BILL ANALYSIS Ó
AB 459
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Date of Hearing: April 21, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 459
(Daly) - As Introduced February 23, 2015
SUBJECT: INSURABLE INTEREST: DECLARATORY RELIEF
KEY ISSUE: SHOULD OWNERS OF CERTAIN LIFE INSURANCE POLICIES BE
ALLOWED TO BRING AN ACTION SEEKING A COURT ORDER DECLARING THAT
THE LIFE INSURANCE POLICY HAS A VALID INSURABLE INTEREST?
SYNOPSIS
This bill seeks to provide an avenue of redress for third-party
insurance policy holders who purchased life insurance policies
as investments prior to 2010. This bill allows these
policyholders to seek declaratory relief from a court to
determine if the policy they own has a valid insurable interest,
prior to the time of filing a claim for payment of the death
benefit of the policy. The selling of life insurance policies
by the owner of the policy as a way to raise immediate funds
became very popular in the late 1980s when the AIDS epidemic was
sweeping through the country, and patients needed a means to
finance expensive medical treatments. Terminally ill patients
sold their life insurance policies to viatical firms in order to
finance expensive medical treatments. Viatical firms would pay
the policy owner more than the cash surrender value of the
policy, but less than the policy's death benefit, generating a
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profit for the purchasing viatical firm. Thus began the
secondary market for life insurance policies, which consisted of
life settlement firms who used these policies as investment
tools for clients. The industry grew and its growth caused
insurance companies to lose profit because policies that were
expected to lapse after a certain period of time were now being
purchased by third-party investors who would maintain the
policies through maturity. This affected the calculations of
premiums and altered the life insurance market. There were also
unsavory practices that began to emerge in the life settlement
industry involving fraudulent policies and senior citizens.
Legislation was passed in 2009 (SB 98, Calderon, Chap. 343)
which severely limited the life settlement insurance market as
it related to the purchase of and investment in third-party life
insurance policies. That bill created regulations for the life
settlement industry that provided consumer protections that were
so extensive that the business of selling third-party life
insurance policies in California has basically ceased to exist.
Some of the regulations that were instituted by the new
regulations included the requirement of medical examinations
prior to policy issuance, criminal charges for those engaged in
bad practices, and the type of financing that would be allowed
to purchase such policies. Since then, insurance companies have
begun to challenge the validity of such policies on the basis
that they lack an insurable interest and are therefore "void at
issuance," denying the claim for death benefits. The problem is
that with many of these policies, the insurance companies
collect years of premiums, before these policies mature and it
is only at the point of maturity, after years of payments, that
claims are actually denied. There have been allegations from
life settlement companies that many times the insurance
companies have knowledge that the policies have no insurable
interest, but they continue to collect the premiums, increase
their coffers, and shore up their corporate financial statements
based on the monies collected in premiums, only to deny the
claims when there is the attempt to collect the death benefits.
In most cases when the policy is found to be invalid and the
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death benefit is denied, the insurance company is obligated to
return the premiums. However, in a few recent cases in Florida,
the court has held that insurance companies have the right to
deny the claim for lack of an insurable interest, and are not
obligated to return to the policyholder the premiums that have
been paid on the policy. The life settlement industry has come
to the Legislature with this bill, seeking an avenue to assist
with the challenges that the industry is facing regarding these
third-party owned insurance policies and the subsequent denial
of claims. This bill allows third-party insurance
policyholders, with policies in excess of $1,000,000 and
purchased prior to 2010, to seek declaratory relief from a court
to determine if the policy they own has a valid insurable
interest. There is no reported opposition to this bill.
SUMMARY: Allows an owner of a life insurance policy to seek
declaratory relief regarding the validity of an insurable
interest. Specifically, this bill:
1)Authorizes a third-party owner of a life insurance policy, who
has a good faith belief that the insurer may challenge the
policy for lack of an insurable interest, to bring an action
seeking declaratory relief of the validity of an insurable
interest in the policy, prior to the date of maturation of the
policy.
2)Limits the ability to seek declaratory relief to validate a
third-party insurance policy to those policies issued for
delivery in California prior to January 1, 2010 that:
a) Have a death benefit equal to or greater than
$1,000,000, and;
b) Have an owner of record that is the same owner of record
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when this bill's provisions become effective.
