In Billy Wilder’s 1944 film noir masterpiece, “Double Indemnity,” Phyllis Dietrichson (Barbara Stanwyck) seduces insurance agent Walter Neff (Fred MacMurray) into murdering her husband to collect on his accident policy. (Who knew insurance could be so seedy?)  The suspicious and relentless claims adjuster, Barton Keyes (Edward G. Robinson), eventually gets to the bottom of the scheme, and along the way, delivers a great (and hilariously overdramatic) movie speech about the important role his job plays:

“Desk job? Is that all you can see in it? Just a hard chair to park your pants on from 9 to 5? Just a pile of papers to shuffle around and five sharp pencils and a scratchpad to make figures on? Maybe a little doodling on the side? Well that’s not the way I look at it, Walter. To me, a claims man is a surgeon. That desk is an operating table and those pencils are scalpels and bone-chisels. And those papers are not just forms and statistics and claims for compensation. They’re alive. They’re packed with drama, with twisted hopes and crooked dreams… A claims man is a doctor and a bloodhound and a cop and a judge and a jury and a father confessor all in one.”

(You really have to read this speech in an Edward G. Robinson gangster voice to appreciate it fully.  Maybe after an adult beverage or two.)

It’s certainly true that a claims adjuster’s desk is (metaphorically speaking) an operating table.   The problem is that, in many instances, the “surgeon” is trying to remove the very heart from your claim. I once had a life insurance case, for example, in which a young husband went on a mountain climbing trip. There was an unexpected and tragic avalanche, and he and his party were all lost, as confirmed by the authorities. When his widow put in a claim,  though, the insurance company responded by saying, in essence: No dead body, no benefits.   Fortunately, we were able to persuade the carrier of the error of its ways without filing suit, but you can see what we’re sometimes up against.  (The most amazing thing to me about that case is that a supervisor actually signed off on the denial letter.)

There’s a concept in insurance known as “post-loss underwriting,” and it’s generally considered to be unsavory if not downright illegal.  The idea is that the carrier will gladly sell you a policy and take your premium.  Just don’t file a claim, ever.  When you do, the claims department will go through the policy application and your background with a fine-toothed comb, generally making you feel like a criminal and looking for a basis to avoid paying on the ground that you were never entitled to be insured in the first place. It’s as though you were in Atlantic City playing blackjack, and every time you got to 21,  the dealer could refuse to pay and tell you that you must’ve been cheating.  And one really infuriating thing about post-loss underwriting is the number of judges who unknowingly tolerate it.

I’m not saying that’s what happened in the recent New Jersey Supreme Court case of Sun Life v. Wells Fargo Bank (really), but the asserted basis for the decision gives pause to those of us who do policyholder-side work. The case involved a $5 million insurance policy on the life of a retired middle school teacher named Nancy Bergman. The application listed the “Nancy Bergman Irrevocable Trust” as the sole owner and beneficiary of the policy.  Ms. Bergman’s grandson, Nachman Bergman, was the Trustee, and the Trust had four additional members, all of whom were strangers to Ms. Bergman. The investors paid the premiums, and the trust agreement provided that any benefits would be paid to Nachman.

About five weeks after Sun Life sold the policy, Nachman resigned as Trustee and appointed the four investors as co-Trustees.  The Trust later sold the policy for $700,000, and after a series of other transactions, Wells Fargo obtained ownership of the policy and continued to pay the (substantial) premiums, which, of course, Sun Life gladly accepted.

Ms. Bergman passed away in 2014 at age 89, and, naturally, the trouble soon began. Wells Fargo, as the now-owner of the policy, filed a claim for the paid-for benefits.  According to the Court, Sun Life then “investigated” and discovered terrible “discrepancies” concerning who actually owned the policy,  leading Sun Life to do the only morally responsible thing:  Deny the claim, of course! After all, how could Sun Life possibly pay what it owed?  It would be unlawful!  Immoral! Why, by paying these benefits, Sun Life would be grossly encouraging people to bet on the lifespans of total strangers! (As if insurance companies don’t do exactly that every day.)  The very ethical structure of our society would collapse!

Now, if I were a judge (which I’m not, and never will be, especially after writing this), I would say, let me get this straight.  You, Sun Life, conducted an underwriting process, collected information, and decided to sell a policy to insure Ms. Bergman’s life.  You collected large premiums for several years, and you saw that the checks or transfers were no longer coming from Ms. Bergman or the Trust, but from other entities, including Wells Fargo.  While you were reinvesting the buckets of premiums you collected and making a profit on them, you never asked any questions about the ultimate beneficiary.  Now Ms. Bergman has passed away, and you’re denying the claim on the ground that Wells Fargo had no “insurable interest” in Ms. Bergman’s life.

Why is that not the very definition of improper post-loss underwriting?

But, as I said, I’m not a judge, and our Supreme Court looked at the situation very differently, holding that the policy was essentially an illegal “STOLI” scheme.  No, not the vodka…but a concept known as Stranger-Originated Life Insurance.  The Court held that for an insurance policy to be valid, the beneficiary must have an “insurable interest” in the covered risk. An insurable interest includes, among other things, an interest in the “life, health and bodily safety of another individual to whom [the beneficiary] is closely related by blood or by law and in whom he has a substantial interest engendered by love and affection.” The Court held that the investors in the life insurance policy had no interest in Ms. Bergman remaining healthy, and instead were essentially gambling on the length of her life, in the hope that she’d die soon, allowing them to collect the death benefit. The Court wrote: “If a person with an insurable interest takes out a policy because he has an agreement to sell it to a third party, the transaction could be as much of an attempt to circumvent the insurable interest requirement is if a stranger had funded the policy at the outset.”

The Court also noted that the New Jersey Department of Banking and Insurance (DOBI) had submitted a brief supporting Sun Life in the case, arguing that “it is against the public policy of New Jersey for a third party to procure a life insurance policy from a life insurance company with the intent to benefit persons without an insurable interest in the insured.”

The takeaway is that, if you’re using a life insurance policy for estate planning purposes or in connection with corporate transactions, you need to be sure that the policy doesn’t run afoul of the STOLI rules as established by the relevant law.

Personally, I think the STOLI rules are downright silly. Insurance is an industry that essentially functions on gambling; carriers are forever betting on the probabilities of someone living, dying, or becoming ill. Apparently, this is a one-way street, however. As far as DOBI protecting the policy-holding public, in my view, the less said, the better.  If you’re supposedly there to help ensure fairness in the insurance market, it’s difficult to articulate a valid reason why, if an insurance company has collected millions of dollars in premiums over period of years, it shouldn’t be held to the terms of the contract it sold, instead of inventing reasons not to pay. But so it goes.

You can read the full decision here.