MAKING SENSE OF THE INTERPLAY BETWEENSECURITIES LAW/BROKER-DEALER RULES AND  INSURANCE STATUTORY REQUIREMENTS     IN CONNE...
AGENDA· Trusts, IRAs, qualified accounts and pension plans· Framework for analysis / resolution· Claim Disputes:       · S...
TRUSTS AND QUALIFIED ACCOUNTS    Follow The Money!
TRUSTS AND QUALIFIED ACCOUNTSTrusts   Settlor         Trustee   BeneficiaryTraditional and Roth IRAsIndividual           I...
TRUSTS AND QUALIFIED ACCOUNTSQualified Accounts  Employer                Plan   Employee or                               ...
FRAMEWORK                          CLAIM DISPUTESPolicyowner        Insurer           Beneficiary     SALES PRACTICES     ...
LITIGATION: CLAIM DISPUTES                                        CLAIM DISPUTESPayment obligationdictated by termsof the ...
LITIGATION: CLAIM DISPUTES                             CLAIM DISPUTESIf the beneficiary isa trust . . . only thetrustee ha...
LITIGATION: CLAIM DISPUTES                                      CLAIM DISPUTESIf the beneficiary isan estate . . . onlythe...
LITIGATION: EXAMPLE          SALES PRACTICES Policyowner               Insurer· Whole life policy· Lapse       · Non-forfe...
LITIGATION: EXAMPLE           RESCISSION Policyowner              Insurer· Consideration must be restored      · Policy is...
LITIGATION: PERFORMANCEPolicyowner         Insurer          Beneficiary                       PERFORMANCETrusts           ...
LITIGATION: PERFORMANCEPolicyowner                   Insurer                  Beneficiary                                 ...
LITIGATION: PERFORMANCEPolicyowner            Insurer          Beneficiary                          PERFORMANCEVariable Li...
LITIGATION: SALES PRACTICES Policyowner               Insurer    If the policyowner is                                    ...
LITIGATION: SALES PRACTICESPolicyowner              Insurer       If the policyowner is                                   ...
LITIGATION: SALES PRACTICESPolicyowner             Insurer    If the policyowner is                                   a tr...
LITIGATION: SALES PRACTICESPolicyowner           Insurer     What does the                                  owner receive?...
LITIGATION: EXAMPLEPolicyowner              Insurer      SALES PRACTICES· $1.6 million term life policy· Owner becomes uni...
LITIGATION: EXAMPLEPolicyowner            Insurer    What has the                                  owner lost?     SALES P...
LITIGATION: SALES PRACTICESPolicyowner           Insurer    Variable Life/Annuities      SALES PRACTICESContract usually h...
LITIGATION: SALES PRACTICES                Agent                   Who does the agentPolicyowner               Insurer    ...
LITIGATION: SALES PRACTICES              Agent                  Who does the agentPolicyowner             Insurer      rep...
LITIGATION: SALES PRACTICES                Agent                 What are thePolicyowner               Insurer     agent’s...
LITIGATION: SALES PRACTICES                   Agent                      What are thePolicyowner                    Insure...
LITIGATION: SALES PRACTICES                  Agent                     What are thePolicyowner                   Insurer  ...
LITIGATION: SALES PRACTICES               Agent              What are thePolicyowner             Insurer   agent’s duties?...
LITIGATION: SALES PRACTICES                Agent                    Who else is involvedPolicyowner                 Insure...
LITIGATION: SALES PRACTICES                 Agent                   Who else is involvedPolicyowner                 Insure...
CONCLUSION                            CLAIM DISPUTES              AgentPolicyowner           Insurer          Beneficiary ...
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Making Sense of the Interplay Between Securities Law/Broker-Dealer Rules and Insurance Statutory Requirements in Connection With the Sale of Variable Life and Annuity Products

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In litigation, it can be essential to understand the different roles played by different parties involved with the sale and administration of variable life insurance policies and annuities. This presentation (from ACI\'s First Annual National Advanced Forum on Life Insurance and Annuity Litigation) provides a useful framework for viewing the related disputes that sometimes arise.

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Making Sense of the Interplay Between Securities Law/Broker-Dealer Rules and Insurance Statutory Requirements in Connection With the Sale of Variable Life and Annuity Products

  1. 1. MAKING SENSE OF THE INTERPLAY BETWEENSECURITIES LAW/BROKER-DEALER RULES AND INSURANCE STATUTORY REQUIREMENTS IN CONNECTION WITH THE SALE OF VARIABLE LIFE AND ANNUITY PRODUCTS Robert R. Pohls Pohls & Associates 1550 Parkside Drive, Suite 260 Walnut Creek, CA 94596 Phone: 925.973.0300 Fax: 925.973.0330 rpohls@califehealth.com
  2. 2. AGENDA· Trusts, IRAs, qualified accounts and pension plans· Framework for analysis / resolution· Claim Disputes: · Standing · Impact of trust, wills and estates law· Sales Practices · Standing · Measure of damages
  3. 3. TRUSTS AND QUALIFIED ACCOUNTS Follow The Money!
