MARYLAND INSURANCE ADMINISTRATION

Transcription

1 MARYLAND INSURANCE ADMINISTRATION MARYLAND INSURANCE REVIEW OF A RECOMMENDED ADMINISTRATION DECISION ISSUED BY EXRELR.A.B. MARYSHOCK Complainant AN ADMINISTRATIVE LAW JUDGE v. OF THE MARYLAND OFFICE OF LINCOLN NATIONAL LIFE ADMINISTRATIVE HEARINGS INSURANCE COMPANY Licensee OAH No.: MIA-CC MIA No.: MIA FINAL ORDER Pursuant to Md. Code Ann., Ins (d) and COMAR O1.10-2H, the undersigned Maryland Insurance Commissioner, hereby issues this summary affirmance of the proposed decision below. On November 2 and 3, 2011, this case was heard by Administrative Law Judge ( AU ) Shock. On November 22, 2011, the AU issued a Proposed Decision, and on the same date the Office of Administrative Hearings mailed the Proposed Decision to the Complainant, R.A.B, to Alex J. Brown, Esq., counsel for the Complainant, to Bryan D. Bolton, Esq., counsel for the Licensee and to Sheryl Robert at Lincoln National Life Insurance Company. Attached to the Proposed Decision was the notice regarding the Right to File Exceptions advising all parties that pursuant to COMAR , they

2 had the right to file written exceptions with the undersigned, within twenty (20) days from receipt of the Proposed Decision. Exceptions were filed on behalf of the Complainant on and a response to these exceptions was filed by Licensee s counsel. I have carefully evaluated the documentary record in this case, the exceptions and responses filed by the parties and the Proposed Decision by AU Shock. In consideration thereof, and pursuant to COMAR D, lam persuaded that the result reached by the AU is correct. A Proposed Decision which is summarily affirmed under COMAR H is not precedent within the rule of stare dec/s/s in other cases. THEREFORE, it is hereby ORDERED that the Proposed Decision of AU Shock be adopted as the Commissioner s Final Order, and it is further ORDERED that the complaint made by the Complainant be DENIED AND DISMISSED; and it is further ORDERED that the records and publications of the Maryland Insurance Administration reflect this decision. It is so ORDERED this td 23 day of February THERESE M. GOLDSMITH Signature on file with Orignal N P(CY~I3~DIN (sso 9~ af~ 4~ eputycommissioner -2- L

3 MARYLAND INSURANCE BEFORE MARY SHOCK, ADMINISTRATION, AN ADMINISTRATIVE LAW JUDGE EXREL:, OF THE MARYLAND OFEICE COMPLAINANT OF ADMINISTRATIVE HEARINGS v. OAR No: MIA-CC LINCOLN NATIONAL LIFE MIA No: INSURANCE COMPANY LICENSEE ~ RECOMMENDED DECISION STATEMENT OF THE CASE ISSUES SUMMARY OF THE EVIDENCE FINDINGS OF FACT DISCUSSION RECOMMENDED CONCLUSIONS OF LAW RECOMMENDED ORDER STATEMENT OF THE CASE On December 29, 2010, the Maryland Insurance Administration (MIA) received a complaint from (Complainant or R.A.B.) alleging that Lincoln National Life Insurance Company (Lincoln), Chubb Life Insurance Company ofamerica (Chubb), and their agent, Pandelis Demedis (Mr. Demedis), sold him policies for which he was not suited. After an investigation, the MIA found that Lincoln had not violated Maryland Insurance Law. It also found that Mr. Demedis s insurance producer s license was no longer in effect. It made no finding as to Chubb. On April 11, 2011, the MIA mailed notice of its decision to the

4 Complainant. The Complainant disagreed with the MIA s decision and, on May 9, 2011, requested a hearing. On June 30, 2011, the MIA referred the matter to the Office of Administrative Hearings (OAH) for a hearing. Md. Code Ann., Ins (Supp. 2011). The MIA delegated the authority for OAR to issue final findings of fact, recommended conclusions of law, and a recommended decision. On July 15, 2011, the Complainant filed a Motion to Join Necessary Parties and Request for Production of Documents. On July 18, 2011, the Complainant filed a second Request for Production ofdocuments. On July 29, 2011, Lincoln filed an Opposition to the Motion to Join Necessary Parties (Opposition) and a Motion to Quash the Requests for Production of Documents. On August 15, 2011, the Complainant filed his replies to the Opposition and to the Motion to Quash. On August 26, 2011, I conducted a prehearing telephone conference. Alex J. Brown, Esquire, and Anna Z. Skelton, Esquire, of Silverman, Thompson, Slutkin and White, represented the Complainant. Bryan D. Bolton, Esquire, of Funk and Bolton, represented Lincoln. On August 31, 2011, I issued a Ruling on Motion to JoinNecessary Parties and Requests for Production of Documents, joining Chubb, denying the motion to join Mr. Demedis, and ordering the production of certain documents. On September 9, 2011, Lincoln filed a Motion for Partial Summary Decision on the Issue ofvicarious Liability. On September 26, 2011, the Complainant filed a Response in to Lincoln s motion and, on October 13, 2011, I issued a ruling denying it. On October 25, 2011, Lincoln filed a Motion forpartial Summary Decision as to all Claims Asserted Directly or Vicariously against Chubb Life Insurance Company of America and 2

