TAG | viatical insurance loss
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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