Anti-STOLI Resources Available from LISA

As our readers know, Stranger Originated Life Insurance (“STOLI”) programs have been a hot topic and the focus of media coverage and legislative and regulatory activities for the past three years.  STOLI schemes can take many forms, but share a common element in that the goal of such programs is to procure newly issued life insurance policies for the ultimate benefit of someone that has no insurable interest in the life of the person insured under the policy.  STOLI should not be confused with life settlements that involve a policy owner’s sale of an already in-force policy, which occurs long after issuance of the policy.  Life settlement providers do not issue policies.  Additional information about the dangers of STOLI and how consumers and investors can protect themselves from becoming inadvertently involved in such a scheme is available through the Life Insurance Settlement Association (LISA).  Nonmembers as well as LISA members will find helpful information at: http://www.lisassociation.org/lifesettlementtruth/index.html and http://www.thevoiceoftheindustry.com/files/content/docs/Brochures/STOLI.pdf

California DOI Issues Proposal for Emergency Rules

On June 11, 2010, the California Department of Insurance published a notice of proposed life settlement regulations, covering a broad range of issues related to implementation of the state’s new Life Settlement Act.  The Act’s operative provisions will govern all life settlement transactions with California residents beginning July 1, 2010.  In addition to setting forth its proposed procedures for provider and broker licensing and form filings, the DOI’s proposed regulations specify requirements for escrow agreements, disclosures to be provided to sellers, post-settlement notices to insureds upon re-transfer of policies, verification of coverage forms, and annual reporting requirements.

It is apparent that the DOI has worked hard to produce a comprehensive set of regulations, and has been responsive to a number of suggestions made by industry participants during an informal meeting in April.  For example, protections for insured privacy rights have been included by limiting the provision of life expectancy reports to only those policy owners that are insureds seeking to sell their own policies, but not to other policy owners that are not the insured individuals.  The DOI also left out of its proposed regulations a few concepts that had been discussed at the April meeting, but that would have been somewhat controversial - such as disclosures to sellers of a provider’s arrangements with its financing entities, regulations concerning a provider’s re-sale of a policy that was previously settled, or attempting to define by insurance regulation rules for determining the state of residence of a trust (which could have created conflicts with trust law principles or tax laws).

The Department’s Notice and a copy of the proposed rules can be found in the Proposed Regulations section of the DOI’s website at http://www.insurance.ca.gov/0250-insurers/0500-legal-info/0200-regulations/proposed-regulations.cfm   

Under California administrative law procedures governing rulemaking on an emergency basis, the DOI must provide notice of proposed regulations at least five working days prior to submission of the emergency proposal to the Office of Administrative Law (OAL).  Once the Department has officially submitted an emergency proposal to the OAL, interested persons have five calendar days to submit comments prior to the OAL’s determination on the proposed emergency adoption of the regulations.  Adoption of a permanent set of rules will follow through a longer hearing process allowing additional time for comment.  The OAL’s emergency rulemaking procedures and docket can be found at: http://www.oal.ca.gov/Emergency_Regs.htm

Florida OIR’s Right to Examine Non-Florida Transactions Upheld on Appeal

Florida Insurance Commissioner Kevin McCarty recently announced that the 11th Circuit Court of Appeals has ruled in favor of the OIR, affirming the OIR’s right to review non-Florida related records for Florida-licensed settlement providers.  Specifically, the OIR may review all of a licensed company’s records to determine which files may be subject to Florida laws, rather than being restricted to review of only those files that the provider itself identifies as being subject to Florida law.  http://www.floir.com/PressReleases/viewmediarelease.aspx?ID=3539

Hawaii to Become the First State to De-Regulate Life Settlements

When the Hawaii Life Settlements Act was passed in 2008, many observers were surprised by the sudden adoption and immediately effective date of that act.  Now, two years later it appears that Hawaii may become the first state to de-regulate life settlements – the result of a two-year sunset clause in the 2008 bill.  Although SB 2016 was introduced in February to extend the act for an additional five years, the bill is reported to have stalled at the committee level.  Absent enactment of legislation extending the act, Hawaii may become an unregulated state upon expiration of the current act on June 16, 2010.