5 a Motion to Quash Hearing Subpoena Duces Tecum and Ad Test~flcandum.On October 26, 2011, Lincoln filed a second Motion to Quash Hearing Subpoena Duces Tecum and Ad Test~ficandum issued to Lincoln. On October 27, 2011, Lincoln filed an Emergency Motion forpostponement. On November 1, 2011, the Complainant filed responses to Lincoln s motions. On October 28, 2011, I denied Lincoln s motion for postponement. On November 2 and 3, 2011, I conducted a hearing at the OAR in Hunt Valley, Maryland. Md. Code Ann., Ins. ~2-210 and (2011); Code of Maryland Regulations (COMAR) and Alex J. Brown, Esquire, represented the Complainant. Bryan D. Bolton, Esquire, represented Lincoln. On November 2, 2011, Mr. Bolton stated that Chubb Life America does not exist today, it was taken over by JeffersonPilot and then Lincoln; thus, I did not rule on Lincoln s Motion for SummaryDecision. 1 Also, I did not rule on the motions to quash because the Complainant failed to serve the subpoenas by personal delivery or certified mail. COMAR C(3). Because I could not enforce the subpoenas, I was not required to quash them. On November 3, 2011, at the close ofthe hearing, the Licensee filed Proposed Findings offact and Conclusions of Law. On November 16, 2011, the Complainant filed Proposed Findings offact and Conclusions of Law. The contested case provisions of the Administrative Procedure Act (APA), the Rules of Procedure of OAR and the procedural regulations for MIA hearings govern procedures in this case. Md. Code Ann., State Gov t ~ through (2009 & Supp. 2011), Code of Maryland Regulations (COMAR) , For the remainder of this decision, I will refer to all the insurance companies as Licensee. 3

6 ISSUES 1. Did the Licensee misrepresent the terms ofthe 1997 variable life insurance policy or 2000 variable annuity or engage in fraud in the sale ofthose products to the Complainant? Exhibits 2. If so, what penalty or other remedy is appropriate? SUMMARY OF THE EVIDENCE I incorporated the MIA file, consisting oftwenty-one exhibits, into the record. The Complainant submitted five exhibits. The Licensee submitted 191 exhibits. I admitted all exhibits and have attached exhibits lists to this Decision. Testimony witnesses: The Complainant testified in his own behalf and presented the following additional 1. J.B., his wife; and 2. John E. Degele, Jr. Michael F. Murray, Vice-President, Lincoln Financial Group, testified for the Licensee. FINDINGS OF FACT I find the following facts by a preponderance ofthe evidence: 1. R.A.B. is seventy-nine years old, born on September 7, (COMP #1.) 2. J.B. is seventy-eight years old, born on April 18, (COMP #2.) 3. R.A.B. and J.B. have known each other since high school and have been married for many years. J.B. generally manages the family s money. (Test. J.B.) 4. R.A.B. was a professional football player in the National Football League (NFL), and a NFL coach. (Test. J.B. and R.A.B.) 4

7 5. When R.A.B. retired from football, he and J.B. were partners in the Charles Village Pub in Towson, Maryland. R.A.B. managed the restaurant. J.B. kept the books for the business and performed other tasks, as needed, including waiting on tables. (Test. J.B. and R.A.B.) 6. R.A.B. and J.B. met Pendelis Demedis through their accountant. Mr. Demedis was also a Charles Village Pub customer. (Test. J.B. and R.A.B.) 7. Effective May 2, 1980, the Licensee authorized Mr. Demedis to submit applications for Individual Life Insurance and Annuities, Individual Disability Income Insurance, Group Insurance, and Group Annuities. The broker s contract provided that Mr. Demedis was an independent contractor and received commissions for the policies he sold. (LIC #4.) 8. On October 15, 1987, through Mr. Demedis, R.A.B. purchased forhimself a $250, universal life insurance policy, with a planed monthly premium of $ (COMP #1.) He was fifty-five years old at the time and wanted to pay forthe policy by the time he reached the age of sixty-five, ten years later. 9. On July 17, 1991, R.A.B. took a $9, loan on the 1987 policy. (LIC #7 & #8.) 10. In 1994, Mr. Demedis wrote to the Licensee about R.A.B., exchanging the 1987 policy. The surrender value of the loan at that time was $18, R.A.B. still owed $8, on the loan, and it was unlikely that he would have paid for the policy by the time he reached sixty-five. (LIC #9.) The Licensee did not offer the Complainant any other exchange options. (LIC #10.) 11. In 1997, Mr. Demedis recommended that R.A.B. replace the 1987 universal life policy with a flexible premium variable life insurance policy. (COMP #2.) R.A.B. told Mr. 5

8 Demedis that the purpose ofthe insurance was family income. R.A.B. was sixty-five years old at the time. 12. On September 8, 1997, R.A.B. signed an Understanding of Policy, Replacement Client Disclosure form. The form stated that R.A.B. s insurance objective was lower premiums and potential for increased growth on cash reserve. (COMP #2.) 13. The Replacement Client Disclosure form also compared R.A.B. s existing policy (a universal life insurance policy) with the newpolicy (a variable universal life policy) with the following changes: the annual premium was reduced from $6, to $800.00; the face value or death benefit of $250, remained the same; the current net value decreased from $54, to $53,555.00; and the projected cash value of the policy fell in five, ten and twenty years, with the twenty-year value falling from $332,612 to $147, (LIC #13.) 14. On September 8, 1997, R.A.B. also signed an Application Supplement for Variable Life Insurance. The form states that cash values may increase or decrease in accordance with the experience of the separate account. (LIC #13.) R.A.B. chose a fixed death benefit of $250, On September 9, 1997, Mr. Demedis mailed R.A.B. copies of all the forms he had mailed to the Licensee including: Application Supplement for Variable Live Insurance; Optional Programs for Flexible Premium Variable Life Insurance; Important Notices; New Account Form; Notice Regarding Replacement; Agent s Report; Authorization to Obtain and Disclose Information; Introductory Notes to Personalized Sales Illustrations; Illustrations; Understanding ofpolicy, Replacement Disclosure; Statement ofunderstanding and Acknowledgement; Medical History; and Application. (LIC #13.) 6

