The presentation discussed the complex interplay between insurance law, securities law, and trust law as they relate to the sale and ownership of variable insurance products, highlighting issues around standing, damages, duties of agents and brokers, and performance of insurance contracts and investment choices. Key topics included determining who has standing to bring claims or lawsuits and understanding the duties insurance agents and brokers owe to policyowners.

1. 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
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. 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. TRUSTS AND QUALIFIED ACCOUNTS
Follow The Money!

4. TRUSTS AND QUALIFIED ACCOUNTS
Trusts
Settlor Trustee Beneficiary
Traditional and Roth IRAs
Individual IRA Individual or
Beneficiary
SEP IRAs
Employer IRA Employee or
Beneficiary
SIMPLE IRAs
Employer/ IRA Employee or
Employee Beneficiary

5. TRUSTS AND QUALIFIED ACCOUNTS
Qualified Accounts
Employer Plan Employee or
Beneficiary
Pension Plans
Employer/ Plan Employee or
Employee Beneficiary
Variable Life Insurance
Policyowner Insurer Beneficiary
Annuities
Policyowner Insurer Beneficiary

6. FRAMEWORK
CLAIM DISPUTES
Policyowner Insurer Beneficiary
SALES PRACTICES
PERFORMANCE

7. LITIGATION: CLAIM DISPUTES
CLAIM DISPUTES
Payment obligation
dictated by terms
of the contract. Insurer Beneficiary
Beneficiaries have “no enforceable right” to the proceeds
of 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 revocable
expectancy vesting only on the insured’s death.”
In re Marriage of O’Connell, 8 Cal. App. 4th 565, 577 (1992)

8. LITIGATION: CLAIM DISPUTES
CLAIM DISPUTES
If the beneficiary is
a trust . . . only the
trustee has standing. Insurer Trust
Trust beneficiary has no legal title or
ownership interest in the trust assets,
so may not sue in the name of the trust Beneficiary
as 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 the
enforcement of the trust, according to its terms.”
Saks v. Damon Raike & Co., 7 Cal. App. 4th 419, 427 (1992)

9. LITIGATION: CLAIM DISPUTES
CLAIM DISPUTES
If the beneficiary is
an estate . . . only
the estate’s legal Insurer Estate
representative has
standing.
· 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. 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. 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. LITIGATION: PERFORMANCE
Policyowner Insurer Beneficiary
PERFORMANCE
Trusts Trust Agreement
Duty of Care
Fiduciary Duties
IRAs/QAs/Pensions Account Agreement / Plan
Duty of Care
Fiduciary Duties
ERISA (if employer-sponsored)

13. LITIGATION: PERFORMANCE
Policyowner Insurer Beneficiary
PERFORMANCE
Variable 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 liability
and damage is the sum or sums payable in the manner
and at the times as provided in the policy to the person
entitled thereto.”
California Insurance Code §10111

14. LITIGATION: PERFORMANCE
Policyowner Insurer Beneficiary
PERFORMANCE
Variable Life/Annuities Contract Terms
Consider the impact of actions by policyholder:
· Investment choices
· Payment of premiums
· Policy loans

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 or
assisting a trustee in the conduct of a transaction, if the third
person acts in good faith and for a valuable consideration
and without actual knowledge that the trustee is exceeding
the trustee’s powers or improperly exercising them: . . . (b)
The third person is fully protected in dealing with or assisting
the trustee just as if the trustee has and is properly
exercising the power the trustee purports to exercise.”
California Probate Code §18100

16. LITIGATION: SALES PRACTICES
Policyowner Insurer If the policyowner is
a trust . . . consider
SALES PRACTICES STOLI.
“Trusts and special purpose entities that are used to
apply for and initiate the issuance of policies of insurance
for investors, where one or more beneficiaries of those
trusts or special purpose entities do not have an
insurable interest in the life of the insured, violate the
insurable interest laws and the prohibition against
wagering on life.”
California Insurance Code §10110(d)
Applies only to policies issued after 7/1/2010

