Life Settlement Provider Industry Alert

Transcription

1 July 2008 Author: Jessica Leigh Wray K&L Gates comprises approximately 1,700 lawyers in 28 offices located in North America, Europe and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations and public sector entities. For more information, visit Hawaii Now Regulates Life Settlements On June 16, 2008, for the first time, Hawaii enacted a bill that regulates life settlement contracts. The bill, which became Act 177, gives the Hawaii Department of Commerce and Consumer Affairs (DCCA) the authority to license providers and brokers who negotiate life settlement contracts, and allows DCCA to conduct investigations and examinations of those who engage in life settlement transactions. Act 177 implements the recently-amended model act of the National Conference of Insurance Legislators (NCOIL). Accordingly, it addresses consumer protection issues such as fraud, stranger-originated life insurance (STOLI), and premium finance loans. Act 177 is effective immediately, but will terminate in June 2010 in an effort to review and improve, if necessary, the effectiveness of the act. At the time this article was written, Act 177 was not available online. The act may be available in the future on the Hawaii legislature s Website. gov/. Connecticut Enacts Life Settlements Act On June 12, 2008, Connecticut repealed its viatical settlements law and enacted a life settlements act. The act closely resembles the recently-amended NCOIL model act. Accordingly, Connecticut s new life settlement law addresses problems relating to STOLI and premium financing arrangements. For example, insurers may ask whether the proposed policy owner intends to obtain financing to pay premiums. If the loan will provide funds that can be used for a purpose other than paying for the premiums, costs, and expenses associated with the life insurance policy and loan, then the application must be denied. The insurer also may require the applicant or insured to certify that they have not made arrangements to sell the policy and that the borrower has an insurable interest in the insured. Connecticut s life settlements act is available at: pdf/2008pa r00hb pa.pdf. Iowa Enacts Viatical Settlement Legislation Iowa has recently enacted several pieces of legislation relating to viatical settlements. On May 9, 2008, Iowa enacted the Viatical Settlements Act. The law that was once scant is now more comprehensive, resembling the National Association of Insurance Commissioners (NAIC) model act. Prior to its enactment, most of the provisions regulating viatical settlements were found in the Iowa Administrative Code. It is not known whether the administrative code will be amended. The new act should be reviewed carefully to ensure compliance. A complete copy can be obtained by selecting SF 2392 from On May 13, 2008, the Viatical Settlements Act was amended to implement minor word changes to section 508E.8, relating to the brochure that must be provided to the viator and future contacts with the insured. These changes can be found in section 130 of HF 2700, which can be accessed through the Website provided in the previous paragraph.

