  also established an exception to this rule for cases where the insured, at the moment he or she buys the policy, is really acting for a third party who lacks an insurable interest and who merely wants to gamble on the insured's death. 

This exception, Justice Smith explained, was based on good reasons:

"Even if we ignore the possibility that the owner of the policy will be tempted to murder the insured, this kind of "insurance" has nothing to be said for it.  It exists only to enable a bettor with superior knowledge of the insured's health to pick an insurance company's pocket.

In a sense, of course, all insurance is a bet, but for most of us who buy life insurance it is a bet we are happy to lose.  We recognize that the insurance company is more likely than not to make a profit on the policy, receiving more in premiums than it will ever pay out in proceeds, and that is the result we hope for; we pay the premiums in order to protect against the risk that we will die sooner than expected.  But stranger originated life insurance does not protect against a risk; it does not make sense for the purchaser if it is expected to be profitable for the insurance company.  The only reason to buy such a policy is a belief that the insured's life expectancy is less than what the insurance company thinks it is.  Thus, we may be confident that the Scioto Trust Association, which acquired a policy on the life of 27 year old Henry Crosser [in the 1882 Supreme Court case], was not surprised when Crosser died before he was 30.  And we may be equally confident that the purchasers in this case thought, probably with good reason, that they knew something about Arthur Kramer's health that the insurance companies did not know."

Justice Smith noted that New York common law already had these rules when the Supreme Court applied them in 1882 and 1911.  Quoting from a 1899 New York case, he stated: 

"[I]t is said that if the payee of a policy be allowed to assign it, a safe and convenient method is provided by which a wagering contract can be safely made.  The insured, instead of taking out a policy payable to a person having no insurable interest in his life, can take it out to himself and at once assign it to such person. But such an attempt would not prove successful, for a policy issued and assigned, under such circumstances, would be none the less a wagering policy because of the form of it.  The intention of the parties procuring the policy would determine its character, which the courts would unhesitatingly declare in accordance with the facts, reading the policy and the assignment together, as forming part of one transaction.

Therefore, New York common law should invalidate STOLI arrangements such as the one before the court in this case, looking through the form of the transaction to divine "[t]he intention of the parties procuring the policy."   In this case, that would result in the treatment of the policy as actually being obtained initially by the purchasers, rather than by the insured."

Justice Smith disagreed with the majority that the New York statutory rule eliminated the exception previously recognized for policies obtained with the initial intention of immediately assigning them to someone who lacked an insurable interest.  Justice Smith stated that there was no reason to believe that the New York State Legislature ever intended to abolish the anti wagering rule, and he construed the legislative response to the 1991 IRS private letter ruling mentioned above, as merely giving statutory form to the long-established New York rule that life insurance contracts may be freely assigned, even to someone without an insurable interest. 

This change did not, the dissent argued, eliminate the long-held secondary rule that [a]ssignability could not be used to cloak a third party wagering transaction.  The dissent believed that the prohibition on the use of a straw-person to acquire a policy was reflected in the "on his own initiative" language of the statute.

On this point, the majority opinion responded, stating:

"Contrary to the dissent's view, the initiative requirement, without more, does not prohibit an insured from obtaining a policy pursuant to a non coercive arrangement with an investor (see dissenting op at 8).  Under the dissent's interpretation, a sophisticated party who approaches an investor about such an arrangement, drafts necessary documents, procures insurance on his own life, and assigns it for compensation is not acting "on his own initiative."  The language of the statute simply does not support such a reading.


What does all this mean and where does it leave us?

The dissent appears to be the better-reasoned viewpoint, though obviously, reasonable minds can disagree.  The STOLI arrangement does appear to violate the longstanding rules prohibiting the use of the insured as a straw-person to acquire a policy on his or her own life for the benefit of someone who lacks an insurable interest. 

The real question in this case was whether New York law still prohibited the use of such artifices to skirt the insurable interest requirements.  The majority thought it did not, while the dissent believed that it did.

This may be largely an academic matter in New York, because a 2009 law enacted after the acquisition of the policies in Kramer prohibits STOLI arrangements, which it defines as:

any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state.

In the broader STOLI arena, however, this case is a real victory for the STOLI promoters and investors.  It comes after several notable judicial successes by the insurers in Federal courts. And because Kramer is an interpretation by a highly-respected state court, it must be seen as a major blow to the insurance industry's efforts to curtail STOLI.

For practitioners, two clear facts remain.  First, there are two sides to the arguments regarding the validity of STOLI arrangements under present law.  Where state statutes do not address these arrangements directly, it is unclear whether or not these policies will be sustained as valid or declared void ab initio.

 Second, insurers will continue to challenge STOLI arrangements and investors and promoters will continue to do them.  We must caution our clients that they enter into these arrangements at their own risk, and with no certainty as to the outcome.


Howard Zaritsky


LISI Estate Planning Newsletter #1716 (November 22, 2010) at Copyright 2010 Leimberg Information Services, Inc. (LISI). Reprinted with permission.


Kramer v. Phoenix Life Ins. Co., , 2010 N.Y. Slip Op. 08376 (Ct. App. Nov. 17, 2010); Kramer v Lockwood Pension Servs., Inc., 653 F Supp 2d 354 (S.D.N.Y. 2009); Principal Life Insurance Co. v. Lawrence Rucker 2007 Insurance Trust, ___ F.Supp.2d ___, (D.Del. 2010); Lincoln Nat'l Life Ins. Co. v. Joseph Schlanger 2006 Ins. Trust, Lincoln Nat'l Life Ins. Co. v. Calhoun, 596 F.Supp.2d 882 (D.N.J. 2009); Wuliger v. Manufacturers Life Insurance Co., 567 F.3d 787 (6th Cir. 2009), rev'g and rem'g, (N.D. Ohio 2008); Sun Life Assurance Co. of Canada v. Paulson, (D. Minn. 2008); Hota v Camaj, 299 AD2d 453 (2d Dept 2002); New England Mut. Life Ins. Co. v. Caruso, 73 NY2d 74 (1989); Corder v Prudential Ins. Co., 42 Misc 2d 423 (Sup Ct, Erie County 1964); Gibson v Travelers Ins. Co., 183 Misc. 678 (Sup Ct, New York County 1944); Grigsby v Russell, 222 US 149 (1911); Steinback v Diepenbrock, 158 NY 24, 31 (1899); Warnock v Davis, 104 US 775 (1882); Olmsted v Keyes, 85 NY 593 (1881); Ruse v Mutual Benefit Life Ins. Co., 23 NY 516, 523 (1861); PLR 9110016; New York Ins. Law ' 3205; New York Ins. Law, Art. 78; Mem of Assemblyman Lasher, Bill Jacket, L 1991, ch 334, at 6.

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