Life insurance: Should 'stranger-originated' policies be legal? © Photodisc Green / Getty Images

Extra5/27/2010 8:30 PM ET

A $15 million insurance mystery

After Suzy Tomlinson, 74, died, her family learned that her 36-year-old companion, the last person to see her alive, stood to benefit from her death.     

By The Wall Street Journal

It is a tale worthy of an airport-kiosk thriller.

The mother-in-law of a nationally known executive is found dead in her bathtub. She is fully clothed from an evening out at a martini bar, high heels still on her feet. The authorities rule she accidentally drowned.

Months later, her family learns that the last person to see the woman alive -- a local businessman half her age -- had a $15 million insurance policy on her life, payable to his company.

The scenario is playing out in real life in a civil lawsuit in federal court in Indianapolis. The mother-in-law, Germaine "Suzy" Tomlinson, died in September 2008 at age 74. The son-in-law is Stephen Hilbert, who co-founded insurance company Conseco and now runs an investment fund. His family is seeking to wrest control of the $15 million policy from its beneficial owner, a company controlled by entrepreneur JB Carlson.

The Hilbert family maintains that the 36-year-old Carlson, who was a social companion to the older woman for several years and had some business dealings with her, had no legitimate reason to obtain the policy.

Hilbert says: "I'm not accusing anybody of anything. There's still incredible suspicion from the family as far as her demise."

Carlson says suggesting the death is anything but a tragic accident "is just ridiculous." He says the loss of a friend has been "tremendously painful."

He says that he drove a tipsy Tomlinson home from the bar about 1 a.m., escorted her inside and left her -- alive -- in her living room. Carlson maintains that he legitimately bought the insurance on Tomlinson as a "key man" policy, sometimes taken out by a business to protect itself from financial damage if a top executive dies. Tomlinson introduced him to potential investors and told people she was a board member of his company.

'Stranger-originated' policies

The dispute over the $15 million policy is a dramatic example of a larger controversy roiling the life insurance industry over "stranger-originated" policies. In recent years, insurance agents, hedge funds and other investors have induced thousands of elderly people to take out giant policies. Investors then buy these policies, pay the premiums and collect when the insured dies.

Insurers argue the practice violates "insurable interest" laws that require a buyer to be a relative, employer or someone else more interested in having the insured person alive than dead. U.S. courts long have supported this concept, including a 1911 ruling in which Supreme Court Justice Oliver Wendell Holmes Jr. wrote: "A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end."

Complaints alleging foul play from policies bought by strangers are rare. But in 2008, a pair of elderly Los Angeles-area women were sentenced to life in prison after being convicted of murdering two homeless men in an insurance scheme. The women befriended the men, took out life insurance policies on them and then murdered them, collecting a total of $2.8 million.

A 'carefully crafted scheme'?

The insurer that issued the $15 million policy on Tomlinson, the American General Life unit of American International Group, or AIG, has asked a federal court to declare it void. The insurer claims the policy was fraudulently obtained and was a stranger-originated policy intended for resale, violating state insurable-interest laws.

AIG charges that Carlson and an insurance agent, Geoffrey VanderPal, submitted vastly inflated net-worth figures for the elderly woman as part of a "carefully crafted scheme" to dupe it into selling such a large policy. An attorney for VanderPal says his client believed Tomlinson was important to Carlson's company and the policy was therefore legitimate. In court filings, VanderPal denies submitting false information.

The insurer says Tomlinson cited "personal estate planning" when she applied for the policy, naming the "Germaine Tomlinson Insurance Trust" as the beneficiary. Such trusts are commonly set up by wealthy people for tax reasons. AIG says it was never told that Tomlinson had signed a document making Carlson Media Group the beneficial owner of that trust. As for Carlson's assertion of a "key man" role for Tomlinson as the basis of the policy, AIG in court papers dubs this a belated explanation and a "sham."

AIG's stance that it shouldn't have to pay the $15 million has united the warring Hilbert and Carlson on one front: They say AIG is stuck with the policy it sold.

Carlson has told the court that AIG's fraud claim is irrelevant because the policy was past the two-year period in which the insurer could legally contest it. Hilbert says AIG shouldn't be allowed to collect the hefty premiums, then use the courts to wriggle out of paying.

An AIG spokesman says the insurer "acted appropriately in the sale of this policy."

Continued: How it all began 

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