2 On April 25, 2008, Iowa amended its securities laws to change the definition of viatical settlement contracts to viatical settlement investment contracts. This change can be found in section 1 of HF 2555, which is accessible through the Website provided above. Oklahoma Enacts Viatical Settlements Act On May 15, 2008, Oklahoma enacted the Viatical Settlements Act of 2008, which regulates both life and viatical settlements. Previously, Oklahoma had two separate acts, which applied depending on whether the insured had a catastrophic or life-threatening illness. Oklahoma s new act closely resembles the NAIC model act, but includes some provisions from the recentlyamended NCOIL model act, such as the STOLI-related provisions. However, some of the STOLI-related provisions of the new act are less restrictive than the NCOIL model act. For example, if the insurance policy was issued less than two years prior to the application for a viatical settlement contract, a contract may be pursued if the insured involuntarily experiences a significant decrease in income that is unexpected and that also reasonably impairs the reasonable ability of the viator to pay the policy premium. This condition of eligibility appeared in a prior version of the NAIC model act, but is not included in the most recent NAIC or NCOIL model act. At the same time, Oklahoma s new act is more comprehensive than its prior two acts and imposes additional requirements upon licensees. For example, a viatical settlement provider or its viatical settlement investment agent must provide certain disclosures to the viatical settlement purchaser, such as information regarding the monitoring of the insured s condition and how and when this information will be transmitted to the purchaser, and information regarding whether the insurer has additional rights that could affect the purchaser s rights. A complete copy of the new act may be obtained from SB1980_ENR.RTF. The Oklahoma legislature has already amended the new viatical settlements act. In addition to a few minor revisions, the amendment modifies some of the definitions, changes record-keeping requirements by distinguishing settled policies from policies which are not settled, and substitutes the effective date provision that was taken from the NAIC model act with the provision from the NCOIL model act. You can view the amendments, which start with section 2, by going to: Kansas Amends Viatical Settlements Act On April 21, 2008, Kansas amended its viatical settlements act to address the sunset provisions of the act. The sections regarding confidentiality of medical information, confidentiality of viator information obtained during commissioner examinations, and confidentiality of information obtained during an investigation for fraudulent activity will now expire on July 1, Kansas viatical settlements act was also amended to include the provisions from the NCOIL model act that address STOLI concerns, and the definition of viatical settlement contract now includes, among other things, premium finance loans whereby the insured received a guarantee of a future viatical settlement value of the policy or agreed on the date of the loan to sell the policy, or portion of the policy, at a later date. The definition of viatical settlement contract also expressly excludes certain transactions, such as a policy loan or accelerated death benefits made by the insurer pursuant to the policy terms. Other amended provisions relate to reporting requirements, duties imposed upon viatical settlement brokers, and insurer disclosures and actions regarding premium finance loans. The amendments may be viewed at: kslegislature.org/bills/2008/2110.pdf. Nebraska Amends Viatical Settlements Act On April 17, 2008, Nebraska amended its Viatical Settlements Act by modifying some of the definitions, such as fraudulent viatical settlement act, viatical settlement contract, viatical settlement provider, viatical settlement purchaser, and viator. Various changes were also made to the licensing and bond requirements, reporting requirements, licensee examinations, viatical settlement broker duties, July

3 rescission, provisions concerning contacts with the insured, and disclosure statements. Notably, the amendments do not include the STOLI provisions of the NCOIL model act. Most of the amendments resemble provisions from the NAIC model act. The amendment to the Nebraska Viatical Settlements Act is available at: FloorDocs/Current/PDF/Slip/LB853.pdf. Georgia Enacts Uniform Securities Act On May 12, 2008, Georgia enacted the Uniform Securities Act of This new act includes viatical settlement investment contracts in the definition of security. This act may be viewed in its entirety at: legis.state.ga.us/legis/2007_08/pdf/sb358.pdf. Some Pending Legislation California s Life Settlement Consumer Protection Act was passed by the Senate and then sent to the Assembly on May 29, The act significantly changes California s regulation of viatical settlements. For example, it deletes the reference to catastrophic illness in the definition of viatical settlement contract, amends the definition of security to include viatical and life settlements, and expands insurable interest laws. The New York Senate introduced S on June 3, 2008, which will regulate all life settlement contracts, even if the insured does not have a terminal or catastrophic illness. Ohio s H.B. 404 passed the General Assembly and was sent to the governor on June 5, The bill makes several changes to the current viatical settlements act. Recent Decisions In Prudential Ins. Co. v. Life Partners, Inc., 2008 WL (D. Minn. May 8, 2008), the United States District Court for the District of Minnesota granted summary judgment in favor of Life Partners the purchaser of the life insurance policy in question and Sterling Trust which held the death benefits in trust to later distribute to the investors of the policy against claims asserted by the decedent s parents that Life Partners violated the Minnesota Viatical Settlements Act and that the insured, Joshua Jericho, was incompetent at the time of the settlement contract, the consideration paid was inadequate, and the contract was unconscionable. Jericho was HIV positive. The medical evaluation submitted to Life Partners stated that Jericho s life expectancy was between six and twelve months. At the time of viatical settlement application, Jericho s life insurance policy had a face value of $220,000. The viatical settlement purchase agreement offered him $39,373 in exchange for the policy rights. Before discussing the plaintiffs claims, the court discussed which state s laws applied. Jericho s parents claimed that Minnesota law applied. The court disagreed because the only connection to Minnesota was the fact that Jericho s mother, who was once a beneficiary to the policy, lived in Minnesota. The court applied Texas law because the viatical settlement purchase agreement provided that Texas law would govern the agreement. Even if Texas law did not apply, the court would have applied Georgia law because Jericho lived in Georgia when he signed the viatical settlement contract and when he died. The court found the viatical settlement agreement neither procedurally nor substantively unconscionable. Procedural unconscionability relates to the process of making the contract; factors such as age, experience, intelligence, bargaining power and meaningful choice are considered. Substantive unconscionability relates to whether the contract terms are fair. Considering the totality of the circumstances, the court found that the viatical settlement contract was not so one-sided as to render it unconscionable as a matter of law. There was no evidence of coercion or duress, and Jericho was competent when he signed the contract. As part of the application, Jericho s doctor attested that Jericho was under no constraint or undue influence and was of sound mind and competent. Further, Jericho signed an affidavit stating that he had the opportunity to consult an attorney. Even though Life Partners had more experience with these types of transactions, Jericho still bargained for the exchange by approaching Life Partners through a broker. He was not forced into the agreement. The court also found that the proceeds Jericho received from the viatical settlement agreement complied with July