9 16. The Agent s Report that Mr. Demedis mailed to R.A.B. on September 9, 1997, states that the purpose for the insurance was Family Income. (LIC #13.) The New Account Form states that R.A.B. s investment objective was long-term growth and his risk exposure was high risk. (LIC #17.)2 17. R.A.B. chose semi-annual portfolio rebalancing where he selected a fund mix that best suits his goals and the portfolio would be periodically rebalanced to the model he selected. R.A.B. selected a model in which the mix consisted of twenty percent, each, in Capital Growth, emerging Growth, International, 047 Contrafund, and 049 Index 500. (LIC #13.) disclosures: 18. The 1997 flexible premium variable life insurance policy contained the following a. The premium is flexible because, unlike many insurance contracts, there is no fixed schedule for premium payments; however, an owner may establish a planned periodic premium schedule. The policy owner may increase or decrease coverage, rather than purchase another policy. (LIC #14, p. LN 1983); b. The policy is variable because, unlike the fixed benefits of an ordinary whole life insurance contract, the accumulation value, 3 the cash value, and (under certain circumstances) the deathbenefit ofthe policy may increase or decrease dependingupon the investment experience in the Separate Account A to which premium payments have been allocated. So long as the policy s cash value continues to be sufficient to pay the monthly deduction, all policy owners are guaranteed a minimum death benefit equal to the face amount of the policy. (LIC #14, p. LN 1983); c. A policy owner may allocate net premium payments among a general account and the divisions of Separate Account A which invest in Portfolios ofthe Funds. (LIC #14, p. LN 1983); d. Unlike traditional lifetime insurance protection, the policy owner participates in the investment experience ofseparate Account A. 2 The NewAccount Form at LIC #17, is a legible copy of the form included in LIC #13. ~The accumulation value is the total amount that a policy provides for investment at any time plus the amount held as collateral for policy debt. (COMP #14, p. LN 1982.) 7

10 Accumulation value under the policy will increase with positive investment experience and decrease with negative investment experience; (LIC #14, p. LN 1980) e. The policy provides for a death benefit payable at the insured s death. If net premiums are allocated to Separate Account A, the amount ofthe death benefit may reflect the investment experience of the chosen division of Separate Account A, as well as the frequency and amount of premiums, any withdrawals of cash value, and the charges assessed in connection with the policy. As long as the policy remains in force, the death benefit will not be less than the current specified amount of the policy. (LIC #14, p. LN 1980); f. The policy will remain in force so long as cash value exceeds indebtedness and cash value less indebtedness is sufficient to pay certain monthly. charges. The cash value equals the accumulation value less any surrender charge. Accumulation value in Separate Account A will reflect investment experience of the chosen divisions, the amount and frequency ofpremium payment, any withdrawals, and charges imposed in connection with the policy. Adherence to the schedule of plannedperiodic premiums will not assure the policy will remain in force. The policy owner bears the entire investment risk for all amounts allocated to Separate Account; no minimum accumulation value is guaranteed and the accumulation value could decline to zero. So long as cash value exceeds indebtedness a policy owner may obtain policy loans. (LIC #14, p. LN 1980); and g. Prospective purchasers of the policy are advised that replacement of existing insurance coverage may not be financially advantageous and should consult with their financial advisers with respect to the policy. (LIC #14, p. LN 1980). 19. On December 3, 1997, R.A.B. received a Notice ofthe Right of Withdrawal and signed an acknowledgment that stated: Your purchase of a Chubb Life Insurance Company of America policy provides valuable financial protection. It also offers a range of living benefits and ownership rights which you should thoroughly understand. Please take this opportunity to carefully review your new insurance policy with your agent. Please acknowledge below that you have received this policy and that you understand the insurance coverage you have purchased. Your signature will also recognize receipt ofthe notice of Right of Withdrawal Form. (LIC #23.) 8

11 20. The 1997 policy provided for an initial annual premium of $ and a death benefit of $ The policy included a ledger statement outlining hypothetical cash flow and hypothetical rate of return and an explanation of the illustration. (COMP #2, p. LN ) 21. The policy also included a Statement ofpolicy Cost and Benefit Information for the Policy, a notice that the projected results of the insurance program could change drastically with variations in the interest rates and cost of insurance rates, and minimum nonforfeiture values. (COMP #1, pp. LN , LN 854.) 22. The Licensee provided R.A.B. with Annual Policy Summaries that included: the current accumulated values; the current cash value; the current death benefit; current policy loans; and activity since the last report. The ending accumulated values were as follows: October 1998 (LIC #34) $59, October 1999 (LIC #35) 75, By letter dated March 13, 2000, Lincoln notified Mr. Demedis that it was terminating his Broker Contract for low production. (COMP #4.) 24. On April 20, 2000, on Mr. Demedis s recommendation, R.A.B. and J.B. applied for a variable annuity with the Licensee, borrowing $25, from the 1997 policy to purchase the annuity. (LIC #39 and #42.) 25. The Licensee provided R.A.B. with a New Account Disclosure Statement and a notice stating that discontinuing or withdrawing value from existing policies may be a good or bad decision.. (LIC #40 and 41.) 26. On the application, R.A.B. and J.B. reported that their annual gross income was $75,000.00, their estimated worth was $750,000.00, and their liquid assets were $450, They signed the application, which noted that their investment objective was long-term growth; they failed to note whether their risk exposure was low, medium, or high. (LIC #41.) 9

12 27. R.A.B. and J.B. signed the application, which included the following statement I understand that annuity payments and surrender values, when based on the investment experience of the Separate Account, are variable and are not guaranteed as to fixed dollar amount. (LIC #44, p. OAR 167.) 28. R.A.B. and J.B. received a copy of the annuity contract, effective April 26, (LIC #44, p. OAR 163). They allocated the fund as follows: International Equity Lombard Order 15%; Emerging Growth MFS 20%; Growth Skong 155; Capital Growth Janus 20%; Fidelity VIP Fund II Contrafund 15%; and MF3 Variable Insurance Trust Research Series 15%. (LIC #44, p. OAR 166.) 29. The Licensee continued to provide R.A.B. with Annual Policy Summaries on the 1997 policy that included ending accumulation values as follows: October 2000 (LIC #49) $93, October 2001 (LIC #59) 66, October 2002 (LIC #67) 54, October2003 (LIC#76) 58, October 2004 (LIC #89 54, October 2005 (LIC #104) 53, October 2006 (LIC #119) 49, October 2007 (LIC #130) 44, October 2008 (LIC #146) 30, October 2009 (LIC #17 1) 17, October 2010 (LIC #188) 6, The Licensee provided R.A.B. and J.B. with Quarterly Account Summaries for the variable annuity for the periods covering April 1, 2000 through March 31, 2010 The summaries included: beginning contract value; premium payments; gain/loss; annual administrative fee; ending contract value; change in the quarter; surrender value; and contract activity. By the end of the first quarter, June 30, 2000, the annuity had an ending contract value of$25, (LIC #48.) By the end of the last quarter, March 31, 2010, the annuity had an ending contract value of $20, (LIC #181.) 10

