Federal Court Finds $10 Million Life Insurance Policy Sold to Wells Fargo Void Ab Initio

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Pruco Life Insurance Co. v. Brasner (U.S. Dist. S.D.FL November 14, 2011)

In Pruco, a 72 year old woman attended a seminar promising “free life insurance.”  When she later inquired with the broker agency, she was signed up for a $10 million dollar policy which listed her as the owner and her husband as the beneficiary.  However, the woman was never intended to pay any premiums on the policy and it was understood that the policy proceeds would be collected by a third party to whom the policy would be sold after the “free life insurance” period was over.  The policy was ultimately issued by Pruco Life Insurance which had no knowledge of the arrangement made by the broker agency.

After its issuance, Pruco received numerous change of ownership and beneficiary requests, the last to Wells Fargo.  It was alleged by Pruco that these took place to conceal the sale of the policy’s beneficial interest to an investor with no insurable interest in the insured’s life.

After the Wall Street Journal printed a story about a similar scheme in 2010, Pruco investigated the policy and file suit against the broker agency and Wells Fargo for damages and a declaration that the policy was void.  After a default judgment was awarded against the broker, Pruco sought summary judgment against Wells Fargo and a finding that the policy was void from the onset.  Wells Fargo filed a cross-motion seeking a return of premiums paid since they acquired the policy.

An insurable interest in the life of the insured is necessary for the validity of a life insurance policy.  Absent such an interest, courts have found that such policies are illegal wagers upon a person’s life and are void as against public policy.  Although Florida law permits life insurance policies to be assigned to entities with no insurable interest, this is not permitted in the form of “sham assignments made simply to circumvent the law’s prohibition on wagering contracts.”

The Southern District Court (J. Cohn) found that the policy was void ab initio because the policy was procured in bad faith.  The Court reasoned that there was never an intention that the insured or her husband would maintain the policy and it was understood from the onset that the policy would be transferred to a stranger.  The court held that this “pre-existing” understanding alone was sufficient to show that the policy was not procured in good faith.  The court further held that Pruco was not required to return policy premiums paid by Wells Fargo because the policy was determined to be void ab initio as against public policy and in such circumstances “the parties will be left as the court found them.”

For a copy of the decision click here

Bryan Richmond and Tom Segalla