BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 459|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: AB 459
Author: Daly (D)
Amended: 8/2/16 in Senate
Vote: 21
SENATE INSURANCE COMMITTEE: 9-0, 6/10/15
AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez, Liu,
Mitchell, Wieckowski
SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
ASSEMBLY FLOOR: 79-0, 4/27/15 - See last page for vote
SUBJECT: Insurance: insurable interest: declaratory relief
SOURCE: Institutional Longevity Markets Association
DIGEST: This bill 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 $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, 2018, seeking a
court order declaring the policy to have a valid insurable
interest.
ANALYSIS:
AB 459
Page 2
Existing law:
1) 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.
2) Provides that if the insured has no insurable interest, the
contract is void.
3) 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.
4) 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.
5) Provides that, beginning January 1, 2010, any device, scheme or
artifice designed to give the appearance of an insurable interest
where there is no legitimate insurable interest violates
insurable interest laws.
6) Allows an insurer 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.
AB 459
Page 3
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.
9) Regulates generally, effective January 1, 2010, life
settlements, and defines "life settlement contract" as a written
agreement solicited, negotiated, or entered into in this state
between a provider and an owner, establishing the terms under
which compensation or anything of value will be paid, which
compensation or thing of value is less than the expected death
benefit of the insurance policy or certificate, in return for the
owner's assignment, transfer, sale, devise, or bequest of the
death benefit or any portion of an insurance policy or
certificate of insurance for compensation, provided, however,
that the minimum value for a life settlement contract shall be
greater than a cash surrender value or accelerated death benefit
available at the time of an application for a life settlement
contract.
10)Defines entering into stranger originated life insurance (STOLI)
as a fraudulent life settlement act.
This bill:
1) Authorizes an owner of record of a life insurance policy who
believes in good faith 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 that have a death benefit equal to or greater than
$1,000,000.
AB 459
Page 4
3) Provides that if a court declares a policy invalid as a
result of a lack of insurable interest, the owner of record
of the policy or the insurer shall not commence any action
against the named insured seeking damages or any other
remedy.
4) Repeals the authority granted by this bill on January 1,
2018.
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. 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.
California statute provides that a life insurance policy is
incontestable after it has been in force for two years except
for non-payment of premiums, or unless an imposter was used to
obtain the policy or there was no insurable interest at the time
of inception of the policy. Generally 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
AB 459
Page 5
the policy at maturation (death of the insured) and is
responsible for all subsequent premium payments. In order to
purchase a life insurance policy from an insurer, 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 (life settlements) distorts the purpose of life insurance
by breaking the "insurable interest" link between an insurer,
policyholder and beneficiary.
The U.S. 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, leaving viatical settlement purchasers
unable to collect on their investment within the anticipated
timeframe, and on the hook to continue making premium payments
or forfeit all money invested to that date.
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
AB 459
Page 6
enough policies to satisfy investors led to widespread
solicitation of seniors to take out life insurance for the sole
purpose of selling it into the secondary market. 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 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. Notably, the approximately 15,000 policies sold
as life settlements in 2007, if they have not already been
challenged by the insurer or owner of record or matured due to
the death of the insured, will be up for death benefit payout
review by the investors in two years (typically, these policies
are reviewed at the 10-year mark). This bill potentially allows
the investors, who purchased those life settlements and have
been paying the insurance premiums for almost a decade, to
reevaluate whether they should continue to pay premiums if the
policy has not matured within the expected timeframe. If the
life insurance policy survives an insurable interest challenge,
the investors would have faith that they would eventually get
the face value death benefit from the life insurance company,
and hopefully make a profit on the investment.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified8/3/16)
AB 459
Page 7
Institutional Longevity Markets Association (source)
Fortress Investment Group
OPPOSITION: (Verified8/3/16)
None received
ARGUMENTS IN SUPPORT: According to the Institutional Life
Markets Association, AB 459 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 situation of
paying premiums on a policy for many years only to have the
insurer challenge the policy's validity when a claim for
benefits is ultimately made (and seek to keep the premiums).
ASSEMBLY FLOOR: 79-0, 4/27/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau,
Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly,
Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder,
Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,
Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,
Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins
NO VOTE RECORDED: Campos
Prepared by:Erin Ryan / INS. / (916) 651-4110
8/3/16 19:17:51
AB 459
Page 8
**** END ****