Insurance Incentive May Leave Old Timer Liable

CHICAGO (CN) - An elderly man may have sold his $6 million life insurance policy to third-party investors who paid him off, a federal judge ruled.

In September 2007, Horace Windham applied to Penn Mutual Life Insurance for a life insurance policy worth $6 million. In his application, he stated the he did not intend to resell the insurance policy to a third party.

After Penn Mutual approved the application, however, Windham took steps to transfer the ownership of the policy to two men with no known connection to the policyholder, Kevin Bechtel and Steven Brasner.

In a federal complaint against the three men, Penn Mutual claimed that Bechtel and Brasner solicited Windham to participate in a "stranger originated life insurance," or STOLI, scheme.

STOLI scheme investors solicit the elderly to apply for a high-value life insurance policy in their names. In return for a fee, the elderly individual transfers ownership of the policy to the investors, who continue to pay the premium, so they can receive the policy benefits once the insured dies.

U.S. District Judge Edmond Chang refused to grant judgment on the pleadings to Windham and the trustee of his policy, Great Banc Trust Co.

Penn Mutual has presented significant evidence demonstrating that "the policy in this case was in fact an illegal contract procured through intentional misrepresentations for the purpose of gambling on the death of Windham," the decision states.

Under Illinois law, "a life insurance policy must not be sold to or be procured by an individual who has no insurable interest in the life of the insured," Chang wrote, quoting precedent.

"Contrary to defendants' belief that the policy was 'undisputably' procured by Windham himself, there is a dispute over who purchased the policy," he added. "Penn Mutual alleges that defendants procured the policy by using Windham and the Windham Trust to disguise the true owner of the policy." (Emphasis in original.)

"Additional discovery is needed before the court can decide whether Windham's life insurance policy is illegal as a matter of law," he concluded.

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