13 31. Beginning with the Quarterly Account Summary ending March 31, 2001, the summary included this statement: (LIC #54.) Market volatility may have effected [sic] the performance of the sub-accounts in yourpolicy. Remember that variable annuities are designed to meet long-term needs such as retirement income. The cash value ofyour policy will reflect the investment performance of the various sub-accounts that your premium dollars have been allocated to. Equity investments have historically outperformed all other asset classes over the long-term. Past performance of investments is not indicative of future results. Shorter-term equities are subject to market volatility. If you are concerned about the performance of yourpolicy you should call your registered representative to discuss your concerns. Reviewing yourpolicy on an annual basis is important to make sure that the policy is properly allocated among the various options to help you achieve your investment objective. 32. On July 16, 2009, the Licensee notified R.A.B. that his 1997 policy did not have enough value to cover the monthly expenses due on July 15, He was required to pay a minimum of $3, to prevent the policy from lapsing. (LIC #163.) 33. On August 27, 2009, Lincoln notified R.A.B. that his policy was in a lapse pending status and that $4, was due by September 10, 2009 to bring the policy to an active status. (LIC #166.) 34. R.A.B. paid the premiums and on September 14, 2009, his variable life insurance policy, with a death benefit of $250,000, was in active status. (LIC #168.) 35. On March 29, 2010, R.A.B. and J.B. completed an Annuity Distribution Request form, requestingtotal surrender of the variable annuity account. (LIC #180.) They received over $20, from the annuity. (LIC #181.) They used approximately $13, to pay the balance of the loan on the life insurance policy. 36. On October 20, 2010, R.A.B. completed a Request for Policy Surrender form. (LIC #189). He received $4, for the policy. (LIC #190.) 11

14 DISCUSSION When the MIA referred this case to the OAR, it directed the presiding administrative law judge to pay attention to section of the Insurance Article and to the Maryland regulations governing duties of replacing insurers. COMAR The Insurance Articles provides in part: Misrepresentation about policies. A person may not: (1) make, issue, circulate, or cause to be made, issued, or circulated an estimate, circular, or statement that misrepresents the terms of a policy issued or to be issued, the benefits or advantages promised by the policy, or the dividends or share of the surplus to be received on the policy Md. Code Ann., Ins (1). Maryland regulations govern insurance companies replacing or selling new life insurance policies or annuity contracts that are financed by existing life insurance policies or annuities~.the rules set out the duties of the replacing insurer, including notices to the exiting insurer and the owner of the policy. COMAR An insurance company or insurance producer that violates the Insurance Article is subject to denial, refusal to renew, suspension, orrevocation ofits certificate or license, as well as imposition ofpenalties or an order to pay restitution. Md. Code Ann., Ins The burden of proof in this case is by a preponderance of the evidence and rests with the Complainant as the moving party. Md. Code Ann., State Gov t (2009); Comm r of Labor & Indus. v. Bethlehem Steel Corp., 344 Md. 17, 34 (1996). The Complainant did not allege that the Licensee, as a replacing insurer, failed to comply with the notice requirements of the regulations. COMAR Instead, the Complainant argues that the Licensee, through its agent, Mr. Demedis, misrepresented the benefits or 12

15 advantages of the 1997 variable universal life policy and the 2000 variable annuity. I find that the Complainant failed to prove that the Licensee violated the Insurance Article. John E. Degele, Jr., accepted as an expert in the standard of care for insurance brokers in Maryland, testified on behalf ofthe Complainant. Mr. Degele stated that insurance producers receive commissions on polices they sell and are paid a decreasing percentage of the premiums over a ten year period. Thus, after ten years, producers will move people to another carrier and restart the commissions. With regard to the 1997 policy, Mr. Degele testified that it was curious that Mr. Demedis sold R.A.B. a replacement exactly ten years after he sold the first policy. Further, Mr. Degele stated that family income, as noted by Mr. Demedis as the Complainant s insurance objective, means income at death, which is a death benefit. The variable universal life policy was an investment product, and Mr. Degele questioned its suitability for the Complainant, who wanted life insurance protection or a death benefit. In Mr. Degele s opinion, the variable annuity was even riskier than the variable universal life policy. The transaction created a loan against the life insurance policy, and in Mr. Degele s opinion, taking money from one policy to put into another is churning; one should never take a loan on one policy to buy something else. He testified that the transactions looked fishy to him. He would not have recommended the products. Mr. Degele s opinion concerned the suitability of the products for the Complainant, and is insufficient to prove that Mr. Demedis or the Licensee fraudulently misrepresented the terms, benefits or advantages of the policies. While Mr. Degele might have read a motive into Mr. Demedis s timing, a motive to earn commissions fails to prove that Mr. Demedis fraudulently misrepresented the 1997 policy or the 2000 annuity. Also, even if I accept Mr. Degele s opinion 13