3)Requires its provisions to remain in effect only until January
1, 2017, unless a later statute deletes or extends these
provisions.
EXISTING LAW:
1)Provides that any person interested under a written
instrument, or under a contract, who desires a declaration of
his or her rights or duties with respect to another, may bring
an original action for declaration of his or her rights or
duties, including a determination of any question of
construction or validity arising under the instrument or
contract. (Code of Civil Procedure Section 1060.)
2)Provides that the court may refuse to grant an action seeking
declaratory relief in any case where its declaration or
determination is not necessary or proper at the time under all
of the circumstances. (Code of Civil Procedure Section 1061.)
3)Provides that a person has an insurable interest in his or her
own life. (Insurance Code Section 10110(a). Unless stated
otherwise, all further statutory references are to that code.)
4)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; (Section
10110.1(a))
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b) Is dependent on the insured for education or support; or
(Section 10110(b))
c) Is related to another person by blood or law. (Section
10110.1(a).)
5)Permits the owner of a life insurance policy to designate any
person as a beneficiary of the policy. (Section 10110.1(b).)
6)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. (Section 10110.1(d).)
7)Provides that any device, scheme, or artifice designed to give
the appearance of an insurable interest where there is no
legitimate insurable interest violates the insurable interest
laws. (Section 10110.1(e).)
8)Provides that an insurable interest is required to exist at
the time the policy become effective, but need not exist at
the time the loss occurs. (Section 10110.1(f).)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: The life settlement industry has changed and many of
the investments that once drove this industry have now become
the industry's greatest liabilities. This bill seeks to provide
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an avenue for investors in the industry to determine the
validity of third-party life insurance policies prior to the
loss of significant premium payments.
Background. When a person owns an insurance policy, he or she
has the right to sell that policy to a third-party. According
to an article written by stock analysis Defina Dunmore entitled,
Our Take on the Secondary Market for Life Insurance, the selling
of life insurance policies by the owner of the policy became
very popular in the late 1980s when the AIDS epidemic was
sweeping through the country, and patients needed a means to
finance expensive medical treatments. Terminally ill patients
sold their life insurance policies to viatical firms in order to
finance expensive medical treatments. Viatical firms would pay
the policy owner more than the cash surrender value of the
policy, but less than the policy's death benefit, generating a
profit for the purchasing viatical firm. As a result of the
profits that these types of transactions generated, the viatical
market "morphed" into the life settlement market in the late
1990s when AIDS/HIV patients began to live longer. Life
settlement companies began to target policyholders with impaired
health, who were 70 years or older who owned no-lapse life
insurance policies with face values of $250,000 or higher.
(Morningstar, Defina Dunmore, Our Take on the Secondary Market
for Life Insurance, June 2006.)
Evolution of the Secondary Insurance Market. The life
settlement market continued to grow, and institutional investors
began to acquire large portfolios consisting of hundreds of life
insurance policies as part of an asset diversification strategy
for their investor clients. As the life settlement market grew,
insurance companies became concerned because a portion of the
calculations used for insurance policy premiums is based on the
assumption that a certain number of polices will lapse, rather
than be retained until the death of the insured. When life
settlement companies buy policies that would have otherwise
lapsed, and continue to pay the premiums on those policies,
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insurance companies are obligated to retain reserves in order to
pay out more death benefits on those policies than they had
anticipated when they originally calculated their premium costs.
This unanticipated factor not only caused insurance companies
to lose money, but the insurance company could not raise rates
on guaranteed premiums in order to make up the losses. Like
most businesses, insurance companies do not like to lose money
so they began to challenge the validity of policies sold to
third-parties more frequently.
The life settlement industry then began to face challenges,
which affected their returns to investors. Insurance companies,
who had been collecting premiums on third-party policies for
years, began to deny payments on the death benefits of these
policies alleging that many of the policies were "void at
issuance" because they were not based on an insurable interest
at the time of purchase. This challenge can be difficult to
refute because by the time the policy is challenged which is at
the time a claim is submitted, the person whose life was insured
by the policy, is by definition deceased. Unless the
third-party policy holder had performed due diligence at the
time of purchase to determine whether the policy was valid, the
insurance company challenge is a valid one. In these instances,
which were becoming more frequent, life settlement companies
began to lose profits from denied claims. The life settlement
industry also began to suffer from fraudulent practices, such as
firms that solicited individuals to buy insurance policies on
their lives in exchange for small monetary compensation, and
then the firms would sell those policies to investors. In some
instances, the firms provided money to the purchaser to actually
buy the policy that the firm would then buy from the insured.
