In an InvestmentNews.com article from March 6, 2012, Darla Mercado writes that the Lincoln National Life Insurance Co. will pay $5 million in death benefits  for a life insurance policy the insurer had contended was fraudulent.

The jury in the U.S. District Court for the Southern District of Florida on Friday found in favor of plaintiff Steven A. Sciarretta, a trustee of the Barton Cotton Irrevocable Trust and owner of a $5 million life insurance policy on the life of the late Mr. Cotton, in a case against Lincoln National.

Mercado writes that Mr. Sciarretta took the insurer to court last April because Lincoln would not pay the death benefit proceeds, even though Mr. Cotton had died after the two-year contestability period in which carriers can refute claims had expired. Lincoln countersued and alleged Mr. Cotton’s policy was void from the start because he had indicated falsely on the policy application that he had no intent to sell the coverage on the secondary market or to assign a beneficial interest in the policy to a trust.

Lincoln National, the insurer, claimed the policy was issued at the behest of so-called stoli promoters. Stoli, or stranger-originated life insurance, involves buyers’ purchasing life insurance coverage they don’t need for the express purpose of selling the death benefits to investors.

The InvestmentNews.com article goes on to say that the jury found the trust had indeed made false statements on the life insurance application. But the panel also stated that it believed Mr. Cotton had not intended at the moment of purchase to transfer the policy to another party with no insurable interest in his life. The jury also found that Lincoln itself was not harmed by these misrepresentations, according to the verdict.

Mercado adds that Mr. Sciarretta benefited from Florida’s insurable interest law, which contains an implicit “good faith” requirement, which requires the insurer to prove that the policy was purchased with the sole intent to sell it to a stranger who doesn’t have an insurable interest in the life of the insured person. In this situation, however, Mr. Cotton’s family members testified that he had intended for the insurance to benefit them. Because the policy was issued in good faith, the trust will end up collecting on the full $5 million.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com. Lars K. Soreide will stand up and fight for the rights of consumers.

Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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Back in April of 2007, the U.S. Securities and Exchange Commission sued a hedge fund, Lydia Capital LLC (Lydia), in the U.S. District Court for Massachusetts alleging fraud against investors in life insurance policies purchased by Lydia. SEC v. Lydia Capital LLC, No. 1:07-CV-10712, (D. Mass. Apr. 12, 2007). granting in part a motion by the SEC, the court entered a temporary restraining order freezing Lydia’s assets. According to the SEC complaint, Lydia was selling hedge fund shares to investors without revealing to those investors (all apparently Taiwanese) that the principal underlying assets of the hedge fund—namely, life insurance policies—may be either worthless or virtually worthless.

The life insurance policies may be worthless, according to the SEC complaint, because the application forms submitted to the insurer asked the purchasers if they intended to sell their policies. On approximately half of the policies purchased by Lydia, the complaint alleges, the individuals purchasing the policies answered that question “no” even though they intended to sell their policies, and did sell their policies, to Lydia.

A false representation on a life insurance application allows the insurer to rescind the policy. Because the purchasers of the insurance policies knowingly answered the question falsely, and because the insurers therefore have the right to rescind those policies, according to the SEC, the policies are virtually worthless. Since Lydia did not notify their investors that the policies are likely worthless, they were engaging in a fraudulent investment scheme, the agency contends.

The buying and selling life insurance policies on a large scale began with the AIDS epidemic, when young AIDS patients, often without families, who had contracted the disease sought to tap into the value of their life insurance policies to pay medical bills and other expenses. A number of states enacted viatical insurance laws that allowed them to do so and regulated the process. The selling of life insurance policies to third parties for market value, invariably substantially higher than the “cash surrender value” that insurance companies include in some life insurance contracts, suddenly developed into a thriving new secondary market for life insurance that has grown by leaps and bounds in the past five years. These transactions are usually called “life settlements” and sometimes distinguished from the more narrow term “viatical settlements,” which refers to sales by persons facing imminent death.

A life insurance policy is “property” and, like other property, can be sold, including to persons who have no insurable interest in the life of person who is insured. (Grigsby v. Russell, 222 U.S. 149, 1911). Such sales, however, can be regulated in order to prevent fraud and to ensure that they do not become mere “wagering contracts.” (See, for example, Clement v. New York Life Ins. Co., 101 Tenn. 22, 46 S.W. 561, 1898).

