New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on December 28, 2004 representing the position of the New York State Insurance Department.

Re: Viatical Settlement Companies

Question Presented:

1. What are the consequences if an investor purchases, as an investment, a share in a viatical settlement from an entity that is not licensed as a viatical settlement company?

2. What are the consequences if the entity that purchased the policy from the viator did not comply with applicable disclosure requirements?

3. May a person or organization that is domiciled outside the United States obtain a license as a viatical settlement company?

Conclusions:

1. If the purchase was from a viator, as defined in New York Insurance Law § 7801(b) (McKinney 2000), the entity that purchased the policy from the New York viator would be in violation of the New York Insurance Law (McKinney 2000 and 2005 Supplement). The effect upon the underlying transaction would depend upon the facts and circumstances of the sale and the knowledge of the parties. If the purchase was not from a viator, the New York Insurance Law would not be implicated.

2. If the required disclosures are not made, and the viator did not make a knowing sale of the policy, the viator might be able to rescind the transaction. The effect of such non-disclosure on the investor is not covered by the New York Insurance Law. If the viator had already died, the original beneficiary or the estate of the viator might similarly be in a position to rescind the viatication.

3. The domicile of the person or entity outside the United States would not, solely by reason of that fact, preclude licensure as either a viatical settlement company or a viatical settlement broker.

Facts:

The inquirer’s institute is pursuing a project on viatical life settlements. He indicated that an interest in a substantial number of such settlements are being purchased by investors in Germany and Austria and had some queries as they affect such investments.

Analysis:

Limitation of Scope of Opinion

New York Insurance Law § 7808(e) (McKinney 2000) 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.

The Insurance Department does not interpret New York Insurance Law § 7808(e) as prohibiting the sale of interests in viaticated policies, as an investment, by a viatical settlement company. Therefore, this opinion is limited to consideration of the underlying purchase of the policy from a viator.

While the sale of interests in life settlements are not considered to be securities under Federal securities laws, Securities & Exchange Commission v. Life Partners, Inc., 87 F3d. 536 (D.C. Circ. 1996), some states consider the sale of such interests to be securities under their own definition of security. With respect to the views of New York on the sale of interests in life insurance policies as investments, the inquirer was directed to contact:

Investor Protection Bureau
Department of Law
120 Broadway
New York, NY 10271

Viatical settlements are defined in New York Insurance Law § 7801(b) & (c) (McKinney 2000):

 (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. . . .

 (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.

The sale of a life insurance policy by an individual who is not a viator, e.g. a life settlement, is not regulated by the New York Insurance Law. The sale of a life insurance policy by an individual who is not resident in New York is not regulated by the New York Insurance Law. Accordingly, this opinion is limited to sales of policies by viators who are New York residents. The National Association of Insurance Commissioners has promulgated a Model Viatical and Life Settlement Statute. Information about the NAIC model and other states’ regulation of life settlements may be obtained from:

National Association of Insurance Commissioners
2301 McGee Street
Kansas City, MO 64108-2662
USA

Licensure of Viatical Settlement Company and Viatical Settlement Broker

New York Insurance Law § 7802(a) (McKinney 2000 and 2004 Supplement) provides:

No individual, partnership, corporation or other entity may act as a viatical settlement company or broker or enter into or solicit a viatical settlement without first having obtained a license from the superintendent, in accordance with procedures established by regulation. 

New York Insurance Law § 7801(a) & (d) define:

(a) ‘Viatical settlement company’ means an individual, partnership, corporation or other entity . . . 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. . . .

(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. ‘Viatical settlement broker’ does not include an attorney, accountant or a person acting under a power of attorney from the viator, retained to represent the viator whose compensation is paid solely by the viator and without regard to whether a viatical settlement is effected.

New York Insurance Law § 3205 (McKinney 2000 and 2004 Supplement) limits the naming of a beneficiary of a life insurance policy to one who has an insurable interest. However, such interest, provided that there has not been an improper solicitation in violation of New York Insurance Law § 3205, is automatically conferred by the insured designating the beneficiary. Corder v. Prudential Insurance Company, 42 Misc. 2d 423, 248 N.Y.S. 2d 265 (Sup. Ct. Erie Cnty. 1964). There is no restriction in New York law or regulations upon an insured changing the beneficiary of an existing life insurance policy.

Accordingly, if an investor purchases a share in a viatical settlement from an entity that is not licensed as a viatical settlement company, the entity purchasing or brokering the purchase of the policy would have been in violation of New York Insurance Law § 7802(a), and be subject to discipline by the New York Insurance Department. The effect upon the underlying investment would depend upon the facts and circumstances of the sale and the knowledge of the purchaser.