17. LITIGATION: SALES PRACTICES
Policyowner 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. LITIGATION: SALES PRACTICES
Policyowner 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. LITIGATION: EXAMPLE
Policyowner 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. LITIGATION: EXAMPLE
Policyowner Insurer What has the
owner lost?
SALES PRACTICES
Face amount? Never payable to policyowner / insured
Right to renew? Renewal requires more premiums
Right to designate beneficiary?
· No monetary value to policyowner
· Only provides “peace of mind”

21. LITIGATION: SALES PRACTICES
Policyowner Insurer Variable Life/Annuities
SALES PRACTICES
Contract usually has some cash value.
Typical claims:
· Contract is not as represented to policyowner
· Contract was not suitable for policyowner

22. LITIGATION: SALES PRACTICES
Agent Who does the agent
Policyowner Insurer represent?
SALES PRACTICES
“The most definitive characteristic of an insurance agent is
his authority to bind his principal, the insurer; an insurance
broker 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 the
insurer, but rather is an agent of the insured.
California Insurance Code §33

23. LITIGATION: SALES PRACTICES
Agent Who does the agent
Policyowner Insurer represent?
SALES PRACTICES
If an insurance agent is the agent for several companies
and selects the company with which to place the insurance
or insures with one of them according to directions, the
insurance agent is the agent of the insured.
3 Couch on Insurance (2d ed. 1984) § 25:112, p. 477

24. LITIGATION: SALES PRACTICES
Agent What are the
Policyowner Insurer agent’s duties?
· DUTY OF CARE
SALES PRACTICES
"[A]n insurance [broker] will be liable to his client in tort
where his intentional acts or failure to exercise reasonable
care with regard to the obtaining or maintenance of
insurance results in damage to the client."
Saunders v. Cariss, 224 Cal.App.3d 905 (1990)

25. LITIGATION: SALES PRACTICES
Agent What are the
Policyowner Insurer agent’s duties?
· DUTY OF CARE
SALES PRACTICES · FIDUCIARY DUTY ?
“Agency law establishes that the relations of principal and
agent, like those of beneficiary and trustee, are fiduciary in
character.”
Workmen’s Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011)
“. . . it is unclear whether a fiduciary relationship exists
between an insurance broker and an insured.”
Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc.
115 Cal.App.4th 1145 (2004)

26. LITIGATION: SALES PRACTICES
Agent What are the
Policyowner Insurer agent’s duties?
· DUTY OF CARE
SALES PRACTICES · FIDUCIARY DUTY ?
“. . . we are unaware of even a single California precedent
permitting a client to sue an insurance broker for breach of
fiduciary duty."
Workmen’s Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011)
“This Court will not expand the doctrine of fiduciary duty to
include insurance brokers, given that it has not been
recognized by California courts.”
Miniace v. Pacific Maritime Assoc., 2005 U.S. Dist. Lexis 40708, p. *34

27. LITIGATION: SALES PRACTICES
Agent What are the
Policyowner 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. LITIGATION: SALES PRACTICES
Agent Who else is involved
Policyowner Insurer in the transaction?
Broker/Dealer
SALES PRACTICES
“Plaintiffs point to no evidence that defendant is a
member of the NASD. They assert that ‘it is well-known
that John Hancock sells the variable products through its
subsidiary. . .”
Lin v. John Hancock Variable Life Insurance Co. (Cal.App. 2007)

29. LITIGATION: SALES PRACTICES
Agent Who else is involved
Policyowner Insurer in the transaction?
Broker/Dealer
SALES PRACTICES
A “clearing broker” which has no direct contact with the
consumer, does not recommend transactions, and does
not give advice or determine suitability, may not be
considered the investor’s broker.
Mars v. Wedbush Morgan Securities, Inc. 231 Cal.App.3d 1608 (1991)

30. CONCLUSION
CLAIM DISPUTES
Agent
Policyowner Insurer Beneficiary
Broker/Dealer
SALES PRACTICES
PERFORMANCE