  4. 4. TRUSTS AND QUALIFIED ACCOUNTSTrusts Settlor Trustee BeneficiaryTraditional and Roth IRAsIndividual IRA Individual or BeneficiarySEP IRAsEmployer IRA Employee or BeneficiarySIMPLE IRAsEmployer/ IRA Employee orEmployee Beneficiary
  5. 5. TRUSTS AND QUALIFIED ACCOUNTSQualified Accounts Employer Plan Employee or BeneficiaryPension Plans Employer/ Plan Employee or Employee BeneficiaryVariable Life InsurancePolicyowner Insurer BeneficiaryAnnuitiesPolicyowner Insurer Beneficiary
  6. 6. FRAMEWORK CLAIM DISPUTESPolicyowner Insurer Beneficiary SALES PRACTICES PERFORMANCE
  7. 7. LITIGATION: CLAIM DISPUTES CLAIM DISPUTESPayment obligationdictated by termsof the contract. Insurer BeneficiaryBeneficiaries have “no enforceable right” to the proceedsof a life insurance policy during the insured’s lifetime. In re Marriage of Brown, 15 Cal. 3d 838, 845 (1976)“The designated beneficiary’s interest is a mere revocableexpectancy vesting only on the insured’s death.” In re Marriage of O’Connell, 8 Cal. App. 4th 565, 577 (1992)
  8. 8. LITIGATION: CLAIM DISPUTES CLAIM DISPUTESIf the beneficiary isa trust . . . only thetrustee has standing. Insurer TrustTrust beneficiary has no legal title orownership interest in the trust assets,so may not sue in the name of the trust Beneficiaryas the beneficiary. Wolf v. Mitchell, Silberberg & Knupp, 76 Cal. App. 4th 1030, 1036 (1999)A trust beneficiary’s “right to sue is ordinarily limited to theenforcement of the trust, according to its terms.” Saks v. Damon Raike & Co., 7 Cal. App. 4th 419, 427 (1992)
  9. 9. LITIGATION: CLAIM DISPUTES CLAIM DISPUTESIf the beneficiary isan estate . . . onlythe estate’s legal Insurer Estaterepresentative hasstanding.· Interpleaders Beneficiary· Delay in Payment Estate of Grant v. State Farm Life Insurance Co. Case No. 05-02389 FCD (E.D.Cal.) MSJ for United Investors Life Insurance Co. v. Grant Case No. 05-01716 MCE (E.D.Cal.) $1M extra-contractual
  10. 10. LITIGATION: EXAMPLE SALES PRACTICES Policyowner Insurer· Whole life policy· Lapse · Non-forfeiture provision · Extended term insurance · 1099 issued· Litigation: Insurer’s duty to warn of tax consequences?
  11. 11. LITIGATION: EXAMPLE RESCISSION Policyowner Insurer· Consideration must be restored · Policy is canceled · Premiums are refunded· If the policyowner was the insured and has died: · Premiums must be refunded to the policyowner · Not a substitute for death benefit
  12. 12. LITIGATION: PERFORMANCEPolicyowner Insurer Beneficiary PERFORMANCETrusts Trust Agreement Duty of Care Fiduciary DutiesIRAs/QAs/Pensions Account Agreement / Plan Duty of Care Fiduciary Duties ERISA (if employer-sponsored)
  13. 13. LITIGATION: PERFORMANCEPolicyowner Insurer Beneficiary PERFORMANCEVariable Life/Annuities Contract Terms“An insurer is not a fiduciary of an insured.” Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. 115 Cal.App. 4th 1145 (2004)“In life or disability insurance, the only measure of liabilityand damage is the sum or sums payable in the mannerand at the times as provided in the policy to the personentitled thereto.” California Insurance Code §10111
  14. 14. LITIGATION: PERFORMANCEPolicyowner Insurer Beneficiary PERFORMANCEVariable Life/Annuities Contract TermsConsider the impact of actions by policyholder: · Investment choices · Payment of premiums · Policy loans
  15. 15. LITIGATION: SALES PRACTICES Policyowner Insurer If the policyowner is a trust . . . trustee’s SALES PRACTICES power is presumed.“With respect to a third person dealing with a trustee orassisting a trustee in the conduct of a transaction, if the thirdperson acts in good faith and for a valuable considerationand without actual knowledge that the trustee is exceedingthe trustee’s powers or improperly exercising them: . . . (b)The third person is fully protected in dealing with or assistingthe trustee just as if the trustee has and is properlyexercising the power the trustee purports to exercise.” California Probate Code §18100
  16. 16. LITIGATION: SALES PRACTICESPolicyowner Insurer If the policyowner is a trust . . . consider SALES PRACTICES STOLI.“Trusts and special purpose entities that are used toapply for and initiate the issuance of policies of insurancefor investors, where one or more beneficiaries of thosetrusts or special purpose entities do not have aninsurable interest in the life of the insured, violate theinsurable interest laws and the prohibition againstwagering on life.” California Insurance Code §10110(d) Applies only to policies issued after 7/1/2010
  17. 17. LITIGATION: SALES PRACTICESPolicyowner Insurer If the policyowner is a trust or estate . . . SALES PRACTICES no emotional distress.· Trusts and estates are legal entities.· Emotional states are exhibited by natural persons, not legal entities. Diamond View Limited v. Herz 180 Cal.App.3d 612, 618 (1986)
  18. 18. LITIGATION: SALES PRACTICESPolicyowner Insurer What does the owner receive? SALES PRACTICES· Owner pays premiums· Owner receives the contract · Right to renew coverage · Right to designate and change beneficiaries
  19. 19. LITIGATION: EXAMPLEPolicyowner Insurer SALES PRACTICES· $1.6 million term life policy· Owner becomes uninsurable· Policy lapses without replacement · A term life policy has no value. In re Estate of Mitchell 76 Cal.App.4th 1378, 1393 (1999) · What has the owner lost?
