For the past two-and-a-half decades owners of life insurance policies who decide they no longer want or need those policies have had an alternative to surrendering those policies back to the issuing carrier – access to an organized and vibrant secondary market for life insurance, giving policy owners liquidity in a previously illiquid asset. Surprisingly, unlike most originators of an asset for which there is a secondary market, life insurers have been slow to embrace this pro-consumer option. In fact, the American Council of Life Insurers has actively opposed legislation creating an obligation for life insurance carriers to inform policy owners who have decided to lapse or surrender their policies that a life settlement might be an option.
The inevitable consequence of the ACLI’s and life insurance carriers’ position on voluntary disclosure is playing out in the recent lawsuit Larry Grill, et al. v. Lincoln National Life Insurance Co., filed in federal district court in California. In this case, the owners of a life insurance policy brought suit alleging claims for fraudulent concealment, financial abuse of an elder and violation of California’s Unfair Competition Law, all stemming from the carrier’s failure to inform them of the existence and possibility of selling their policy into the secondary market for life insurance.
The plaintiffs purchased a policy from the defendant in 2004 with a face value of over $7,000,000; and, notwithstanding having paid hundreds of thousands of dollars in premiums, the investment returns on the policy became insufficient to cover the on-going cost of insurance charges. The plaintiffs approached the defendant’s agent and were told their only options were to pay more premiums into the policy or undertake a partial surrender to decrease the cost of insurance. The plaintiffs chose to surrender over $5,000,000 of the original face value of the policy. When the plaintiffs learned that they might have been able to sell that $5,000,000 in coverage into the secondary market for life insurance, they filed suit. The carrier filed a motion to dismiss for failure to state a claim upon which relief can be granted; that is, the carrier argued even if the plaintiffs’ claims were accepted as true, they were still entitled no relief.
On the basis of a technical analysis focused on the sufficiency of the claims pleaded by the plaintiffs, the court ultimately dismissed all of those claims; however, it did so with leave to amend to cure the deficiencies in the pleadings, and with a clear indication that the court believes that the plaintiffs’ claims are viable and can proceed once they were correctly presented. For instance, the court stated that “the Court agrees that Plaintiffs have sufficiently alleged a duty to disclose based on partial representations by alleging that Defendant’s agent represented that they had two options and concealed the life settlement option”. Further, the court concluded that the plaintiffs had sufficiently alleged a claim under California’s Unfair Competition Law on the basis of their claims that 1) elder citizens are unaware of the option of a life settlement; 2) that the defendant has a practice or policy of concealing the option from such citizens; and 3) that there is no utility or countervailing benefit to the defendant’s conduct. Faced with these facts, the court concluded “[t]he Court agrees that there does not appear to be any utility to this alleged practice [failing to disclose the life settlement option], but the possible monetary harm to the insured and policy beneficiaries is clear.”
In sum, while this is one of the first lawsuits alleging that life insurers have an affirmative obligation to disclose the existence of the life settlements option, even in the absence of a legislative obligation to do so, it is unlikely to be the last. For nearly 30 years the secondary market has offered consumers an option to realize additional value from their life insurance policies, it is time for life insurers to voluntarily embrace the secondary market before they are ordered to do so.
Originally published in Morris, Manning & Martin’s Insurance and Reinsurance Review Newsletter (Summer 2014)