Lincoln National ordered to make good on insurance in heated Stoli case

The Lincoln National Life Insurance Co. will pay $5 million in death benefit proceeds for a life insurance policy the insurer had contended was fraudulent. A jury in the U.S. District Court for the Southern District of Florida on Friday found in favor of plaintiff Steven A. Sciarretta, a trustee of the Barton Cotton Irrevocable Trust and owner of a $5 million life insurance policy on the life of the late Mr. Cotton, in a case against Lincoln National. Mr. Sciarretta took the insurer to court last April because Lincoln would not pay the death benefit proceeds, even though Mr. Cotton had died after the two-year contestability period in which carriers can refute claims had expired. Meanwhile, Lincoln countersued and alleged Mr. Cotton's policy was void from the start because he had indicated falsely on the policy application that he had no intent to sell the coverage on the secondary market or to assign a beneficial interest in the policy to a trust. The insurer claimed the policy was issued at the behest of so-called stoli promoters. Stoli, or stranger-originated life insurance, involves buyers' purchasing life insurance coverage they don't need for the express purpose of selling the death benefits to investors. The jury found that the trust had indeed made false statements on the life insurance application. But the panel also stated that it believed Mr. Cotton had not intended at the moment of purchase to transfer the policy to another party with no insurable interest in his life. The jury also found that Lincoln itself was not harmed by these misrepresentations, according to the verdict. According to Julius A. Rouseau III, a partner at Arent Fox LLP and an attorney representing Mr. Sciarretta, his client benefited from Florida's insurable interest law, which contains an implicit “good faith” requirement, This requires the insurer to prove that the policy was purchased with the sole intent to sell it to a stranger who doesn't have an insurable interest in the life of the insured person. In this situation, however, Mr. Cotton's family members testified that he had intended for the insurance to benefit them. Because the policy was issued in good faith, the trust will end up collecting on the full $5 million, said Mr. Rousseau. “Since the carrier lost in Florida, which today has the most favorable law for insurers of any state, carriers may be more reluctant to challenge cases in other states,” he added. A spokeswoman for Lincoln National said the comment does not comment on litigation.