BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 459 Hearing Date: June 10,
2015
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|Author: |Daly |
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|Version: |February 23, 2015 Introduced |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Erin Ryan |
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Subject: Insurance: insurable interest: declaratory relief.
SUMMARY Authorizes an owner of record of a life insurance policy
issued for delivery in California prior to January 1, 2010 and
having a death benefit equal to or greater than one million
dollars ($1,000,000), who believes that the insurer may
challenge the policy for lack of an insurable interest, to bring
an action for declaratory relief no later than January 1, 2017
seeking a court order declaring the policy to have a valid
insurable interest.
DIGEST
Existing law
1) Provides that an interest in the life or health of a person
insured must exist when the insurance takes effect, but need not
exist thereafter or when the loss occurs. (IC §286)
2) Provides that if the insured has no insurable interest, the
contract is void.
3) Provides that every person has an unlimited insurable interest
in his or her own life, health, and bodily safety, and may take
out a policy of insurance and have the policy payable to
whomsoever he or she pleases, regardless of whether the
beneficiary designated has an insurance interest. (IC §10110.1)
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4) Provides that an insurable interest exists when based upon a
reasonable expectation of pecuniary advantage through the
continued life, health or bodily safety or another, or when
engendered by a substantial interest engendered by love and
affection in the case of individuals closely related by blood or
law.
5) Provides that any device, scheme or artifice designed to give
the appearance of an insurance interest where there is no
legitimate insurance interest violates insurable interest laws.
6) Provides that an insurer is entitled to rely upon all
statements, declarations or representations made by an applicant
for insurance relative to the insurable interest, and shall
incur no legal liability by virtue of any untrue statements,
declarations or representations so relied upon in good faith.
7) Provides that an individual life insurance policy is
incontestable, except for non-payment of premiums, after it has
been in force, during the lifetime of the insured, for a period
of not more than two years after its date of issue.
8) Specifies that trusts and special purpose entities that are
used to apply for and initiate the issuance of policies of
insurance 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.
This bill
1) Authorizes an owner of record of a life insurance policy
who believes that the insurer may challenge the policy for
lack of an insurable interest, to bring an action for
declaratory relief seeking a court order declaring the
policy to have a valid insurable interest.
2) Limits the right to bring an action only to life insurance
policies issued for delivery in California prior to January
1, 2010, and having a death benefit equal to or greater than
one million dollars ($1,000,000).
3) Repeals the authority granted by this bill on January 1,
2017.
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COMMENTS
1. Purpose of the bill To resolve potential litigation
regarding life insurance policies issued before California
expressly prohibited "stranger originated life insurance"
(STOLI).
2. Background An individual has an unlimited insurable
interest in his or her own life. Individuals related by
blood or marriage can also have an insurable interest. An
employer can have an insurable interest in the life of its
directors, officers or other key personnel, with the consent
of the employee. As defined in the California Insurance
Code, "an individual has an unlimited insurable interest in
his or her own life, health and bodily safety and may
lawfully take out a policy of insurance on his or her own
life, health, or bodily safety and have the policy made
payable to whomsoever he or she pleases, regardless of
whether the beneficiary designated has an insurable
interest." An insurable interest must exist at the time the
policy becomes effective, but does not have to exist at the
time the loss occurs. An individual can always take out
insurance on his or her self, and then transfer the policy
to someone else. The question comes down to the intent at
the time the policy is purchased.
By statute, a life insurance policy is incontestable after
it has been in force for two years except for non-payment of
premiums, unless an imposter was used to obtain the policy.
The insurance company has those two years to identify any
undisclosed or misrepresented facts that rise to the level
of material misrepresentation, allowing it to rescind the
policy. If the fraud was material and intentional-for
example if there was no insurable interest at the time the
policy was taken out-the insurer may attempt to contest the
policy beyond the two year period.
A life settlement is a complex financial transaction in
which an owner of a life insurance policy sells the policy
to a third party for more than the cash surrender value
offered by the life insurance company. The purchaser
becomes the new beneficiary of the policy at maturation
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(death of the insured) and is responsible for all subsequent
premium payments. In order to purchase a life insurance
policy, the purchaser must have an "insurable interest" in
the life of the person insured. The life insurance industry
has claimed that the buying and selling of life insurance
policies in a secondary market distorts the purpose of life
insurance by breaking the "insurable interest" link between
an insurer, policyholder and beneficiary.
The US Supreme Court established in 1911 in Grigsby v.
Russell that a life insurance policy is the property of the
policyholder and is fully transferable. This opinion placed
the ownership rights in a life insurance policy on the same
legal footing as more traditional investment property such
as stocks and bonds. Notwithstanding the court's ruling,
the market for life settlements did not gain much traction,
or institutional investors, until the 1980s.
During the 1980s, the so-called viatical settlement market
developed in response to the AIDS crisis. These
transactions involved the sale of life insurance policies by
persons with a catastrophic or life threatening illness or
condition (diagnosed as having a life expectancy of 24
months or less) for an amount less than the death benefit,
but more than the cash surrender value, in order to raise
funds to pay for end-of-life care. As a result of abuses,
legislation was enacted in 1990 to regulate viatical
settlements. The viatical market largely evaporated after
medical advances dramatically altered the life expectancy of
an AIDS diagnosis.
Life settlements-or the sale of policies by those not facing
a terminal illness--were not regulated in California until
legislation was enacted in 2009 (SB 98 Calderon, Chapter 343
Statutes of 2009). In the 2000's, the market for life
settlements had taken off, and capital from hedge funds,
investment banks and pension funds in search of higher
returns began flowing into the life settlement market. The
need for enough policies to satisfy investors led to
widespread solicitation of seniors to take out life
insurance for the sole purpose of selling it. The life
insurance industry objected to many life settlement
transactions at the time, particularly those transactions
referred to as STOLI because they claim they violated the
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requirement for an insurable interest. Many policies issued
prior to enactment of SB 98 have been the subject of
litigation by insurers who characterize them as STOLI and
have denied benefits when the named insured dies, claiming
they were void at issuance because of the lack of an
insurable interest by the purchaser.
The market for life settlements largely collapsed during the
Great Recession, and is slowly rebounding governed by the
new statutory requirements. Investors, however, have
continued to pay the premium on many policies purchased at
the market's height. They have sponsored AB 459 in an
attempt to ensure that they will be able to collect on those
policies, or stop paying premiums for life insurance
policies that are found by the court to be invalid.
3. Support The Institutional Longevity Markets Association
supports AB 459 because it will provide much needed
certainty to the $30 billion secondary life insurance
market. It represents a reasonable and workable compromise
that gives investors a legal procedure to immediately
determine the validity of a policy prior to its maturation
while also preserving the rights of insurers to assert
available legal challenges to the policy. Without this legal
procedure, investors are frequently left in an untenable
position of paying premiums on a policy for many years only
to have an insurer challenge the policy's validity when a
claim for benefits is ultimately made.
4. Opposition None received.
5. Prior and Related Legislation SB 98 (Calderon, Chapter 343,
Statutes of 2009) established regulations for the life
settlements market and expressly prohibited STOLI
transactions.
POSITIONS
Support
Institutional Longevity Markets Association (sponsor)
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Oppose
None received
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