Required Disclosures

New York Insurance Law § 7807 (McKinney 2000), dealing with disclosure, provides:

(a) The application for a viatical settlement shall contain a notice, prominently displayed, to read as follows: ‘Receipt of payment pursuant to a viatical settlement may affect eligibility for public assistance programs such as medical assistance (medicaid), family assistance, supplementary social security income and AIDS drug assistance programs and may be taxable. Prior to applying for a viatical settlement, policyowners should consult with the appropriate social services agency concerning how receipt will affect the eligibility of the recipient and the recipient's spouse or dependents, and with a qualified tax adviser.’

(b) Upon receipt of an application for a viatical settlement, the viatical settlement company shall deliver to the applicant an information booklet describing: (1) how viatical settlements operate; (2) possible alternatives to viatical settlements for persons with catastrophic or life-threatening illnesses, including, but not limited to, accelerated benefits offered by the issuer of the life insurance policy and loans secured by the life insurance policy; (3) tax consequences that may result from entering into a viatical settlement; (4) consequences of interruption of assistance as provided by medical or public assistance programs; (5) the viator's right to rescind a viatical settlement within fifteen days of receipt of the viatical settlement proceeds; and (6) the identity of any person who will receive any fee or compensation from the viatical settlement company with respect to the viatical settlement and the amount and terms of such compensation.

The required disclosures have been expanded by regulation, N.Y. Comp. Codes R. & Regs. tit 11, § 380.8 (2003) (Regulation 148).

If the required disclosures are not made by the viatical settlement company or viatical settlement broker, especially if there has been fraud or overreaching, notwithstanding the 15 day period expressed in New York Insurance Law § 7807(b)(5), and the viator did not make a knowing sale, the viator might be able to rescind the transaction. In addition, the original beneficiary or the estate of the viator might have a cause of action to void the transaction. The effect of any non-disclosure on the investment is not covered by the New York Insurance Law.

"Foreign" Viatical Settlement Company or Viatical Settlement Broker

Under the New York Insurance Law, an insurer that is domiciled in another jurisdiction of the United States is considered a foreign insurer, New York Insurance Law § 107(a)(21) (McKinney 2000 and 2004 Supplement), while, New York Insurance Law § 107(a)(5), one incorporated under the laws of another country is an alien insurer. However, the definitions in New York Business Corporation Law § 102(7) (McKinney 2003), dealing with for profit corporations, and New York Not-For-Profit Corporation Law § 102(7) (McKinney 1997 and 2004 Supplement) both define a foreign corporation as one incorporated under the laws of a jurisdiction other than New York, which definition would encompass a corporation incorporated under the laws of a jurisdiction outside the United States.

While New York Insurance Law §§ 107(44) and 1106 (McKinney 2000) require that an alien insurer do business in New York through a United States Branch, there is no similar statutory requirement for other Insurance Department licensees.

New York Insurance Law § 7802 provides:

(b) Application for a viatical settlement company or broker license shall be made to the superintendent by the applicant on a form prescribed by the superintendent, and the application shall be accompanied by a license fee of two thousand five hundred dollars. . . .

(d) The applicant shall provide such information as the superintendent may require on forms prescribed by the superintendent. . . .

(f) (1) Upon the filing of an application and the payment of the license fee, the superintendent shall make an investigation of each applicant and shall issue a license if he finds that the applicant: . . . (C) if a corporation, is a corporation incorporated under the laws of this state or a foreign corporation authorized to transact business in this state; . . . .

Upon compliance with the requirements of New York Business Corporation Law Article 13 (McKinney 2003) or New York Not-For-Profit Corporation Law Article 13 (McKinney 1997 and 2004 Supplement), a corporation incorporated under the laws of a jurisdiction outside of New York, including one outside the United States, may be authorized to do business in New York.

New York Insurance Law § 7806 (McKinney 2000) provides:

The superintendent may examine the business and affairs of any licensee or applicant for a license. The superintendent shall have reasonable access to any records, books, files or other information of the licensee or applicant. The expenses incurred in conducting any examination shall be paid by the licensee or applicant.

In order to facilitate any examination, the Insurance Department would require that the licensee’s books and records be maintained within the United States.

Accordingly, subject to a requirement that the licensee’s books and records be maintained in the United States, an individual or organization domiciled or incorporated in a jurisdiction outside the United States may become licensed as a viatical settlement company or viatical settlement broker, provided such applicant is qualified in all other respects.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.