What are an insurer’s duties to insureds about disclosing the possibility of a life settlement? At least three recent cases have addressed an insurer’s duty to inform insureds about the existence and availability of life settlements. Moreover, a handful of states have already enacted legislation requiring insurers to inform insureds about the possibility of a life settlement.

Life Settlement Disclosure Legislation

With respect to legislation, a handful of states have enacted various versions of the NCOIL Life Insurance Consumer Disclosure Model Law (the “NCOIL Model Law”), requiring insurers to inform policy owners of alternatives to the lapse or surrender of a policy.¹ While the disclosure statutes are similar in requiring notification of alternatives to the lapse or surrender of policies, the legislative framework is not uniform. This presents a potential legal minefield for insurers. Some states require disclosure and others do not, but even within those states that require disclosure, the triggers for disclosure and disclosure requirements themselves differ.

For example, the Oregon statute requires notification based on certain triggering events. It obliges an insurer to “provide notice to the owner of an individual life insurance policy when the insured person under such a policy is 60 years of age or older” and the insurer receives “notice from . . . an owner of a request to surrender” a policy in whole or in part; the insurer receives “notice from . . . an owner of a request to receive an accelerated death benefit;” or the insurer sends a lapse notice regarding a policy other than a term policy. Or. Rev. Stat. § 744.362. The Kentucky and Washington statutes provide similar notification triggers, but also include the occurrence of any other event as set forth by the insurance commissioner. See Ky. Rev. Stat. § 304.15-075(3)(b) and Wash. Rev. Code § 48.102.100(1).

In a break from the Oregon scheme, the Kentucky, Maine, and Washington statutes not only require notification for insureds over age 60, but also those whom the insurer becomes aware are terminally or chronically ill. Ky. Rev. Stat. § 304.15-075(3)(b); Me. Rev. Stat. tit. 24-A, § 6808-A(4)(D); Wash. Rev. Code § 48.102.100(1). The Wisconsin framework is much different. Rather than operate from triggering events, Wisconsin law requires a notice regarding alternatives to lapse or surrender be provided to each individual life policy owner “at the time the policy is issued.” Wis. Admin. Code Ins. § 2.18.

In addition to the aforementioned legislation, other states are considering legislation similar to the NCOIL Model Law. Georgia recently passed House Resolution 806, which created a committee to study life insurance consumer disclosure issues. The resolution explained that the committee was needed because seniors often lapse or surrender policies “as part of a Medicaid spend down plan,” and many seniors do not understand all options available to them for unneeded or unwanted life insurance policies. It also noted the concerns that drove the drafting of the NCOIL Model Law. H.R. 806, 153rd Gen. Assemb., Reg. Sess. (Ga. 2015). While both House and Senate bills based on the NCOIL Model Act were introduced in Georgia, neither passed last year. Importantly, the Georgia House and Senate bills would have made violating the notification provisions an unfair trade practice. H.B. 193, 153rd Gen. Assemb., Reg. Sess. (Ga. 2015); S.B. 136, 153rd Gen. Assemb., Reg. Sess. (Ga. 2015).

Life Settlement Disclosure Litigation

While the laws in Washington, Maine, and elsewhere do not contain the same unfair trade practice provision as the proposed Georgia bills, violation of their respective statutes may nonetheless create litigation exposure. For example, in Graham-Bingham Irrevocable Trust v. John Hancock Life Ins. Co. USA, 827 F. Supp. 2d 1275, 1287 (W.D. Wash. 2011), the Western District of Washington addressed a plaintiff’s allegations that failure to comply with Washington’s life settlement disclosure law also violated Washington’s Consumer Protection Act and constituted bad faith. Despite John Hancock’s argument that the plaintiff had been aware of the secondary market and had, in fact, tried and failed to sell the policy on the secondary market, the court denied summary judgment to John Hancock on these claims, and the case settled prior to trial.

Other plaintiffs have sought recovery for failure to disclose the option of a life settlement, even without alleging the violation of any life settlement disclosure statute. For instance, a putative class action that settled last summer included claims that the defendant insurer employed a “common and systemic practice” of “failing to inform and/or concealing from its insureds the option of a life settlement in connection with their life insurance policies.” Grill v. Lincoln Nat. Life Ins. Co., Case No. 14-cv-00051 (C.D. Cal.) [Third Amended Complaint]. The named plaintiff asserted that the insurer “purposely omits this information from Plaintiffs and Class members because it knows that other options, such as surrendering the policy (in whole or in part) or letting it lapse, will generate greater profits to Defendant than a life settlement would.” Id.

While this case settled before the class certification or summary judgment stage, copycat actions have followed, including a case filed January 20, 2016: Joseph v. Kaye, et al., Case No. SC125276 (Cal. Super. Ct.). The complaint in Joseph includes much of the same substance as the Grill complaint, borrowing wholesale from the allegations in the third amended complaint. More specifically, the complaint alleges that “[t]he omission or concealment of the option of a life settlement is a common and regular practice employed by defendants, and indeed is a pervasive practice in the life insurance industry,” and that the particular defendant involved “instructs its own agents as well as independent agents that transact insurance on Defendant’s behalf to omit or conceal the option of a life settlement from its insureds.” Joseph v. Kaye, et al., Case No. SC125276 (Cal. Super. Ct.) [Complaint]. The complaint brings claims for violation of the California Consumer Legal Remedies Act, financial abuse of an elder, and unlawful, unfair, and fraudulent business practices, and seeks compensatory, punitive, and treble damages, among other things. Id.

Conclusion

As courts grapple with cases and state lawmakers consider new legislation, insurers’ duties to disclose the possibility of a life settlement will continue to develop. As the recent trend suggests, life insurers may be forced to litigate these issues. Life insurers therefore should carefully monitor both state legislative activity and current court decisions for any impact on their disclosure of life settlements. Life insurers should also carefully ensure they are compliant with life settlement disclosure laws in each relevant state.

_{¹ At least Kentucky, Maine, Oregon, Washington, and Wisconsin have enacted life settlement disclosure laws. Other states have considered or are considering enacting such legislation.}