The Office of General Counsel issued the following opinion on July 21, 2003 representing the position of the New York State Insurance Department.
Re: Life Settlements/Electronic Exchange.
May ABC firm establish an electronic exchange whereby investors and insureds may negotiate the sale of life insurance policies?
The exchange, as proposed, would not be contrary to the New York Insurance Law (McKinney 2000 and 2003 Supplement). However, additional details are required to confirm this view.
Mr. A is a sub-licensee of ABC firm, which is licensed as an insurance agent pursuant to New York Insurance Law §§ 2103(a) and (b) (McKinney 2000), as an insurance broker pursuant to New York Insurance Law § 2104 (McKinney 2000 and 2003 Supplement), and as an excess line broker pursuant to New York Insurance Law § 2105 (McKinney 2000 and 2003 Supplement).
Mr. A is aware that there are firms that purchase life insurance policies that have been in force beyond the contestable period from individuals whose probable life expectancy is between 4 to 6 years, which Mr. A characterizes as "life settlements". It is our understanding that once the purchase is made, the purchaser becomes both the owner and beneficiary of the policy. The purchaser then packages a number of policies and sells interests in the policies to investors. As an incentive to investors, the purchaser secures an insurance policy that will pay investors, if an individual insured should live for a specified period beyond his or her anticipated date of demise.
Mr. A proposes establishing a separate entity as an affiliate or subsidiary of his firm whereby purchasers of such "life settlements" will indicate their desire to purchase policies, and policy owners (who may also be the insured), either directly or through intermediaries, will indicate their willingness to sell the policy. Mr. As proposed entity will not purchase or sell any policies, but Mr. A contemplates charging both sides of the transaction for posting their intention to either purchase or sell a policy. It is his belief that the most efficient means of operating such a "meeting place" is an electronic bulletin board. It is his contention that such a bulletin board will benefit policy owners by encouraging bidding for desirable policies.
Mr. A is aware that a similar bulletin board operated in Atlanta, Georgia, but was discontinued by the operator because it was not profitable. Mr. A is not aware, however, as to the exact methodology utilized by that bulletin board.
The New York Insurance Law does not provide restrictions on life settlements. However, although Mr. A disclaims any intent to deal in viatical settlements, some of the participants in the bulletin board may be interested in purchasing or selling a policy that meets the definition of a viatical settlement. Accordingly, New York Insurance Law Article 78 (McKinney 2000) might be applicable.
New York Insurance Law § 7801 (McKinney 2000) defines:
(a) Viatical settlement company means an individual, partnership, corporation or other entity not prohibited from acting as a viatical settlement company . . . that enters into an agreement with a person owning a life insurance policy insuring the life of a person who has a catastrophic or life threatening illness or condition, under the terms of which the viatical settlement company pays compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the policyowner's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company. . . .
(b) Viator means the owner of a life insurance policy insuring the life of a person who has a catastrophic or life threatening illness or condition, who enters into an agreement under which the viatical settlement company will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the viator's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company. Viator may also include a person insured under a group life insurance policy who is not prohibited from assigning his or her rights or benefits and who assigns those rights or benefits by a viatical settlement.
(c) Viatical settlement means an agreement entered into between a viatical settlement company and a viator. The agreement shall establish the terms under which the viatical settlement company will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the viator's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company.
(d) Viatical settlement broker means an individual, partnership, corporation or other entity who or which for another and for a fee, commission, or other valuable consideration, offers or advertises the availability of viatical settlements, introduces viators to viatical settlement companies, or offers or attempts to negotiate viatical settlements between a viator and one or more viatical settlement companies. . . .
Since, in those instances where the insured is a viator, the initial purchase by a viatical settlement company will have already taken place, the proposed entity would not have to be licensed as a viatical settlement broker.
However, New York Insurance Law § 7808(e) provides:
Viatical settlement companies shall not enter into any agreement or communication with any other viatical settlement company with respect to the terms to be offered to a viator except that a viatical settlement company may assign such settlement or insurance policy only to another viatical settlement company licensed pursuant to this article.
Depending on how Mr. As proposed bulletin board and the underlying transactions are structured, the bidding for purchase of a viators policy might be violative of New York Insurance Law § 7808(e).
With respect to using Mr. As bulletin board for life settlements, other than viatical settlements, based upon the information Mr. A has furnished, it does not appear that a license as an insurance consultant would be required. For the same reason, the memorandum required by New York Insurance Law § 2119 (McKinney 2000), consenting to fees to brokers from insureds, would not be required.
It is the rule in New York that the naming of a beneficiary confers insurable interest for life insurance by the insured. New York Insurance Law § 3205(b)(1) (McKinney 2000) and Corder v. Prudential Insurance Company of America, 42 Misc. 2d 423, 248 N.Y.S. 2d 265 (Sup. Ct. Erie 1964). Since in Mr. As situation, the transfer of ownership of the policy and change in beneficiary takes place after issuance of the policy and is not suggested at the time of policy application, there is no violation of New York Insurance Law § 3205(b)(2).
In order to evaluate Mr. As proposal, an understanding of the entire structure of the underlying transactions is required. Although it has been held, Securities & Exchange Commission v. Life Partners, Inc., 87 F.3d 536 (D.C. Circ. 1996), that sale of a interest in a viatical settlement is not a security, as that term is defined under Federal law, 15 U.S.C.A. § 77b(a)(1) (West 1981 and 2003 Supplement), it is our understanding that those entities that are Mr.As potential customers, intend to "securitize" their purchase of the interests in both viatical settlements and life settlements, will therefore be subject to applicable securities law. In addition, the definition of security under New York law, New York General Business Law § 352(1) (McKinney 1996) differs from the Federal definition.
Mr. A refers to a "capitation" policy that enables the purchaser to "accurately guarantee a rate of return on the pooled policies." Such a policy would constitute life insurance, as that term is defined in New York Insurance Law § 1113(a)(1) (McKinney 2000 and 2003 Supplement). Since the policy would cover the lives of a number of disparate individuals and those individuals would not qualify as a group in accordance with New York Insurance Law § 4216 (McKinney 2000 and 2003 Supplement), the policy must be issued out of New York. In addition, New York Insurance Law § 2105(a) does not permit an excess line broker to procure policies of life insurance from unauthorized insurers for delivery into this State.
In evaluating Mr. As proposed bulletin board, it is also important to keep in mind that when the New York Insurance Exchange was first organized, specific enabling legislation, 1978 N.Y. Laws 480, was enacted. Since it was believed then, that such specific legislation was required to authorize exchange of insurance contracts, it is possible that that Mr. As proposed bulletin board would also require legislative authorization.
New York Insurance Law § 6201 (McKinney 2000), the successor to the original New York Insurance Exchange statute, New York Insurance Law § 425-a (McKinney 1978), describes a particular entity, which has since been liquidated. Accordingly, if Mr. As proposed bulletin board does require legislative authorization, it could not be encompassed within the authorization of New York Insurance Law § 6201 and additional legislation would be required. However, based upon the information Mr. A has furnished, it can not be determined whether the activities of proposed bulletin board would extend into areas requiring such legislation.
In summary, while the New York Insurance Law does not prohibit the operation of Mr. As proposed bulletin board, further detailed information as to the functioning of the bulletin board is required for the Department to confirm this view. Mr. A was directed to furnish specific information on the operations of the proposed bulletin board to the Department, if he still wishes to pursue the matter.
For further information you may contact Principal Attorney Alan Rachlin at the New York City office.