New York State Seal

STATE OF NEW YORK

INSURANCE DEPARTMENT

25 BEAVER STREET

NEW YORK, NEW YORK 10004

David A. Paterson

Governor

James J. Wrynn

Superintendent

OGC Op. No. 10-08-03

The Office of General Counsel issued the following opinion on August 5, 2010, representing the position of the New York State Insurance Department.

Re: Life Settlement Broker Disclosure Requirements

Questions Presented:

1. Under N.Y. Ins. Law § 7811(c)(3), added by Chapter 499 of the Laws of 2009, must a life settlement broker disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary or financing entity even though such person or entity is not involved in the life settlement transaction?

2. Under Insurance Law § 7811(c)(3), must a life settlement broker disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary or financing entity even though such person or entity is not licensed or registered in New York?

3. Under Insurance Law § 7811(c)(4), must a licensed life settlement broker disclose the compensation that it pays to another licensed life settlement broker?

Conclusions:

1. Yes, under Insurance Law § 7811(c)(3), a life settlement broker must disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary or financing entity even though such person or entity is not involved in the life settlement transaction.

2. Yes, under Insurance Law § 7811(c)(3), a life settlement broker must disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary or financing entity even though such person or entity is not licensed or registered in New York.

3. No, under Insurance Law § 7811(c)(4), a licensed life settlement broker need not disclose the compensation that it pays to another licensed life settlement broker. However, any other life settlement broker engaged in the life settlement transaction must comply with the requirements set forth in Insurance Law § 7811(c)(4), and must disclose its compensation.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

On November 19, 2009, Governor David A. Paterson signed into law Chapter 499 of the Laws of 2009, which repeals Article 78 of the Insurance Law and adds a new Article 78 entitled, “Life Settlements.” 1 Chapter 499 took effect on May 18, 2010, with the exception of new Insurance Law §§ 7810, 7811, and 7815, which apply to privacy, disclosures to owners of life insurance policies and insureds under the policies, and stranger-originated life insurance (“STOLI”), respectively, and which took effect on November 19, 2009. This inquiry relates specifically to the new disclosures that life settlement brokers now must provide to life insurance policy owners pursuant to Insurance Law § 7811(c). This section provides in pertinent part that:

The life settlement broker shall provide the owner with a separate written document conspicuously displaying the information and disclosures required by this subsection. The separate document shall be signed by the owner and life settlement broker, no later than the date the life settlement contract is signed by all parties. At a minimum, the document shall state:

* * *

(3) any affiliations or contractual arrangements with any life settlement provider, other life settlement broker, life settlement intermediary or any financing entity;

(4) the gross amount to be paid pursuant to the life settlement contract, the net amount of the proceeds to be paid to the owner pursuant to the life settlement contract, the amount of compensation to be paid to the life settlement broker pursuant to the life settlement contract, and the name of such life settlement broker. For purposes of this paragraph "gross amount to be paid" means the total amount or value to be paid by the life settlement provider for the purchase of one or more life insurance policies, inclusive of commissions and fees….

1. and 2. Affiliations or contractual arrangements

The inquirer asks whether a life settlement broker must disclose to a life insurance policy owner {“owner”) any of the life settlement broker’s affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary, or financing entity even though such person or entity is not involved in the life settlement transaction. The inquirer further asks whether a life settlement broker must disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary, or financing entity even though such person or entity is not licensed or registered in New York.

New Article 78 of the Insurance Law requires both the life settlement provider itself as well as the life settlement broker to make certain disclosures to the life insurance policy owner. These disclosure requirements are intended to ensure that the owner has the information necessary to make a fully-informed decision when selling the policy. Specifically, Insurance Law §§ 7811(a)(13)2 and § 7811(c)(3) require both a life settlement provider and a life settlement broker, respectively, to disclose any affiliations or contractual arrangements3 with any other life settlement provider, other life settlement broker, life settlement intermediary or any financing entity. Although the two provisions read slightly differently — section 7811(a)(13) refers to a “party financing the transaction” whereas section 7811(c)(3) says any “financing entity” — the Department does not evince any legislative intent that they should apply to different entities.4

On their face, both provisions require the life settlement provider or the life settlement broker to disclose any such affiliations or contractual arrangements, irrespective of whether the affiliated person or entity is involved in the specific life settlement transaction. Although the requirement that a life settlement provider or broker disclose any affiliations or contractual arrangements with a person or entity that is not involved in the life settlement transaction may seem broad, there are a number of reasons why the owner’s interests are best served by knowing whether a life settlement provider or a life settlement broker has such an affiliation or contractual arrangement. For example, the owner may be seeking offers from multiple providers and knowledge of an affiliation or arrangement could explain why certain providers may not make offers or make very low offers. The more transparent the life settlement market, the more likely that the owner will make a fully-informed decision.

As such, a life settlement broker must disclose any affiliations or contractual arrangements with a life settlement provider, other life settlement broker, life settlement intermediary or financing entity even though such person or entity is not involved in the life settlement transaction. And, in response to the second question, this requirement applies whether or not such provider or other person or entity is licensed or registered in New York. The law, by its terms, does not limit applicability of the disclosure to licensees and registrants. Indeed, financing entities do not even have a licensing or registration requirement under the Insurance Law, yet their involvement in financing the provider’s purchase of the policy must be disclosed.

