Defense of Underwriters at Trial

Ohio National Insurance sued its insured, an insurance agent, her husband (the premium financier) and a business colleague (the estate planning attorney), for selling STOLI policies (stranger-oriented life insurance). With STOLI policies, the policyholder sells the policy to a third party who then makes the premium payments and is named as the beneficiary. Such STOLI policies, also called life settlements and senior settlements, are controversial in the insurance industry because the rate of such polices lapsing is much lower than if the insured was responsible for making the premium payments. Instead, these are thought of by insurers as investment vehicles used by entities who pay the named insured up front a small percentage of the coverage and then ensure that the premiums are paid.

The lawsuit against the agent alleged causes of action for negligent misrepresentation, fraud and breach of contract. The complaint did not allege a cause of action for negligence as the sale of the STOLI policies would have been, by necessity, an intentional act. The agent’s E&O carrier (our client, Underwriters at Lloyd’s of London), denied coverage of the claim because the policy excluded “viatical settlements” (but was silent with respect to STOLI policies). In spite of the common usage of both terms being interchangeable, the complaint against the agent did not use the word “viatical.” As such, the agent sued Lloyd’s arguing that the policy must defend her in the lawsuit against her by Ohio National.

After a three day bench trial, the court ruled that no defense was required under the terms of the policy. Moreover, the court found that there was “no chance, however slim, of coverage.”