16 that the policies were unsuitable and that he would not have recommended them to R.A.B., he has no knowledge of exactly what Mr. Demedis said to R.A.B. and J.B that would constitute misrepresentation. Additionally, he did not testify that the documents the Licensee provided to R.A.B. when he purchased the products were false, misleading, or otherwise misrepresented the policies. Mr. Degele also failed to address whether a family income objective precludes the sale of a variable life insurance policy or annuity, and whether a broker necessarily, or even more likely than not, would have been required to misrepresent a policy to make such a sale. Instead, he said he would not have recommended those products. The evidence here establishes that R.A.B. had a $250, death benefit when he surrendered the policy in October 2010; Mr. Degele did not address that fact. Overall, Mr. Degele s testimony that the transactions were curious and fishy, is too vague to constitute a reliable expert opinion. Michael F. Murray, Vice-President, Lincoln Financial Group, testified for the Licensee. He stated that when a person applies for a life insurance policy, a registered principal, so certified by the Financial Industry Regulatory Authority, will review the application for suitability. If, based on the information provided in the application, the registered principal finds the policy unsuitable, the Licensee will reject the application. The Complainant pointed out that on the 2000 annuity application no one indicated the risk exposure that R.A.B. and J.B. wanted to take; high, medium or low. (LIC #41). Despite the absence of that choice, the Licensee s registered principal approved the application. Mr. Murray stated that the registered principal may have referred to the 1997 application that indicated high risk exposure and defaulted to that exposure. (LIC #17.) I find that testimony to be weak. Mr. Murray could only speculate that the registered principal defaulted to that exposure, and if she 14

17 did, he failed to explain why that action is permissible when performing a suitability analysis. An applicant s risk exposure can change over time. While income investments are generally thought to be safer, Mr. Murray testified on cross-examination that family income investments can be high risk. For example, high yield bonds can be family income investments. Family income investments, however, are generally not expected to result in long-term growth; consequently, an older applicant should select income investments instead. Further, Mr. Murray stated that some of the subaccounts the Complainant selected are not income-type investments. The Complainant, however, failed to explain how his investment selections resulted from any misrepresentation by the Licensee and how he misrepresented the terms, benefits or advantages of the policy. R.A.B. testified that when he left the NFL in 1987, he lost league and team policies, and he wanted to buy a policy to protect his wife. His accountant recommendedmr. Demedis, who sold him the 1987 policy. R.A.B. stated that Mr. Demedis approached him in 1997 and in 2000 to change the policies. Mr. Demedis promised lower premiums. R.A.B. further stated that Mr. Demedis would prepare all the papers, go through the document with R.A.B. and R.A.B. would sign. They would meet to discuss the policies at the Charles Village Pub at a private booth, but R.A.B. stated that it was not the most enviable environment. J.B. testified that she knows nothing about insurance. When Mr. Demedis came to her and R.A.B. in 1997 and said that they had a lot of cash value in the 1987 policy that they could make work for them, she trusted him. Mr. Demedis knew that she and R.A.B. were not knowledgeable about insurance and when she asked for explanations, he said not to worry and that he would take care of it. 15

18 J.B. also testified that when she and R.A.B. borrowed money on the 1997 policy to purchase an annuity in 2000, Mr. Demedis stated that they would not even have to pay on the $25, loan and that he would get their cash to grow. Mr. Demedis said that if they purchased the annuity, they would have another income and that there was plenty of money in the 1997 insurance policy to pay for the loan to purchase the annuity. J.B. stated that she did not understand how all of this could be done when they were borrowing money. The Complainant subpoenaed Mr. Demedis to testify. Mr. Demedis appeared for both days of the hearing and waited outside the hearing room. While I will not draw a negative inference from the Complainant s failure to call Mr. Demedis, the result of that failure is that R.A.B. 5 and J.B. s testimony, alone, fails to prove that Mr. Demedis orally misrepresented the terms, benefits, or advantages of the policies. Their testimony that Mr. Demedis said, for example, not to worry, he would take care of them, that they should make the money in the policy work for them, and that they could lower their premium, was too vague to establish fraudulent misrepresentation. Mr. Demedis may have tried to sell policies to R.A.B. and J.B. in order to earn commissions, he may have recommended risky products to the Complainant; however, there is insufficient evidence that he misrepresented the terms of the policies or misrepresented the risks. On the contrary, there is evidence that he provided a written comparison between the 1987 and 1997 policies, that the Complainant received copies of the application and contract, and that the Complaint was able to withdraw from the contract after receipt and review of the written materials. (LIC #13, #14, #23.) I have considered that the contracts and, particularly, the prospectus, are difficult to read. However, the prospectus for the 1997 policy presents a straight-forward summary, which includes the following statements: the policy is not like an ordinary whole life insurance 16

19 contract; the policy is an investment product; the policy owner participates in the investment experiences by allocating premium payments among the general account and the Separate Account A; the value of the policy increases or decreases depending on the investment experience; the policy remains in force as long as the cash value exceeds indebtedness and can cover service charges; and that the policy holder bears the entire risk of the investment. (LIC #14, pp ) Further, both R.A.B. and J.B. signed the annuity application, providing the following attestation: I understand that annuity payments and surrender values, when based on the investment experience of the Separate Account, are variable and are not guaranteed as to fixed dollar amount. (LIC #44, p. OAR 167.) R.A.B. and J.B. are sophisticated people, business owners who understand, or are reasonably expected to understand, the consequences of signing a contract. They were in their sixties when they purchased the 1997 variable life insurance and the 2000 annuity; not so old that I can find that Mr. Demedis or the Licensee took advantage of them based on their age, particularly when there is no evidence that their age prevented them from understanding the terms of the polices. Also, R.A.B. had taken out a loan on the 1987 policy, and, by 1994, was experiencing difficulty paying offthe loan and the policy within ten years as he had planned. (LIC #9 and #10). Thus, R.A.B., and J.B., who managed the family money, had policy loan experience and knew or should have known that such a loan could affect the value oftheir policies. Additionally, if the pub was not a good environment to meet with Mr. Demedis, then it was up to the Complainant to change the location; there is no evidence that Mr. Demedis insisted 17

