Monday, November 21, 2016

No. 189: Life Settlement Promotion Based on a Lawsuit That Went Nowhere

On November 10, 2016, I received an email from a marketing organization on the subject of "Fiduciary notice for life agents." Here is the full text of the email:
Recently, a family filed a class action lawsuit in a California U.S. District Court against their life insurance provider. They sought punitive damages, treble damages, restitution and an injunction because their agent failed to inform them of their options on the life settlement market.
This is not a fluke occurrence.
Uphold your fiduciary responsibility, save yourself from litigation and help seniors save the 100B worth of lapsed policies that could be used, for example, to fund long-term care.
Simply read a new white paper that provides a simple overview of life settlements in a fiduciary context, plus life and annuity options to help you uphold your responsibility and make additional sales. [Emphasis in original.]
The email identified the lawsuit as Grill v. Lincoln National Life. I had looked at the case in February 2016, but did not report on it at the time because it had gone nowhere. Now that the case is being used to support the argument that a life insurance agent has a "fiduciary responsibility" to mention life settlements as "options," I felt it would be appropriate to report on the case.

The Grill Lawsuit
On January 9, 2014, three members of the Grill family filed a class action lawsuit against Lincoln National Life Insurance Company. The case was assigned to U.S. District Judge Jesus G. Bernal. President Obama nominated him in April 2012, and the Senate confirmed him in December 2012. His career is an immigrant success story. Born in Mexico, he received his undergraduate degree cum laude from Yale University and his law degree from the Stanford Law School. (See Grill v. Lincoln National, U.S. District Court, Central District of California, Case No. 5:14-cv-51.)

The plaintiffs filed four complaints. The discussion here is based on the fourth (third amended) complaint, which was filed September 29, 2014.

In 2004 the plaintiffs purchased a second-to-die policy with a death benefit of $7.2 million. The insureds were aged 68 and 65. The third plaintiff was trustee of the trust that was owner and beneficiary of the policy. The policy type is not stated, but it was probably universal life because the complaint said the "premium payments were designed to generate investment returns that would cover the cost of insurance." Although the complaint did not say so, the policy probably was being paid for with minimum premiums so as to generate no account value.

By 2008 the investment returns became insufficient to cover the cost of insurance. The plaintiffs consulted their agent, who allegedly said "they had two options: (1) pay new premiums into the Policy to extend it, or (2) surrender the Policy, in whole or in part, to reduce the cost of insurance." The plaintiffs surrendered part of the policy, decreasing the death benefit to $5.4 million. By 2009 the investment returns again became insufficient, and the plaintiffs again surrendered part of the policy to reduce the death benefit to $2 million. The plaintiffs alleged that they had twice surrendered parts of the policy "for no consideration" and that their agent did not tell them about life settlements. Further, they alleged:
Defendant's failure to inform and/or concealment of the option of a life settlement is part of a common and systematic practice by Defendant to hide this option from its insureds. The reason for this failure to inform and/or concealment is clear: Defendant stands to profit significantly if Plaintiffs and similarly situated Class members pay new premiums into their policies or surrender their policies for little or no value. Conversely, if Plaintiffs and similarly situated Class members sell their policies in a life settlement, Defendant would have to pay the death benefit without receiving higher premiums and/or without a surrender.
The complaints survived Lincoln's motions to dismiss. On October 6, 2014, one of the insureds died. On May 29, 2015, Judge Bernal ordered the plaintiffs to file a motion for class certification by June 15. On that date the plaintiffs instead filed a notice of settlement. On August 24 the parties filed a joint stipulation to dismiss the case based on the fact that one of the lead plaintiffs had died and the survivors had not substituted another lead plaintiff. On August 25 Judge Bernal granted the stipulation to dismiss with prejudice (permanently) all claims asserted by the plaintiffs.

The Final Stipulation
On September 21, 2015, the parties filed a joint stipulation of dismissal. Here is the full text of the stipulation:
WHEREAS, Plaintiffs' investigation and analysis to date did not support the allegation that Defendant had a common and systematic practice of concealing life settlement options from its insureds;
WHEREAS, the parties have elected to settle each and every claim asserted in the above-captioned matter with no admission of wrongdoing, impropriety or liability on the part of any party;
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and between the parties through their respective counsel of record pursuant to that settlement agreement, and pursuant to Rule 41(a)(1) of the Federal Rules of Civil Procedure, the individual claims of the named plaintiffs in the above-entitled action be dismissed with prejudice, and the claims of the putative class be dismissed without prejudice, with each party to bear its own costs.
General Observation No. 1
Citing a case that went nowhere to support the notion that the agent has a fiduciary obligation to disclose life settlement "options" is not the only phony tactic used by life settlement promoters. The requirement of insurable interest has caused a huge amount of litigation in the secondary market for life insurance. In the June 2009 issue of The Insurance Forum, in a discussion of an agent's lawsuit against Phoenix Life Insurance Company, I said the plaintiff had cited a 2007 article in a prestigious law journal condemning the insurable interest doctrine. The author argued that "the doctrine creates perverse incentives that encourage the very practices the doctrine seeks to deter," that "the doctrine also invites unfairness and inefficiency in the insurance market," and that the doctrine should be abolished. The article was written by a law student on the editorial staff of the law journal. In a note the author acknowledged the help of a fellow student on the editorial staff of the law journal, and the help of a member of the faculty of the law school.

I was certain that the article had been planted by promoters of the secondary market for life insurance. I wrote to the author and his fellow student, both of whom by then were associated with major law firms. I also wrote to the faculty member. I asked who had suggested the idea for the article. I also asked whether anyone at the law school had received compensation. In the December 2013 issue of the Forum, in an article entitled "Why the Secondary Market for Life Insurance Will Never Win Full Public Acceptance," I said I had received no reply.

General Observation No. 2
The plaintiffs in the Grill case, in their reasoning about why Lincoln allegedly concealed the life settlement option, are incorrect. As a general rule, life insurance companies want their policies to remain in force. That is why companies often reward agents for strong persistency. Exceptions to the general rule are so-called "lapse-supported" policies that are priced so as to depend on high lapse rates for profitability. The policy in this case does not fit into the "lapse-supported" category. Furthermore, in their reasoning, the plaintiffs neglected to point out that the speculator in human life who would have acquired the policy in the secondary market would have had to continue paying premiums to keep the policy in force until the death of the second insured, and that the need to pay those premiums would have been a factor in determining the price paid in a life settlement.

General Observation No. 3
A matter somewhat related to the second observation above is the question of how much a company would pay on surrender of a policy whose insured is in poor health. At least two observers—an actuary and I—have suggested the idea of "health-related" or "health-adjusted" cash values. If an insured is in poor health, it would seem reasonable for a company to pay an enhanced cash value upon surrender of the policy. In the March 1999 issue of the Forum, which was a special 12-page issue, I mentioned health-related cash values as one of eleven suggested methods of dealing with "The Growth of the Frightening Secondary Market for Life Insurance Policies." The February 2001 issue of the Forum included an article by Albert E. Easton, FSA, MAAA. He had written a technical article on the subject in an actuarial journal, and I had invited him to write a nontechnical article for the Forum.

Available Material
I am offering a complimentary 21-page PDF containing the four Forum articles mentioned in the general observations above. Email and ask for the November 2016 package of Forum articles about the secondary market for life insurance.