3. Disclosure of compensation paid by a life settlement broker to another life settlement broker

The inquirer's final question asks whether a licensed life settlement broker must disclose the compensation that it pays to another life settlement broker. These arrangements may arise because one life settlement broker referred the insurance policy owner to another life settlement broker, and the first life settlement broker is seeking a referral fee from the second, which, under new Insurance Law § 7814(a)(8), may be paid only to another licensed life settlement broker, or one life settlement broker may act in a wholesale capacity, and thus act as a middle-man between the provider and the broker directly engaging with the owner.

Relevant to this discussion is the disclosure provision set forth in new Insurance Law § 7811(a)(8) for life settlement providers, which requires the life settlement provider to disclose:

the gross offer or bid that the life settlement provider shall pay pursuant to the life settlement contract; the net amount to be paid to the owner pursuant to the life settlement contract; the name of each life settlement broker, life settlement intermediary, insurance producer or insurance consultant that will be compensated by the life settlement provider, or any affiliate, parent corporation, or subsidiary of the life settlement provider; and the amount of compensation that the life settlement provider, or any affiliate, parent corporation or subsidiary of the life settlement provider, shall provide to a life settlement broker, life settlement intermediary, insurance producer or insurance consultant, or any affiliate, parent corporation or subsidiary of such broker, intermediary, producer, or consultant, pursuant to the life settlement contract. For the purposes of this paragraph, “gross offer or bid” means the total amount or value offered by the life settlement provider for the purchase of one or more life insurance policies, inclusive of commissions and fees;

Thus, the law unequivocally requires a life settlement provider to disclose the amount that it compensates “each life settlement broker”. However, while Insurance Law § 7811(c)(4) of the Department’s bill that had originally been proposed (Assembly 7131) imposed a similar disclosure requirement on life settlement brokers, the Legislature removed the requirement from the bill that the Legislature ultimately enacted (Senate 66009/Assembly 40009). Hence, a licensed life settlement broker is not required under Insurance Law § 7811(c) to disclose the compensation that it pays to another licensed life settlement broker.

However, under new Insurance Law § 7811(c)(4), a licensed life settlement broker must disclose the amount of compensation that the life settlement broker will receive pursuant to the life settlement contract. Where there are multiple life settlement brokers involved in the transaction, the plain language of the statute requires every such life settlement broker to comply with these disclosure requirements. Indeed, pursuant to new Insurance Law § 7813(l), a life settlement broker shall represent only the owner and owes a fiduciary duty to the owner, including a duty to act according to the owner's instructions and in the best interest of the owner. Clearly, a life settlement broker can not discharge such duty where the owner is ignorant of how much the broker is being compensated or, for that matter, that such life settlement broker is even involved in the sale.

Moreover, new Insurance Law § 7814(a)(9) prohibits any person from directly or indirectly providing compensation to a life settlement broker, except where the compensation is for a specific life settlement contract and is clearly disclosed to the owner as required in Article 78. Although the actual life settlement contract may not contain the fee-sharing arrangement between the life settlement brokers, the compensation to be paid to the other life settlement broker flows from the life settlement contract and would not exist but for the life settlement contract. Nothing, however, precludes the first life settlement broker from providing the disclosure on behalf of the other life settlement broker.

For further information, you may contact Assistant Deputy Superintendent and Counsel Paul A. Zuckerman at the New York City Office.

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1 New Insurance Law § 7802(k) generally defines “life settlement contract” as “an agreement establishing the terms under which compensation is provided to an owner, which compensation is less than the expected death benefit of the policy, in return for the assignment, transfer, sale, release, devise or bequest of any portion of: (A) the death benefit; (B) the ownership of the policy; or (C) any beneficial interest in the policy, or in a trust or any other entity that owns the policy, where a primary purpose of the transaction is to acquire the policy.”

2 While either the life settlement provider or the life settlement broker may provide the disclosures required by Insurance Law § 7811(a)(13), the life settlement provider must sign the disclosures. Although Insurance Law § 7811(a)(13) allows a life settlement broker to provide the disclosures for practical reasons, the ultimate obligation is on the life settlement provider, and the information to be disclosed is the information pertaining to the life settlement provider, since new Insurance Law § 7811(c) addresses the life settlement broker’s own disclosures.

3 To be sure, the applicability of the disclosure is not limited to entities that are “affiliates” of the life settlement provider or life settlement broker. Under the Insurance Law, other than for holding company purposes under Article 15, an affiliate is a corporation a majority of whose shares is owned or controlled by shareholders, directors or officers of another corporation, who own or control a majority of the shares of the other corporation. See Ins. Law § 107(a)(4). The phrase “any affiliations or contractual relationships” clearly has broader meaning and should be construed liberally by a life settlement provider or life settlement broker. At the minimum, the Department construes the phrase to include an entity that is under common “control” with the life settlement provider or life settlement broker. Insurance Law § 107(a)16) defines “control” as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise.

4 New Insurance Law § 7802(e) defines “financing entity” to mean:

an accredited investor:
(1) whose principal activity in connection with the transaction is providing funds to effect the life settlement contract or to purchase one or more policies; and
(2) who has an agreement in writing with a life settlement provider to finance the acquisition of a life settlement contract.