20 that they meet at the pub or even took advantage ofthe pub environment to mislead R.A.B. or J.B. Finally, it is insufficient for R.A.B. and J.B. to state that they trusted Mr. Demedis. If, in response to their questions, Mr. Demedis told them not to worry, they relied on him at their own risk. There is no evidence that Mr. Demedis prevented them from obtaining the advice of another financial professional or even told them that they should not do so. He did not force them to sign anything. R.A.B. and J.B. were responsible for the documents they signed. They had the opportunity and ability to read the contracts for insurance that they purchased. Those contracts did not misrepresent the terms, benefits or advantages of the policies. RECOMMENDED ONCLUSIONS OF LAW I conclude as a matter of law that the Complainant failed to prove that the Licensee misrepresented the terms of the 1997 variable life insurance policy or the 2000 variable annuity, engaged in fraud in the sale of those products to the Complainant, or otherwise violated the Insurance Article. Md. Code Ann., Ins ; COMAR RECOMMENDED ORDER Based on the foregoing Findings offact, Discussion, and Conclusions of Law, I propose that the Licensee not be found in violation of section of the Maryland Insurance Article and COMAR and that the Complainant s complaint be DENIED and DISMISSED. November 22, 2011 Date Decision Mailed Signature on file with Orignal Mary Sh ock Administrative Law Judge MKS/fe #

21 RIGHT TO FILE EXCEPTIONS Upon receipt of this recommended decision, affected parties have twenty (20) days to file exceptions with the Insurance Commissioner. COMAR Ol.lO-1B(l). If they wish to have a transcript of the hearing before filing exceptions, they have ten (10) days to file with the Insurance Commissioner a copy oftheir written request to a private stenographer for preparation of a transcript. COMAR 3l.02.Ol.10-lB(2). If a transcript is requested, the transcript must be filed with the Commissioner within sixty (60) days of the request, and then the parties have thirty (30) days after the filing of the transcript to file exceptions with the Commissioner. COMAR D. Written exceptions and copies of requests for transcripts should be addressed to the Insurance Commissioner, Maryland Insurance Administration, 200 St. Paul Place, Suite 2700, Baltimore, MD The Office of Administrative Hearings is not a party to any review process. Copies Mailed To: Alex J. Brown, Esquire Silverman, Thompson, Slutkin & White 201 North Charles Street, 26 th Floor Baltimore, MD Bryan D. Bolton, Esquire Funk & Bolton, 12 th Floor 36 South Charles Street Baltimore, MD Sheryl Roberts Lincoln National Life Insurance Compliance Dept P.O. Box Greensboro, NC

22 MARYLAND INSURANCE BEFORE MARY SHOCK, ADMINISTRATION, AN ADMINISTRATIVE LAW JUDGE EXREL: OF THE MARYLAND OFFICE COMPLAINANT OF ADMINISTRATIVE HEARINGS v. OAR No: MIA-CC LINCOLN NATIONAL LIFE MIA No: INSURANCE COMPANY LICENSEE COMPLAINANT S EXHIBITS COMP #1 Chubb LifeAmerica, Policy, 1987 COMP #2 Letter from Pandelis Demedis to Chubb Securities Corporation, with Application, September 9, 1997 COMP #3 Variable Annuity Application, April 21, 2000 COMP #4 Letter to Pandelis Demedis from Licensee, March 13, 2000 COMP #5 Letter from Licensee to Complainant, November 30,

23 MARYLAND INSURANCE ADMINISTRATION EXREL; R.A.B., IN THE OFFICE OF ADMINISTRATIVE HEARINGS Case No. MIA-CC Complainant, V. LINCOLN NATIONAL LIFE INSURANCE COMPANY, Licensee. LICENSEE EXHIBITS (1-26) Volume 1 (Hearing November 2-3, 2011) - Licensee Exhibit 1 Volunteer Policy number Licensee Exhibit 2 September 30, 1987, letter from Pandelis Demedis to RAB Licensee Exhibit 3 Agency contract between Mr. Demedis and Volunteer Licensee Exhibit 4 Broker Contract between Mr. Demedis and Lincoln National Licensee Exhibit 5 November 30, 1987, letter from Mr. Demedis to Volunteer Licensee Exhibit 6 July 1, 1991, Volunteer name changed to Chubb Life Insurance Company ofamerica Licensee Exhibit 7 July 17, 1991, RAB letter to Volunteer requesting a loan Licensee Exhibit 8 Licensee Exhibit 9 July 24, 1991, check from Chubb Life Insurance Company of America for $9,166 to RAB March 31, 1994, letter by Mr. Demedis to Richard Silva Licensee Exhibit 10 April 29, 1994, letter from Mr. Silva (Chubb Life) to Mr. Demedis Licensee Exhibit 11 May Licensee Exhibit 12 August 26, 1997, illustrations Licensee Exhibit 13 Licensee Exhibit 14 September 1994, RAB loan repayments on Volunteer Policy loan September 9, 1997, letter from Mr. Demedis to RAB with enclosures August 28, 1997, Prospectus for Ensemble II Variable Universal Life Insurance

24 Licensee Exhibit 15 September 8, 1997, Policy Exchange/Absolute Assignment Agreement (I.R.C. Section 1035) signed by RAB Licensee Exhibit 16 Licensee Exhibit 17 Licensee Exhibit 18 Chubb Securities New Account Qualification/Disclosure Statement Licensee Exhibit 19 September 9, 1997, letter from Mr. Demedis to Chubb Life Licensee Exhibit 20 October 15, 1997, RAB s Annual Statement from Volunteer Policy Licensee Exhibit 21 November 26, 2007, memo from Elaine Endi (Chubb Life) to Mr. September 8, 1997, Application Supplement for Variable Life Insurance September 8, 1997, Chubb Securities Corporation New Account Form signed by RAB Demedis Licensee Exhibit 22 December 3, 1997, Amendment to Application for Insurance, signed by RAB Licensee Exhibit 23 December 3, 1997, delivery receipt signed by RAB Licensee Exhibit 24 December 5, 1997, letter Mr. Demedis sent to Elaine Endi at Chubb Life, Licensee Exhibit 25 Premium Notice billing RAB for $750 quarterly premiums Licensee Exhibit 26 Chubb Life Flexible Premium Variable Life Insurance Policy no