New Hampshire - Critics Fear Consumers Will Be Left Out in the Cold

New Hampshire has now become the first state to regulate life settlement providers - but without any regulatory provisions governing the conduct of persons that may seek to represent policy owners in soliciting bids or negotiating contracts with licensed providers.  HB 660 does not use the term “broker” nor does it provide for any regulation of a seller’s representative in a life settlement transaction.  Although the bill calls for licensure of producers that may be appointed by a settlement provider to represent the provider, the legislature has curiously failed to provide for licensing or regulation of individuals that may seek to represent the seller. 

As is commonly the case, there are sections of the new bill that recognize that a seller may hire an attorney, CPA or a certified financial planner to represent the seller, in which case regulation of such a representative seems to be outside the jurisdiction of the Commissioner’s office.  It would also be up to the seller to arrange for payment of such a representative’s compensation, as there is no provision that would allow the provider to arrange for disbursement of such a representative’s fee from the proceeds of the settlement.  If sellers are limited to the option of independently retaining an attorney, CPA or financial planner, the impact in the NH market could be significant.

In addition to failing to provide for regulation of seller representatives, the bill also includes the five-year rule from the NAIC model act.  Those who view the five-year ban as unduly restricting consumers’ exercise of their property rights may be further concerned by the absence of provisions for regulation of experienced life settlement brokers to act on the seller’s behalf in any settlement transaction. 

New York: Thirty-Three Providers Provisionally Authorized to Do Business Under New Law

New York’s new life settlements act (Ins. Law Art. 78, Ch. 499) became fully effective May 18, 2010.  Providers intending to do business under the 6-month transitional provisions of the new law were required to have filed their life settlement contract and disclosure forms thirty days in advance of that effective date.  Unless previously licensed under the state’s old viatical laws, those providers were also required to submit license applications on or before May 29, 2010.  Per the Department’s initial report in early June, Life Settlement Solutions, Inc. and 32 other providers had met the requirements of Section 21 of the Life Settlements Act such that they may currently operate as life settlement providers in New York. 

Texas Issues Emergency Order Against Retirement Value and Midwest Medical Review

The Texas Department of Insurance recently issued an Emergency Cease and Desist Order to Retirement Value, LLC, Midwest Medical Review, LLC and Richard H. Gray, directing that they immediately cease and desist from engaging in any unlicensed settlement activities, illusory participation or loan agreements, using life expectancy certificates from Midwest or any other settlement broker not properly registered with the Department, and other activities alleged to have involved fraudulent or otherwise wrongful acts or practices.  The order was based on findings alleging, among other things, that the respondents have acted without proper licensing in various respects; that one or more of them have used misleading or deceptive life expectancy certificates, and used unlawful inducements or misrepresentations in soliciting funding for purchase of life insurance policies; and that Retirement Value acted as an unauthorized insurer and its investor agreements constitute life insurance contracts.  A copy of the order is posted on the TDI website at: http://www.tdi.state.tx.us/consumer/documents/orderforretirement.pdf

State Legislative Landscape

As has been the case for the past two years, 2010 is shaping up to be an active year for legislators and rule makers across the country.  Legislation enacted so far this year includes:

• Kentucky NB 126 (eff. Jul-2010) – Mandates that the Executive Director promulgate notice to be given by life insurers to policy owners, for insureds age 60+ or known to have terminal/chronic condition, informing consumers of life settlements and other options available prior to lapse or surrender of a policy;
• New Hampshire HB 660 – Signed by the governor and immediately in effect as of 06/14/2010. (see above for additional details);
• Maine LD 1523 (eff. Jul-2010) – Clarifies STOLI definition as not to be interpreted to include lawful life settlement transactions;
• Utah HB 39 (eff. May-2010) – Clarifies definitions related to life settlements;
• West Virginia SB 407 (eff. Apr-2010) – Amends W.Va. Administrative Code, making certain technical corrections and clarifies licensing procedures, form filing and annual reporting requirements for brokers and producers; and
• Wisconsin SB 513 (eff. Nov-2010) – New Life Settlements Act, based on NAIC model..