  20. 20. LITIGATION: EXAMPLEPolicyowner Insurer What has the owner lost? SALES PRACTICESFace amount? Never payable to policyowner / insuredRight to renew? Renewal requires more premiumsRight to designate beneficiary? · No monetary value to policyowner · Only provides “peace of mind”
  21. 21. LITIGATION: SALES PRACTICESPolicyowner Insurer Variable Life/Annuities SALES PRACTICESContract usually has some cash value.Typical claims: · Contract is not as represented to policyowner · Contract was not suitable for policyowner
  22. 22. LITIGATION: SALES PRACTICES Agent Who does the agentPolicyowner Insurer represent? SALES PRACTICES“The most definitive characteristic of an insurance agent ishis authority to bind his principal, the insurer; an insurancebroker has no such authority.” Marsh & McLennan of Cal., Inc. v. City of Los Angeles 62 Cal.App.3d 108, 118 (1976)An independent insurance broker is not an agent of theinsurer, but rather is an agent of the insured. California Insurance Code §33
  23. 23. LITIGATION: SALES PRACTICES Agent Who does the agentPolicyowner Insurer represent? SALES PRACTICESIf an insurance agent is the agent for several companiesand selects the company with which to place the insuranceor insures with one of them according to directions, theinsurance agent is the agent of the insured. 3 Couch on Insurance (2d ed. 1984) § 25:112, p. 477
  24. 24. LITIGATION: SALES PRACTICES Agent What are thePolicyowner Insurer agent’s duties? · DUTY OF CARE SALES PRACTICES"[A]n insurance [broker] will be liable to his client in tortwhere his intentional acts or failure to exercise reasonablecare with regard to the obtaining or maintenance ofinsurance results in damage to the client." Saunders v. Cariss, 224 Cal.App.3d 905 (1990)
  25. 25. LITIGATION: SALES PRACTICES Agent What are thePolicyowner Insurer agent’s duties? · DUTY OF CARE SALES PRACTICES · FIDUCIARY DUTY ?“Agency law establishes that the relations of principal andagent, like those of beneficiary and trustee, are fiduciary incharacter.” Workmen’s Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011)“. . . it is unclear whether a fiduciary relationship existsbetween an insurance broker and an insured.” Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. 115 Cal.App.4th 1145 (2004)
  26. 26. LITIGATION: SALES PRACTICES Agent What are thePolicyowner Insurer agent’s duties? · DUTY OF CARE SALES PRACTICES · FIDUCIARY DUTY ?“. . . we are unaware of even a single California precedentpermitting a client to sue an insurance broker for breach offiduciary duty." Workmen’s Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011)“This Court will not expand the doctrine of fiduciary duty toinclude insurance brokers, given that it has not beenrecognized by California courts.” Miniace v. Pacific Maritime Assoc., 2005 U.S. Dist. Lexis 40708, p. *34
  27. 27. LITIGATION: SALES PRACTICES Agent What are thePolicyowner Insurer agent’s duties? · DUTY OF CARE SALES PRACTICES · FIDUCIARY DUTY ? · SUITABILITY?· Insurance products: State insurance laws FINRA Rules (only if variable)· Annuities: State insurance laws FINRA Rules (fixed and variable)
  28. 28. LITIGATION: SALES PRACTICES Agent Who else is involvedPolicyowner Insurer in the transaction? Broker/Dealer SALES PRACTICES“Plaintiffs point to no evidence that defendant is amember of the NASD. They assert that ‘it is well-knownthat John Hancock sells the variable products through itssubsidiary. . .” Lin v. John Hancock Variable Life Insurance Co. (Cal.App. 2007)
  29. 29. LITIGATION: SALES PRACTICES Agent Who else is involvedPolicyowner Insurer in the transaction? Broker/Dealer SALES PRACTICESA “clearing broker” which has no direct contact with theconsumer, does not recommend transactions, and doesnot give advice or determine suitability, may not beconsidered the investor’s broker. Mars v. Wedbush Morgan Securities, Inc. 231 Cal.App.3d 1608 (1991)
  30. 30. CONCLUSION CLAIM DISPUTES AgentPolicyowner Insurer Beneficiary Broker/Dealer SALES PRACTICES PERFORMANCE
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