These policies became referred to as "stranger owned life
insurance" policies (STOLI). In 2010 these types of policies
were almost eliminated in California by SB 98 (Calderon), Chap.
343, which made these types of policies, which generally
involved the life of a senior citizen being insured, and an
unrelated stranger being the policy's beneficiary, were against
public policy. The result is that there are no new policies of
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this type being issued, but there are still a large number of
third-party owned insurance policies, which were legally
purchased prior to 2010 and are now owned by a large number of
investors. A few recent court rulings in the state of Florida,
have allowed the insurance companies to deny the validity of
third-party owned insurance policies on the basis of a lack of
insurable interest, and retain the premiums that were paid on
the denied policies. (See, e.g., Pruco Life Ins. Comp. v. US
Bank (S.D. Florida), Aug. 20, 2013; Pruco Life Ins. Comp. v.
Brasner (S.D. Florida), January 9, 2012; and Principle Life Ins.
Co. v. Lawrence Rucker 2007 Ins. Trust, 774 F.Supp.2d 674
(2011).)
These court cases have changed the customary practice of
reimbursing premiums to the policy holder, if the policy is
found invalid and has caused great concerns for life settlement
companies.
This bill, does not seek to change those cases, but instead
seeks to provide an avenue of redress for the holders of these
third-party owned insurance policies. This bill allows the
owners of third-party life insurance policies, with a death
benefit over $1,000,000 and purchased prior to 2010, to have a
court determine if the policy has a valid insurable interest.
By seeking declaratory relief, an owner can have a determination
of validity made in advance, and not have to wait until the
maturation date of the policy in order find out if the policy is
valid. Thus, if the policy is determined invalid, the owner can
cease making payments on the policy, and stop throwing good
money after bad.
In support of the bill, the author writes:
Some insurers also have taken the position that policy
owners cannot seek a judicial declaration that a policy is
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valid until a claim has been made and rejected by the
insurer. This leaves investors in the untenable situation
of paying premiums on a policy for many years only to have
the policy's validity challenged when a claim for benefits
is ultimately made. This has become particularly
problematic as insurers increasingly seek to retain the
full amount of premium collected (often hundreds of
thousands of dollars) while also denying benefits under the
policy.
Policyholders thus face the prospect of paying premiums for
years only to learn upon maturity that the insurer intended
to dispute the policy's enforceability all along?.
Insurers have regularly taken the position in litigation
and in private negotiations that policy owners do not have
a right to seek a declaratory judgment until a claim has
been made and denied?. This has the effect of driving up
litigation costs and forces policy owners to continue
paying premiums without any assurance that a claim on that
policy will be paid. As a result, policy owners who wish
to ensure that any individual policy they are paying
premiums on will be honored face significant cost and
litigation on the threshold issue of whether they can seek
declaratory relief, before the underlying substantive issue
of the policy's validity is even reached.
AB 459 removes the preliminary evidentiary hurdle of
establishing a "probable future controversy" by allowing
owners of policies worth more than $1,000,000 to seek a
declaratory judgment on enforceability without having to go
through the costly process of demonstrating an imminent
controversy or anticipatory breach.
Retroactive Application of the STOLI Law. Insurance companies
have challenged the validity of third-party insurance policies,
not solely on the basis of a lack of an insurable interest but
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also on the basis that the policies are invalid based on SB 98,
(Calderon, Chap. 343). In a case in California's 4th Appellate
District, The Lincoln Life and Annuity Company of New York v.
Jonathan S. Berck (2011) 2011 Cal. LEXIS 8741, the court
determined that that legislation governing STOLI type insurance
policies was not retroactive to insurance policies issued prior
to 2010, because there was no clear evidence that the
Legislature meant for the statute to be applied retroactively to
insurance transactions. This bill only applies to insurance
policies that were issued prior to 2010, and the issue regarding
their validity of the policies has been affirmed by the court of
appeals, so the opportunity to seek declaratory relief that this
bill provides is appropriate for these types of policies.