25 MARYLAND INSURANCE ADMINISTRATION EXREL; R.A.B., IN THE OFFICE OF ADMINISTRATIVE HEARINGS Case No. MIA-CC Complainant, V. LINCOLN NATIONAL LIFE INSURANCE COMPANY, Licensee. LICENSEE EXHIBITS (27-104) Volume 2 (Hearing November 2-3, 2011) Licensee Exhibit 27 Jefferson Pilot Financial Insurance Company Policy no Licensee Exhibit 28 December 12, 1997, transaction confirmations and December 11, 1997, Accumulated Value for Volunteer Policy Licensee Exhibit 29 February 9, 1998, premium transaction confirmation Licensee Exhibit 30 April 9, 1998, premium transaction confirmation Licensee Exhibit 31 October 15, 1998, premium transaction confirmation Licensee Exhibit 32 April 15, 1998, transaction confirmation for first semi-annual portfolio re-balancing Licensee Exhibit 33 July 22, 1998, premium transaction confirmation Licensee Exhibit 34 October 14, 1998 Annual Policy Summary Licensee Exhibit 35 October 14, 1999 Annual Policy Licensee Exhibit 36 January 13, 2000, premium transaction confirmation Licensee Exhibit 37 April 8, 2000, Life Insurance Policy Review for RAB Licensee Exhibit 38 April 18, 2000, transaction confirmation for requested allocation change Licensee Exhibit 39 April 21, 2000, application for Allegiance Variable Annuity with Alexander Hamilton Life Insurance Company

26 Licensee Exhibit 40 April 21, 2000 Important Notice Regarding Replacement or Change of Life Insurance or Annuity Policies Licensee Exhibit 41 Licensee Exhibit 42 April 21, 2000, Mr. Demedis letter to Alexander Hamilton Licensee Exhibit 43 April 25, 2000, loan transaction confirmation Licensee Exhibit 44 April 26, 2000, Alexander Hamilton Flexible Premium Multi-Funded Licensee Exhibit 45 Deferred Variable Annuity, Contract No April 26, 2000, Alexander Hamilton transaction confirmation for receipt of $25,000 April 21, 2000, New Account Form for Jefferson Pilot Securities Corporation, signed by RAB and Mrs. RAB Licensee Exhibit 46 Notice of Substitution as of May 1, 2000 Licensee Exhibit 47 May 23, 2000, letter from Mr. Demedis to RAB and Mrs. RAB Licensee Exhibit 48 June 30, 2000, first quarterly Annuity statement Licensee Exhibit 49 October 14, 2000, Annual Policy Summary Licensee Exhibit 50 October 16, 2000, transaction confirmation for loan repayment Licensee Exhibit 51 Licensee Exhibit 52 December 31, 2000, quarterly Annuity statement Licensee Exhibit 53 January 8, 2001, transaction confirmation for loan repayment Licensee Exhibit 54 March 31, 2001 quarterly Annuity statement Licensee Exhibit 55 April 16, 2001, transaction confirmation for loan repayment November 8, 2000, Jefferson Pilot letter to RAB advising that Alexander Hamilton merged into Jefferson Pilot Licensee Exhibit 56 May 1, 2001, transaction confirmation reporting Annual Portfolio Re-balanced for Annuity June 30, 2001 quarterly Annuity statement Licensee Exhibit 57 Licensee Exhibit 58 September 30, 2001, quarterly Annuity statement Licensee Exhibit 59 October 14, 2001, Annual Policy Summary Licensee Exhibit 60 October 16, 2000, transaction confirmation for loan repayment

27 Licensee Exhibit 61 March 12, 2002, Mrs. RAB calls and changes allocation Licensee Exhibit 62 March 12, 2002, RAB requests allocation change Licensee Exhibit 63 March 31, 2002, quarterly Annuity statement Licensee Exhibit 64 Licensee Exhibit 65 June 30, 2002, quarterly Annuity statement Licensee Exhibit 66 September 30, 2002, quarterly Annuity statement Licensee Exhibit 67 October 14, 2002, Annual Policy Summary Licensee Exhibit 68 October 19, 2001 and other transaction confirmations for loan repayments Licensee Exhibit 69 Licensee Exhibit 70 December 31, 2002, quarterly Annuity statement Licensee Exhibit 71 March 31, 2003, quarterly Annuity statement April 15, 2002, transaction confirmation confirming semi-annual portfolio re-balancing October 15, 2002, transaction confirmation for semi-annual portfolio re-balancing Licensee Exhibit 72 April and May 2003, transaction confirmations for semi-annual re-balancing for Policy and annual re-balancing for Annuity Licensee Exhibit 73 June 30, 2003, quarterly Annuity statement Licensee Exhibit 74July 2003, quarterly planned premium notice of $750 for Jefferson Pilot and a check from Mrs. RAB for $500, and a transaction confirmation sent to RAB Licensee Exhibit 75 September 30, 2003, quarterly Annuity statement Licensee Exhibit 76 October 14, 2003, Annual Policy Summary Licensee Exhibit 77 Licensee Exhibit 78 Licensee Exhibit 79 Licensee Exhibit 80 Transaction confirmations for RAB s loan and premium payments for policy year ending October 14, 2003 October 15, 2003, transaction confirmation confirming semi-annual portfolio rebalancing October 24, 2003, Policy Fund Transfers and Exchanges December 2003, letter from Jefferson Pilot Securities to customers re: review of mutual fund purchases

28 Licensee Exhibit 81 December 31, 2003, quarterly Annuity statement Licensee Exhibit 82 March 31, 2004, quarterly Annuity statement Licensee Exhibit 83 April and May 2004, transaction confirmations confirming semi-annual and annual portfolio rebalancing occurred for Policy and Annuity Licensee Exhibit 84 May 18, 2004, Jefferson Pilot responds to RAB s request for internet access Licensee Exhibit 85 June 30, 2004, quarterly Annuity statement Licensee Exhibit 86 July 14, 2004, letter from RAB to Jefferson Pilot Licensee Exhibit 87 July 21, 2004, letter from Jefferson Pilot in response to RAB Licensee Exhibit 88 September 30, 2004, quarterly Annuity statement Licensee Exhibit 89 October 14, 2004, Annual Policy Summary Licensee Exhibit 90 Quarterly planned periodic premium payment reminders for policy year ending October 14, 2004 Transaction confirmations for loan repayments received for policy year ending October 14, 2004 Licensee Exhibit 91 Licensee Exhibit 92 September 30, 2004, quarterly Armuity statement Licensee Exhibit 93 October 14, 2004, Annual Policy Summary Licensee Exhibit 94October 15, 2004, transaction confirmation indicating semi-annual portfolio re-balancing for Policy Licensee Exhibit 95 October 26, 2004, Annuity mutual fund sub-accounts requested allocation Licensee Exhibit 96 December 31, 2004, quarterly Annuity statement Licensee Exhibit 97 March 31, 2005, quarterly Annuity statement Licensee Exhibit 98 April 15, 2005, transaction confirmation confirming semi-annual portfolio re-balancing for Policy Licensee Exhibit 99 June 30, 2005, quarterly Annuity statement Licensee Exhibit 100July 18, 2005, premium transaction confirmation Licensee Exhibit 101 September 26, 2005, Premium Notice of interest due on Policy loan

