BILL ANALYSIS Ó
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Date of Hearing: April 8, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
AB 459
(Daly) - As Introduced February 23, 2015
SUBJECT: Insurance: insurable interest
SUMMARY: Provides for a process to resolve disputes regarding
the validity of life insurance policies issued before January 1,
2010. Specifically, this bill:
1)Permits the owner of a life insurance policy to ask a court to
declare that the life insurance policy has a valid insurable
interest if the policy:
a. Was purchased before January 1, 2010.
b. Has a death benefit of more than $1,000,000.
2)Repeals the provisions of the bill on January 1, 2017.
EXISTING LAW:
1)Provides that every person has an insurable interest in their
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own life.
2)Provides that a person has an insurable interest in the life
of another if that person:
a. Has a reasonable expectation of pecuniary advantage
through the continued life of the insured;
b. Is dependent on the insured for education or
support; or,
c. Is related to another person by blood or law.
3)Permits the owner of a life insurance policy to designate any
person as the beneficiary of the policy.
4)Provides that trusts and special purpose entities seeking to
purchase life insurance policies for investors have no
insurable interest unless the designated beneficiary of the
policy has an otherwise valid insurable interest in the life
of the insured.
FISCAL EFFECT: Undetermined
COMMENTS:
1)Purpose . According to the author, this bill helps to resolve
potential litigation regarding life insurance policies issued
before California law was changed to prohibit "stranger
originated life insurance" (STOLI). An individual has the
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legal right (under both state and federal law) to sell his or
her life insurance policy to a third party. These
transactions allow consumers to access the cash value of their
life insurance policies to meet unforeseen financial needs.
When the policy is sold the third party becomes the
beneficiary of the policy and is responsible for paying the
premium. Typically, the third parties consist of financial
firms which specialize in "life settlements" and commonly
bundle up a number of policies to be sold as a group to
institutional investors. For a number of years, firms
solicited individuals (and in some cases provided them with
the money) to buy life insurance policies that were then sold
back to these firms. These arrangements were characterized as
STOLI by the insurance industry and California enacted
legislation in 2010 to restrict the purchase of life insurance
policies in some of these circumstances.
Many policies issued prior to the 2010 legislation have been
the subject of litigation by insurers who characterize them as
STOLI and have denied claims. Insurers have denied claims by
asserting that the policy was "void at issuance" because of
the absence of an "insurable interest" by the purchaser. In
some of these cases, judges have upheld the denial of the
claim by the insurer and allowed the insurer to keep the
premiums paid on the policy despite the policy being
determined to be "void at issuance." Owners of these policies
object strenuously to allowing insurers to retain the premium
paid on these policies if the policies were never valid. This
bill provides policy owners with the right to go to court now
instead of allowing insurers to collect years of premiums
before contesting the validity of the policy.
2)Insurable Interest . There is a long-standing principle in
insurance law that anyone buying a life insurance policy must
have a legitimate interest in the life of the insured. To
allow people without a legitimate interest in the life of the
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insured would permit wagering on the lives of others and is
against public policy and standards of decency. California
law has a very expansive definition of insurable interest and
regulates the life settlement industry to protect consumers
from potential abuses when buying and selling life insurance
policies.
REGISTERED SUPPORT / OPPOSITION:
Support
Institutional Longevity Markets Association (sponsor)
Opposition
None received
Analysis Prepared by:Paul Riches / INS. / (916) 319-2086
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