Insurable Interest Defined. Currently law defines an insurable
interest, as it pertains to life insurance, as an interest based
upon a reasonable expectation of pecuniary advantage through the
continued life, health, or bodily safety of another person and
consequent loss by reason of that person's death or disability
or a substantial interest engendered by love and affection in
the case of individuals closely related by blood or law. This
bill allows owners of certain third-party life insurance
policies to have a court determine whether their particular
insurance policy has a valid insurable interest.
In order to determine whether an insurable interest existed when
the policy became effective, the person whose life the policy
insures must have had a specific type of relationship with the
person who purchased the policy, before the policy was sold to a
third-party. Due to the nature of life insurance policies, they
become effective when issued but there can be years between the
effective date and the maturation date. Allowing third-party
policy holders to seek a determination of validity in advance
allows the insured person the opportunity to provide information
to prove an insurable interest. If the policy holder has to
wait until the death of the insured to ascertain the validity of
the policy, the opportunity to gather facts and information from
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the main witness, namely the insured person, will be gone.
Declaratory Relief. California law provides that any person
interested under a written instrument, or under a contract, who
desires a declaration of his or her rights or duties with
respect to another, may bring an original action for declaration
of his or her rights or duties, including a determination of any
question of construction or validity arising under the
instrument or contract. Declaratory relief is well founded in
California case law. The California Supreme Court affirmed in
Meyer v. Sprint Spectrum L.P. (2009) 45 Cal. 4th 634, 648,
"declaratory relief is designed in large part as a practical
means of resolving controversies, so parties can conform their
conduct to the law and prevent future litigation."
Is Declaratory Relief an Appropriate Remedy? Declaratory relief
is granted in cases where one or more parties need the court to
make a determination of the rights of a party, the duty owed by
a party, or the duty owed from one party to another party as a
result of the terms of a written instrument, or contract. In
Meyer v. Sprint Spectrum L.P. (Id. supra at 648), the court
ruled that in order to obtain declaratory relief, it is not
necessary that a breach of the contract has occurred, only that
an actual controversy exists. Here there is definitely an
actual controversy because the parties have an agreement which
one party wishes to enforce, while the other party seeks to void
based upon the fact that the agreement was "void at issuance"
because an insurable interest did not exist when the policy
became effective. This bill would allow the third-party policy
holder to seek a declaration from a court of law, stating either
the insurance policy is in fact valid and therefore obligates
the insurance company to pay according to the terms of policy,
or there was no insurable interest at the time the policy was
issued and thus the insurance company is not obligated to pay at
the time of death. Being able to have this declaration made
before the maturation date, will allow a third-party policy
holder to cease premium payments on an invalid policy.
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Depending on the duration of the policy and the amount of
premiums paid, the third-party policy holder should be entitled
to a refund of all premiums paid prior to the court's
determination. This bill allows for third-party policy holder
to have an early determination of the validity of the policy and
avoid future litigation over the validity of the policy, when
death benefits exceed $1,000,000.
The Court's Discretion to Grant Declaratory Relief. Code of
Civil Procedure Section 1060 allows a party to seek declaratory
relief to have the court determine the duties or rights of a
party to a contract. Section 1061 of the same code, provides
that a court may refuse to grant declaratory relief in any case
where its declaration or determination is not necessary or
proper at the time under all circumstances (CCP Section 1061).
The court always retains the discretion to refuse to grant
declaratory relief in cases where it determines it is not
necessary. This bill is very specific in that it requires that
the party seeking declaratory relief have a good faith belief
that the insurer may challenge the insurance policy for lack of
an insurable interest. By requiring that a good faith belief
exists before seeking declaratory relief, the bill provides an
avenue for redress in cases where the court is more likely to
find that such declaratory relief is merited.
REGISTERED SUPPORT / OPPOSITION:
Support
Institutional Longevity Markets Association (sponsor)
Opposition
None on file
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Analysis Prepared by:Khadijah Hargett / JUD. / (916) 319-2334