The dispute arose after Linda Angel lost her father less than a month after he sold the beneficial interest of an insurance trust—and the right to $10 million in life policy proceeds—to LPC for $300,000. Although the $10 mil is up for grabs amidst the counter-suits and cross-claims flying between the settlement company, the daughter and the trust—and the litigation is in its very earliest stages—Judge Chin’s conclusion that Angel alleged enough to state a claim that her father obtained the policy with the prior intent to transfer it to a stranger with no “insurable interest” in his life is a definite setback for the life settlement industry.
Leon Lobel (Angel’s deceased father) was a 77-year-old retired butcher when an insurance agent made him aware of a “financial opportunity whereby he could receive an immediate and substantial cash payment by taking out a life insurance policy on himself for the benefit of an investor who was a stranger to him.” (The court’s words, not mine). Lobel executed the trust and applied for the policy on Nov. 15, was issued a $10 million life policy on Dec. 14, transferred the beneficial interest in the trust to LPC on Dec. 20, received $300,000 from LPC on Jan. 4 and died on Jan. 10. Examples of stranger-owned life insurance (or STOLI) transactions don’t get any more classic than this.
LPC conceded that it never had an insurable interest in Lobel’s life. Therefore, to defeat LPC’s motion, Angel had to sufficiently plead that Lobel did not procure the policy on his own initiative, and that the transaction was instead designed to cloak what was in its inception a wager by LPC on her father’s life. Apparently the co-owner of Lobel’s Butcher Shop could not afford to pay the policy’s annual premiums ($572,000 the first year) and was never even given a copy of the policy. Angel also alleges that her father had no prior interest in obtaining additional life insurance before he was approached by the agent, that the plan to resell the policy existed before her father even applied for the policy and that her father intended from the outset for the investor to pay all premiums, maintain the policy and receive any benefits under the policy when he died.
The business of having consumers sell their life policies to groups of investors for cash first became prominent in the 1990’s with the advancing AIDS crisis. Patients afflicted with the disease would sell their policies to purchase experimental medications that traditional health insurance did not cover. Fraud ran rampant in the viatical settlement business and instigated the first round of regulation over this segment of the industry.
The viatical or life settlement business is constantly morphing. As the Life Product Clearing case shows, investors are now encouraging consumers to purchase life insurance with the specific intent to sell their policies. In many cases, the policies are financed with a loan so that the policyholders aren’t burdened with premium payments. The insureds in turn sell their policies after expiration of the two-year incontestability period. Once all policy transfers are complete, the insured receives payment from the life settlement company, and essentially becomes the recipient of “free” coverage. These types of STOLI transactions are commonly referred to in the trade as “wet ink” deals because the ink barely dries on the policy application before ownership of the policy is transferred to investors.
Several states (Ohio, Indiana, North Carolina, Nebraska and others) are considering legislation that will specifically discourage life settlement transactions. Following the lead taken in jurisdictions like North Dakota, these states are considering a five-year moratorium before a life settlement company can take ownership of a policy that has been 100 percent financed. No doubt regulators and legislators who favor placing additional restrictions on the life settlement business will wave the Life Product Clearing case like a red flag of justification.
The settlement companies’ vigorous opposition to this restrictive legislation, both at the National Association of Insurance Commissioners and in states where such laws are being introduced or passed, should come as no surprise. This IS a multi-billion dollar industry that we’re talking about here and property rights are at stake. The lobbying will be nothing short of fierce.
Settlement companies continue to cross swords with regulators and other officials charged with consumer protection. Coventry First, a Pennsylvania life settlement company, recently settled regulator action with Florida Insurance Commissioner Kevin McCarty. Coventry First also has a case pending with the New York Attorney General relating to bid rigging and other consumer fraud accusations.
As far as Life Product Clearing goes, it all boils down to some very wet ink and a few incredibly muddy intentions. If Leon Lobel’s little girl can prove the allegations that resulted in the defeat of LPC’s motion, she stands to become an heiress. In an opinion as colorful as the facts that spawned it, Judge Chin writes, “such a scheme surely could amount to an impermissible attempt to circumvent the prohibition on wager policies.” After all, it does appear that Angel’s father obtained $10 million in life insurance, at age 77, at virtually no cost to him. We’ll have to wait and see about the rest.