Thursday, February 3, 2011

Another Belated Trend in the Investment World?: Litigation Over Secondary-Market Life Insurance Policy Sales Practices

A few years ago, I represented a law professor in his quest for relief after purchasing life insurance policies on the terminally immortal. The defendant/respondent life insurance/investment-advisory Representative encouraged the good professor to liquidate hundreds of thousands of dollars in mutual funds and to invest those funds in to “viaticals,” in addition to an ever-rotating team of variable annuities. And like a school kid in February, the Representative moved from one RIA to another, spreading an influenza-like strain of failure-to-supervise liability.

It wasn't too long ago that I followed with fascination the story of the untimely death of the mother-in-law of the former CEO of life insurance company Conseco, Inc. The beneficiary of a $15 million life insurance policy on the elderly woman--whose body was found in a bath tub in 2008--was a company owned by a young male companion whose company she shared on the night of her death. The woman's family has brought a federal lawsuit against the policy issuer – American International Group. The Wall Street Journal covered the story with a page-one article in April of last year as well as a follow up article in October of 2010.

In the viatical case I handled, the purchaser of the policy in the secondary market suffered from ongoing premium payments years beyond those estimated in fraudulent life-expectancy documentation provided at the time of purchase. The fraudulent medicals went hand-in-hand with negligent, if not deceptive investment advice. Securities regulators prone to ADD symptomology fixated their fickle eyes upon “viaticals” back in the late 1990's and the first few years of this decade. At the time, viaticals structured upon policies insuring the lives of those suffering from – and unexpectedly still living with – AIDS was the focus on the passing scrutiny. But, in recent months it has been the issuers of the policies that that have brought legal actions, claiming that their underwriters were defrauded with applications failing to disclose a secondary-market purpose.

In the most recent iteration of the litigation fall-out, the insureds themselves are bringing legal actions. Yesterday's Wall Street Journal provided us with an example. Bruce Porter claims that his insurance agent defrauded him with false promises regarding the marketability of a policy on Mr. Porter's life, the premiums for which were being financed by a trust funded by a bank loan Mr. Porter allegedly guaranteed without his knowledge.

I just recently settled a case in which my client was assured that the 20 years of $118,000 annual premiums on a variable whole life policy would be satisfied in their entirety with the cash value of the policy. Not so much.

Most observers attribute the recent uptick of litigation in this area to the market woes of the last three years. I , for one, am unsure that there was actually any abatement in the litigation or finger pointing in this murky area of the already murky “insurance-as-investment” market.

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