29 Licensee Exhibit 102September 29, 2005, letter from RAB to Jefferson Pilot Licensee Exhibit 103September 30, 2005, quarterly Annuity statement Licensee Exhibit 104October 14, 2005, Annual Policy Summary

30 MARYLAND INSURANCE ADMINISTRATION EXREL; R.A.B., IN THE OFFICE OF ADMINISTRATIVE HEARINGS Case No. MIA-CC Complainant, V. - LINCOLN NATIONAL LIFE INSURANCE COMPANY, Licensee. LICENSEE EXHIBITS ( ) Volume 3 (Hearing November 2-3, 2011) - Licensee Exhibit 105October 15, 2005, transaction confirmation for re-balancing of Policy Licensee Exhibit 106December 12, 2005, transaction confirmations for loan repayment Licensee Exhibit 107December 31, 2005, quarterly Annuity statement Licensee Exhibit 108January-October 2006, Premium Notices and loan repayments Licensee Exhibit 109July 27, 2006, RAB and Mrs. RAB contact Jefferson Pilot by telephone Licensee Exhibit 110March 31, 2006, quarterly Annuity statement Licensee Exhibit 111April 3, 2006, Notice, indicating Jefferson Pilot Financial merged with Lincoln Financial Group, no change to benefits or contract Licensee Exhibit 112April 15, 2006, transaction confirmation confirming policy semi-annual portfolio re-balancing Licensee Exhibit 113May 19, 2006, letter confirming request for internet access Licensee Exhibit 114 June 30, 2006, quarterly Annuity statement Licensee Exhibit 115August 4, 2006, letter to RAB enclosing an authorization form Licensee Exhibit 116August 10, 2006, from Jefferson Pilot to RAB Licensee Exhibit 117September 26, 2006, Interest Due Notice

31 Licensee Exhibit 118September 30, 2006, quarterly Annuity statement Licensee Exhibit 119October 14, 2006, Annual Policy Summary Licensee Exhibit 120 December 31, 2006, quarterly Annuity statement Licensee Exhibit 121January 11, 2007, loan repayment notes Licensee Exhibit 122March 31, 2007, quarterly Annuity statement Licensee Exhibit 123April 4, 2007, loan repayment notes Licensee Exhibit 124April 15, 2007, transaction confirmation regarding semi-annual re-balancing for Policy Licensee Exhibit 125July 2, 2007, Notice that effective July 2, 2007, Jefferson Pilot Financial Insurance Company was merged into The Lincoln National Life Insurance Company Licensee Exhibit 126 General Agent s Contract between Jefferson Pilot and Mr. Demedis Licensee Exhibit 127June 27, 2007, Premium Notice and loan repayment Licensee Exhibit 128September 26, 2007, Premium Notice and loan repayment Licensee Exhibit 129September 30, 2007, quarterly Annuity statement Licensee Exhibit 130October 14, 2007, Annual Policy Summary Licensee Exhibit 131October 15, 2005, transaction confirmation for semi-annual portfolio re-balancing for Policy Licensee Exhibit 132November 3, 2007, letter from RAB to Lincoln regarding changes to mutual fund sub-accounts Licensee Exhibit 133December 31, 2007, quarterly Annuity statement Licensee Exhibit 134January 11, 2008, loan repayment notes Licensee Exhibit 135March 31, 2008, quarterly Annuity statement Licensee Exhibit 136April 8, 2008, Lincoln National writes to RAB Licensee Exhibit 137April 8, 2008, premium loan repayment notes Licensee Exhibit 138April 14, 2008, transaction confirmation regarding semi-annual portfolio rebalancing

32 Licensee Exhibit 139April 21, 2008, transaction confirmation forportfolio transfers in Annuity Licensee Exhibit 140May 29, 2008, letter from Lincoln National to RAB regarding request for internet access Licensee Exhibit 141June 30, 2008, quarterly Annuity statement Licensee Exhibit 142July 12, 2008, loan repayment notes Licensee Exhibit 143August and September 2008, loan repayment confirmations Licensee Exhibit 144September 30, 2008, quarterly Annuity statement Licensee Exhibit 145October 20, 2008, transaction confirmations for changes in mutual fund sub-accounts Licensee Exhibit 146October 14, 2008, Annual Policy Summary Licensee Exhibit 147October 15, 2008, transaction confirmation for semi-annual portfolio re-balancing Licensee Exhibit 148October 17, 2008, loan repayment notes Licensee Exhibit 149 November 17, 2008, loan repayment notes Licensee Exhibit 150December 31, 2008, quarterly Annuity statement Licensee Exhibit 151January 5, 2009, transaction confirmation for loan repayment Licensee Exhibit 152February 17, 2009, transaction confirmation for loan repayment Licensee Exhibit 153March 11, 2009, letter from Lincoln National to RAB Licensee Exhibit 154-March 13, 2009, letter from Lincoln National to RAB Licensee Exhibit 155March 31, 2009, quarterly Annuity statement Licensee Exhibit 156April 2, 2009, transaction confirmation for loan repayment Licensee Exhibit 157April 10, 2009, premium notice and loan repayment notes