Investors Win a Round in Litigation Over ‘Stranger-Originated Life Insurance’

October 11, 2011 – In The News
American Lawyer

The case between Principal Life Insurance Company and trustees of a family trust relates back to JoAnn DeRose who applied for coverage in 2006, stating that a family trust would pay her premiums but that the policies were intended to benefit her grandchildren.

Principal life alleged that the trustees bought the policies with the intent to resell them on the secondary market, and that they had concealed a plan to obtain non-recourse funding for the policies. The trustees fought back as did the bank that financed the premiums, First Priority Bank. First Priority, with counsel from Fox Rothschild, intervened in the suit to protect its security interest after the trustees defaulted on the loan in April 2010.

Pennsylvania federal district court judge Christopher Conner denied motions for a summary judgment by First Priority and the trustees over the issue of whether Principal can declare the policies void because of misrepresentations made on DeRose's application. But he granted First Priority and the trustees summary judgment on the issue of whether the policies could be voided for lack of an insurable interest.

Counsel for the trustees said the ruling was important in the ongoing fight over stranger-originated policies.

First Priority counsel Samuel Cortes added that the ruling could have an impact outside the life settlement context. "This comes up all the time in estate planning and wealth preservation [contexts]," he said.

Both counsel expect a trial in the first months of 2012 on whether the defendants made any material misrepresentations.