To protect against the possibility that a life insurance policy is being procured for the sole purpose of selling it to third parties, life insurers have started adding a question to the standard life insurance application form, asking if the purchaser intends to sell the policy. Some carriers will turn down the application if the question is answered “yes.”  Answering the question “no” could raise the possibility that the policy could be rescinded at a later date for material misrepresentation,  if in fact the applicant does intend to sell the policy to investors.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com. 

 We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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There are large sums of money involved with life insurance and the industry needs to protect against people setting up fraudulent policies and transactions. There are three  concepts that must be understood as they relate to a senior life settlement. They are; Insurable Interest,  Rescission, and Contestability,.

Insurable Interest and Life Settlements

“Insurable interest” is deals with the legal legitimacy of a life insurance policy and its beneficiary. The intention of life insurance is to provide a financial payment to the beneficiary after the death of the insured. The beneficiaries are typically the family, descendents, heirs, employers, businesses, business partners and charities of the insured. These are legitimate beneficiaries that qualify for “Good Insurable Interest”.

For a life insurance policy to have legitimate good insurable interest, it is required that at the time of purchase, the intent was to benefit a legitimate beneficiary. If it can be shown that a policy was bought with the sole intention of making a life settlement then this would be considered “bad insurable Interest” or a “lack of insurable interest”. In this situation, the policy was issued on fraudulent grounds and the applicant was acting as an agent on behalf of an investor and NOT for the reasons listed on the application form. This situation has the potential for a recession at any time. This could also lead to a contested death claim at any time well beyond the 2 years of contestability.

Contestability Period and Life Settlements

• The contestability period is the first two years a new life policy is in force. During this two-year period;
  • A death claim may be denied or “contested” due to a fraud on the life insurance application or the suicide of the insured.
  • The life settlement value of a policy is typically higher after the contestability period. 
  • An overwhelming majority of life settlement buyers will not purchase policies during the contestability period.
  • Life insurance companies don’t like life settlements but are particularly averse to life settlement transactions during the contestability period.

  Seniors should be aware that life insurance companies are not proponents of  life settlements. The fact is that life insurance companies profit greatly when a policy lapses without them having to pay a death benefit. When a policy is sold to an investor in a life settlement, it becomes a virtual certainty that the policy premiums will be paid and the death benefit will have to be honored. Also, professional investors pay the absolute minimum premiums until the anticipated death of the insured. These factors lower life insurance company profits.

  Seniors have every right to sell their life insurance policies that have been acquired legitimately and the life settlement market provides them a profitable avenue to do that. However, seniors cannot just buy life insurance with the intention of selling it in a life settlement to make money. To do so may be fraudulent because life insurance applications all ask the intent of the buyer.

   

  Rescission of Life Insurance and Life Settlements

  A rescission is a cancellation of the life insurance contract by the issuing life insurance company. If during the two year contestability period the life insurance company suspects fraud it can rescind the life insurance policy. If the fraud is related to a lack of insurable interest at the time the policy was issued, the recession can take place at any time. Obviously, life settlement investors will only purchase policies that they believe are in good standing and without any fraud in the origination.

  In order to rescind a policy the following conditions need to be met.

  • No death has occurred; i.e, the insured is still alive.
  • The company believes a fraud or misrepresentation was perpetrated on the application.
    • Medical information misstated.
    • Financial information misstated.
    • A misstatement of purpose that indicates bad insurable interest.

   

Arranging a life settlement in advance as part of buying a life insurance policy may lead to fraudulent statements on the life insurance application which in turn may lead to a finding of bad insurable interest which in turn may lead to policy rescission and/or a contested death claim.

Each state is responsible for creating and enforcing insurance laws and regulations. As a result the laws differ state by state and it is important to use experienced life settlement  attorneys to ensure that all laws are being adhered to. Florida has some of the strongest life settlement laws: It is a felony to solicit life insurance for the purposes of creating a life settlement.

• In most states insurable interest must exist only at the time a policy is issued. Afterwards, any owner and beneficiary are just as legitimate as the original beneficiary.
• Bad insurable interest at the time a policy is issued is a potential reason for a CONTESTED DEATH CLAIM or a policy RESCISSION at any time.
• A fraudulent statement on the initial life insurance application related to insurable interest could lead to a policy rescission or contested death claim many years AFTER the contestability period has gone by.

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