Relates to the licensure of life settlement brokers; creates certain crimes relating to life settlement fraud; relates to premium finance agreements; repealer

Section 2 of the bill adds a new subsection (s) to Insurance Law § 2101, which cross references Insurance Law § 7802, as amended.

Sections 3 and 4 of the bill amend Insurance Law §§ 2102 and 2110 to add life settlement brokers to the list of those persons required to obtain a license, and whose licenses may be revoked, suspended or not renewed by the Superintendent of Insurance ("Superintendent").

Section 5 of the bill adds a new subsection (e) to Insurance Law § 2119 requiring life settlement brokers to receive compensation only pursuant to a written contract, and prohibiting excess charges.

Section 6 of the bill amends the continuing education requirements of Insurance Law §2132 to also apply to licensed life settlement brokers, and to exclude certain insurance producers with a life line of authority from the requirement to take an examination.

Section 7 of the bill adds a new Insurance Law § 2137, which specifies the licensing requirements (both initial and renewal) applicable to life settlement brokers and excludes certain individuals from the requirements for pre-licensing education and an examination.

Section 8 of the bill amends Insurance Law § 2401 to include life settlements within the category of insurance subject to the prohibitions of unfair methods of competition or unfair or deceptive acts or practices.

Section 9 of the bill amends the definitions of "person" and "defined violation" contained in Insurance Law . 2402 to include the business of life settlements and certain acts committed with respect to that business.

Section 10 of the bill amends subsection (c) of Insurance Law § 3220 with respect to group life insurance policies to require that a group policy that permits assignment of an insured person's rights by gift shall also allow assignment for value to the same extent that it allows assignment by gift.

Section 11 of the bill repeals existing Article 78 of the Insurance Law and adds a new Article 78 which, among other things:

- provides the license requirements for life settlement providers; - provides the registration requirements for life settlement intermediaries;

- provides the Superintendent with the authority to refuse to renew, revoke or suspend the license of any life settlement provider to the registration of any life settlement intermediary subject to notice and hearing;

- requires life settlement providers to obtain approval by the Superintendent of life settlement contract forms prior to use;

- requires each licensee to file an annual statement with the Superintendent, and authorizes the Superintendent to examine or investigate the affairs of any licensee, registrant or applicant;

- prohibits licensees and registrants from disclosing the identity of the insured or owner in connection with a proposed or actual life settlement unless the disclosure is necessary for specifically identified purposes;

- prohibits any person who obtains or may obtain a settled policy from disclosing the identity of the insured under or owner of the policy;

- requires specific disclosure to be provided by the life settlement provider and the life settlement broker including the amount of compensation to be paid to the broker;

- permits a life settlement provider to transfer ownership of a settled policy only to another licensed life settlement provider, accredited investor, qualified institutional buyer, financing entity, special purpose entity or related provider trust, and provides an exception to that requirement by allowing a transfer of ownership of a settled policy to persons other than the listed persons if no personally identifying information of the policy owner or insured is provided to such persons;

- identifies prohibited practices;

- sets forth a provision entitled Stranger-originated life insurance which prohibits life settlement providers, life settlement brokers or their representatives from engaging in any act, practice or arrangement at or prior to issuance of a policy to facilitate issuance of the policy for the intended benefit of a person who has no insurable interest in the life of the insured;

- sets forth penalties and civil remedies;

- sets forth provisions addressing nonconforming life settlement contracts; and

-sets forth provisions addressing the applicability of Article 78.

Sections 12, 13 and 14 of the bill amend Insurance Law § 403 to: (1) make the commission of a fraudulent life settlement act a violation of the Insurance Law; (2) define a fraudulent life settlement act by reference to Penal Law § 176.40; and (3) add "fraudulent life settlement act" as one of the actions for which the Superintendent is empowered to impose a civil penalty.

Section 15 of the bill amends Insurance Law § 404(a) to include the business of life settlements within the activities that the Superintendent may investigate.

