Leslie Scism’s Wall Street Journal article, “Insurers Sued Over Death Bets,” describes how life insurance policies sold to investors, who expect to receive a big payment when the insured dies, have led to lawsuits by insurance companies and investors against each other, as well as by relatives of some of the deceased elderly, alleging that death benefits belong to the family members.
During 2004 through 2008, thousands of seniors purchased life insurance policies and “sold” them to investors, who paid them a portion of the expected death benefit up front, and agreed to make the premium payments, in exchange for the right to receive the full death benefit when the purchaser died. Now, many insurance companies are taking the position that these policies are void as against public policy, and are seeking to cancel them, refusing to pay the investors either the death benefit or refund their premium payments. Investors, in turn, have filed lawsuits against the insurance companies to try to compel them to pay the death benefits. Investors point out that the insurance companies and their agents who claim to be victims of illegal wagering, actually encouraged the “scheme” in order to generate commissions, and only cried foul when it came time to pay up.
According to the article, the litigation is in early stages, and legal experts say it the outcome is unclear. Obviously, investors will lose big if the policies are canceled, leaving them with nothing to show for their expenditures.
Most, if not all, states require that one who purchases an insurance policy have an “insurable interest” in the thing insured. The underlying public policy is to prevent fraud. For example, in order to purchase homeowner’s insurance, you have to be the owner of the home that is the subject of the policy. The insurable interest requirement may be less clear if, for example, the person with the insurable interest assigns the right to receive the insurance benefit to a stranger while continuing to be the record “owner” of the policy.
California courts recently ruled that investors had met the minimum pleading standards necessary to move forward with their fraud claims against Phoenix Companies, Inc. in two lawsuits involving 30 policies totaling more than $260 million in face amount.
In those cases, investors Olive Tree Holdings LLC and XLI Holdings LLC allege that Phoenix “embarked on a concerted effort to regain momentum in its sale of life-insurance products” in 2005, targeting seniors to buy high-face-value policies that the insurer “knew were likely to be resold” to investors, in a “scheme” aimed at generating large commissions and bonuses for its agents and managers, according to the article.
The investors further allege that, in 2006, Phoenix representatives, including a regional manager told an XLI executive that Phoenix was willing to issue large policies to people who wanted to resell them to investors.
After Olive Tree and XLI bought rights to various Phoenix policies, however, Phoenix reportedly canceled most of them and retained the premiums that had been paid.
In Texas, a different set of investors filed suit against American International Group alleging that AIG similarly welcomed stranger-originated policies as a way to boost revenue, and “did not seek information that they now contend, after the fact, to be material,” according to the article.
This is the same AIG that was bailed out by the U.S. government after falling apart and contributing to the credit crisis by writing credit default swaps covering over $400 billion of bonds when it had nowhere near enough money to cover them.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.