4 the minimum requirements of the Texas viatical settlement laws. Although the amount Jericho received was far less than what Minnesota law would allow, the court recognized that Jericho nevertheless did receive a lump sum. If he would have died without completing the viatical settlement, he would have received nothing and the proceeds would have gone to his mother. The consideration therefore was adequate. Ultimately, the plaintiffs claims failed. This case raises interesting points for potential life settlement investors to consider. First, it cannot be assumed the laws of the state in which the insured lives always apply. Therefore, which state s laws will govern the viatical settlement contract and will it make a difference in the outcome of the case? For instance, in this case, the amount given to the insured as a result of the viatical settlement purchase agreement may have violated Minnesota law because it was too low, but it did not violate Texas law. Further, what protective measurements have been taken to ensure that the insured is competent and not under constraint or undue influence? Was the insured given an opportunity to confer with an attorney and did the insured attest to this fact? Failure to ask these and related questions before investing in a life settlement can lead to disappointment when the returns are not realized because the contract violated settlement laws or was found to be unconscionable. In In re Trade Partners, Inc., 2008 WL (W.D. Mich. April 15, 2008), the United States District Court for the Western District of Michigan denied several motions to dismiss raised by some of the defendants that provided escrow services for funds involved in viatical-based investments made with Trade Partners, Inc. (TPI). The lawsuits arose from the sale of viatical settlement investments by TPI. Plaintiffs asserted five causes of action, but the only claim discussed was the alleged violation of the Michigan Uniform Securities Act (MUSA). Specifically, plaintiffs alleged that the defendants sold unregistered securities in violation of MUSA. The court first decided that it had personal jurisdiction over the defendants and that the defendants, who were neither Michigan residents nor in Michigan when they were TPI associates, were still subject to MUSA. The court then discussed whether the prior court decision that held that MUSA s use of the term security includes viatical settlements was retroactive. The defendants argued that when the securities were sold, viatical settlements were not defined as securities so MUSA was inapplicable. The court disagreed because judicial decisions are retroactive unless exigent circumstances justify the extreme measure of prospective-only application. There were no exigent circumstances and, prior to the decision, there were no court decisions that held that viatical settlements were not securities. The court decision therefore was retroactive and the viatical settlement investments were securities in accordance with the court s holding. Furthermore, the defendants could not successfully claim that they did not know the viatical settlements were securities because the court concluded that a reasonable inference from the marketing activities is that [the defendants] had a sufficient understanding of TPI s viatical settlements that they knew or could have known that TPI s viatical settlements were securities under MUSA. Overall, the court denied the motions to dismiss because the factual allegations of the complaint could support the claim that the defendants sold securities that were unregistered in violation of MUSA. This case raises interesting points for potential life settlement investors to consider. Mainly, was the sale of viatical settlements in compliance with securities laws? Even if viatical settlements were not included in the definition of security when the viatical settlements were sold, these laws should be examined to ensure that the sale complies in the event the laws are applied retroactively. July

5 K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin, in Beijing (K&L Gates LLP Beijing Representative Office), and in Shanghai (K&L Gates LLP Shanghai Representative Office); a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general partnership (K&L Gates) which practices from our Taipei office; and a Hong Kong general partnership (K&L Gates, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Data Protection Act 1998 We may contact you from time to time with information on K&L Gates LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please london@klgates.com if you would prefer not to receive this information K&L Gates LLP. All Rights Reserved. July