Section 16 of the bill makes conforming amendments to Insurance Law § 405 to include life settlement, life settlement acts, fraudulent settlement acts, and life settlement providers. Section 17 of the bill amends Insurance Law § 406 to also provide immunity from civil liability for any person who, in good faith, provides information relating to suspected fraudulent life settlement acts to law enforcement officials, the insurance frauds bureau or other specified persons.

Section 18 of the bill adds a new Insurance Law § 411 detailing the required parameters of life settlements fraud prevention plans that must be implemented and reported annually to the Superintendent.

Section 19 of the bill adds 7 new sections to the Penal Law to create new crimes of life settlement fraud and aggravated life settlement fraud.

Section 20 of the bill amends Banking Law § 570 to integrate its provisions governing premium finance agreements with the requirements of amended Article 78 of the Insurance Law.

Section 21 of the bill sets forth the effective date of the proposed bill, which is generally 180 days after enactment except that the privacy, disclosure and stranger originated life insurance provisions are effective immediately.

Existing law

Article 78 of the Insurance Law was enacted in 1994 to address the emergence of the viatical settlement market. Its provisions include:

(1) licensing requirements for viatical settlement companies and viatical settlement brokers; (2) authorization for the Superintendent to suspend, revoke, or refuse to renew the license of any viatical settlement company or broker under specified circumstances upon notice and hearing; (3) requirements for viatical settlement companies to obtain approval by the Superintendent of viatical settlement agreements prior to use; (4) disclosure and filing requirements; (5) authorization for the Superintendent to examine the business and affairs of any licensee or applicant; (6) prohibitions pertaining to viatical settlement companies and brokers; and (7) requirements that a group life insurance policy that permits assignment of a covered person's rights by gift shall also allow assignment for value.

Legislative history

The Insurance Department introduced similar legislation (A.104011 S.7356) in 2009.

Statement in support

During the AIDS epidemic, many seriously ill individuals with life insurance policies sold their policies to pay for medical care, experimental medical treatments or other essential needs. Article 78 of the Insurance Law was enacted to regulate such transactions, where an insured with a catastrophic or life-threatening illness or condition sells his or her life insurance policy. These transactions - known as viatical settlements are carried out by viatical settlement companies and viatical settlement brokers regulated by the Department under Article 78.

Recently, a new life settlement market has developed, wherein owners of life insurance policies where the insureds do not have a catastrophic or life-threatening illness or condition are selling their policies. The insured individuals generally are senior citizens who may no longer want or need their policy and who are able to obtain a monetary benefit greater than the cash surrender value but less than the death benefit of the policy by selling their policy to a life settlement provider. These transactions fall outside the scope of the existing Article 78 and regulatory oversight of these transactions is needed.

This bill therefore establishes a comprehensive statutory framework that would regulate all such transactions whether or not the insured has a catastrophic or life threatening illness or condition. The bill uses the term life settlements to describe both types of situations. The bill also regulates an additional participant that plays a role in the life settlement market today called a life settlement intermediary, that is subject to registration and other requirements set forth in the bill.

The bill permits a life settlement provider to transfer ownership of a settled policy only to certain specified persons. It also permits the transfer of a settled policy to persons other than those specified if no personally identifying information about the policy owner or the insured is provided to such persons.

Under the bill the life settlement broker owes a fiduciary duty to the owner of the policy. In addition, the bill provides for penalties and civil remedies for certain violations. This bill also provides for a transparent and fair marketplace by requiring disclosure to the policy owner of a full and complete description of all offers, counter-offers, acceptances and rejections related to the proposed life settlement, a complete reconciliation of the amount of each life settlement provider's gross offer to the net amount of proceeds to be received by the policy owner, the identity of the life settlement broker receiving any compensation with respect to the life settlement contract and the amount and terms of any compensation paid to the life settlement broker and any other person.