Following is a recap of settlement legislation as of May 2009:

• States that have adopted life settlement laws:  AK, AR, CA (eff. Jul-2010)CO, CT, FL, GA, HI, ID, IA, IL (eff. Jul-2010), IN, KY, KS, LA, MA, MD, ME, MN, MS, MT, NC, ND, NE, [NH eff. 06/14/2010], NJ, NV, NY (eff. May-2010), OH, OK, OR (eff. Jan-2010), PA, RI (eff. Jul-2010), TN, TX, UT, VT(eff. Jan-2010),  VA, WA, WI (eff. Nov-10) & W.VA
• States that still regulate only viaticals:  DE, MA, MI, & NM
• States that have not enacted any settlement life or viatical settlement laws:  AL, AZ, D.C., MO, SC, SD & WY 
• States with settlement-related bills currently in legislature:  CA, MA, MI, NC, NJ, NY, OK, PA, SC & TN

Compliance Note:  Use and Disclosure of Personal Information

Georgia Insurance Commissioner John Oxendine recently announced the opening of an investigation into the manner in which a P&C agency, First Insurance Network (Smyrna, GA), had been storing customer files, due to privacy concerns and allegations that customer files were kept in unsecured storage containers.  Although not related to life insurance or settlements, this demonstrates the importance of compliance with both state and federal privacy laws.  Life settlement laws generally include privacy provisions protecting personal information of sellers and Insureds.  The Gramm-Leach-Bliley Act, HIPAA and state privacy laws also apply in most cases.  Privacy laws must be considered in obtaining and disclosing private information to effect a settlement transaction, and in post-settlement monitoring of the Insured’s health and life status.  Portfolio owners and servicing companies may also be required to provide privacy notices to insureds on an annual basis.

HIPAA-compliant consent forms are necessary to obtain the Insured’s medical records for evaluation or enforcement of policy assets.  The ability to obtain updated medical records in the future, which may require updated HIPAA consent forms, is also an important consideration.  While medical records are the focus of HIPAA, GLB governs a wider range of nonpublic personal and financial information.  Disclosure of such nonpublic information requires the express written consent of the consumer to which the information relates, although it may be permissible to extract data to facilitate certain disclosures if done in a manner that is not personally identifiable to any individual.

By comparison, life settlement laws are in some ways more restrictive than either GLB or HIPAA.  In many instances, disclosure of personal information that is identifiable to a particular person is typically allowed only to the extent necessary to effect or finance a settlement or other transfer of a policy, management of the policy asset, and enforcement of rights under the policy.  These restrictions on the purpose for any re-disclosure of information are typically embodied in state-approved settlement contract and disclosure forms.  As with GLB and HIPAA, these laws are focused on disclosure of information, but may not preclude internal use of data for other purposes so long as there is no disclosure of personally identifiable information for any reason other than the specifically enumerated purposes.  Another distinction is that, although GLB protects only “nonpublic” information, life settlement laws often do not contain such limitations.  Consequently, even though certain information may be publicly available (such as a person’s name, address or phone number), life settlement laws may still prohibit re-disclosure of that information for other than one of the specifically permitted purposes.

SETTLEMENT BROKER LICENSING & CONTINUING EDUCATION REQUIREMENTS (06/01/10)

Scope – Type of Regulation (V = Viatical Only; L = Both Life & Viatical)
Statutes – Sections of Life Settlement Act governing Life Producer/Settlement Broker licensing & CE requirements specific to activities as settlement broker.  Where acting under life producer license, regular producer/agent CE requirements apply.