The bill also establishes standards of conduct and prohibits anti-competitive behavior. Other required disclosures provide significant consumer protections. For example, the bill requires disclosures advising the consumer of: (1) the life settlement broker's fiduciary duty to the owner of the policy; (2) certain tax consequences that may result from receipt of the life settlement proceeds; (3) the owner's right to rescind the life settlement contract; (4) the possible adverse impact on the insured's insurable capacity; (5) certain medical, financial or personal information that may be disclosed; and (6) the fact that the insured may be contacted at certain delineated times to determine health status, as well as other disclosures.

The bill also affords significant privacy protections with respect to the identity of the insured and the policy owner. The protection of the safety and privacy of the insured is a paramount purpose of this bill.

The bill limits and specifies the parties to whom and the circumstances under which such information may be disclosed. Only a licensed life settlement provider can purchase a policy from the policy owner. A life settlement provider may sell, assign or transfer ownership of a settled policy only to another licensed life settlement provider, an accredited investor, qualified institutional buyer, financing entity, special purpose entity or related provider trust.

The bill also provides that any person who obtains or may obtain a settled policy shall comply with the provisions of the Insurance Law and regulations and all other applicable laws governing the protection of the identity and privacy of the insured or policy owner. In addition, a life settlement provider may sell, assign or transfer a beneficial interest in a settled policy to someone other than the listed persons if the provider continues to administer the settled policy and the policy owner's and insured's personally identifying information is not disclosed to such purchasers. This structure permits both the listed persons and other persons to participate fully in the marketplace while the privacy of consumers is still protected.

The bill includes a provision entitled Stranger Originated Life Insurance (known as STOLI) that prohibits life settlement providers (who purchase the life insurance policies from the original policy owners), life settlement brokers (who broker the life settlement transaction between the original owner of the policy and the life settlement provider) or their representatives from engaging in any activity that would facilitate the issuance of a policy for the intended benefit of a person who has no insurable interest in the life of the person insured under the policy.

Insurance Law § 3205 requires that, at the time a policy is purchased, the beneficiary must have an insurable interest in the life of the person insured. The concept of insurable interest has long been affirmed in case law and codified in statute pertaining to life insurance in order to prevent the moral hazards that arise with speculation on human life. An insurable interest is a substantial interest in the continued life of the person insured rather than an interest that would arise only by a financial interest in the death of the person insured.

Insurable interest is defined in section 3205 as either a substantial interest engendered by love and affection or a substantial economic interest in the continued life of the insured.

The following is an example of a STOLI situation: A life insurance policy is initially purchased by an individual for the primary purpose of transferring it to a third party stranger and arrangements are made so that the policy owner does not payor is effectively reimbursed for any policy premiums paid, the third party has no insurable interest in the life of the insured, and the policy is transferred to the third party.

If it can be shown that there was a prior plan or arrangement for the individual to purchase the policy for the purpose of selling it to the third party, it may be determined that there was no insurable interest at the inception of the policy.

The bill includes "any beneficial interest in a trust or other entity that owns the policy where a primary purpose of the transaction is to acquire the policy" in the definition of life settlement contract. This ensures that various scenarios involving these entities will be subject to the requirements of the bill. An example of such a scenario is where a policy is purchased by a trust and the beneficial interest, i.e. the right to the death benefit, is sold to a third party stranger but the trust remains the owner of the policy. This addresses a significant concern of the Department and the life insurance industry. The bill includes a provision setting forth limitations on the proceeds, fees or other consideration that persons involved in the business of premium financing can receive with respect to premium financing transactions. Premium financing is a legitimate type of loan transaction that, for example, may be used to pay large initial premiums on large policies used for certain business transactions or estate planning. The purpose of this provision is to ensure that premium financing is not used as a mechanism to effectuate a STOLI transaction by limiting the amounts that may be received by such persons to principal, interest and any reasonable costs or expenses incurred in the transaction. The provision also requires that any amounts received over and above the amounts listed must be remitted back to the original policy owner.

Budget implications

This bill will not have a material impact on State finances. EFFECTIVE DATE : This bill would take effect 180 days after enactment except that the privacy, disclosure and stranger-originated life insurance provisions of the bill would take effect immediately.