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

Andrew M. Cuomo
Governor

James J. Wrynn
Superintendent

OGC Op. No. 11-02-07

The Office of General Counsel issued the following opinion on February 8, 2011, representing the position of the New York State Insurance Department.

Re: Life Settlement Disclosures

Question Presented:

Does New York Insurance Law § 7811(a)(13) require a life settlement provider to disclose to a life insurance policy owner every contractual arrangement that the provider has with unaffiliated life settlement brokers, when the agreements have the same boiler-plate language governing the manner in which the provider and the broker will conduct business if the provider agrees to pursue a life settlement application submitted by the life settlement broker?

Conclusion:

No. Insurance Law § 7811(a)(13) is not intended to require a life settlement provider to disclose to a life insurance policy owner every agreement that the provider has with unaffiliated life settlement brokers, when the agreements have the same boiler-plate language governing the manner in which the provider and the broker will conduct business if the provider agrees to pursue a life settlement application submitted by the life settlement broker, and the life settlement brokers are not actually engaged in the life settlement transaction.

Facts:

The inquirer states that he is director of regulatory compliance and closing operations at ABC, Inc. (“ABC”), a life settlement provider, 1 and that he enters into boiler-plate agreements with life settlement brokers that govern the manner in which ABC and a life settlement broker will conduct business if ABC agrees to pursue a life settlement application submitted by a life settlement broker (the “agreement”). Each agreement sets forth definitions and rules of interpretation, terms of authority, life settlement broker undertakings, life settlement broker compensation, ABC undertakings, confidentiality clauses, certain representations and warranties, indemnification terms and conditions, the term and termination of the agreement, dispute resolution, and miscellaneous items. The agreement also includes ten exhibits, which set forth a producer submission agreement, a code of conduct, and a fee schedule, among other things.

The inquirer further states that nothing in the agreement requires ABC to accept a life settlement application submitted by a life settlement broker. Rather, the agreement states that “ABC is willing, under the terms and conditions of the Agreement, to consider purchasing Policies from Sellers who are represented by a Broker.” In addition, the inquirer states that ABC is not affiliated with any particular life settlement broker, and that any commission that a life settlement broker receives is solely related to the transaction that would result from the successful closing of a life settlement application that ABC has accepted. The inquirer also states that ABC will not conduct business with any broker that does not agree to these general arrangements.

As a result, the inquirer asks the Insurance Department (the “Department”) to confirm that Insurance Law § 7811(a)(13) does not require the disclosure of the agreements.

Analysis:

Insurance Law § 7811(a)(13) applies to disclosures to owners, and states that:

(a) The life settlement provider or 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 provider, no later than the date the life settlement contract is signed by all parties. At a minimum, the document shall state:

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(13) any affiliations or contractual arrangements with any other life settlement provider, life settlement broker, life settlement intermediary or party financing the transaction;[….]

Thus, a life settlement provider or broker must disclose to a life insurance policy owner any affiliations or contractual arrangements with any other life settlement provider, life settlement broker, life settlement intermediary, or party financing the transaction. Section 7811(c)(3), with respect to the life settlement broker disclosure notice, contains a similar requirement.

In OGC Opinion 10-08-03 (Aug. 5, 2010), the Department opined that a life settlement provider must disclose any affiliations or contractual arrangements with any other life settlement provider, life settlement broker, life settlement intermediary, or party financing the transaction, even if the person or entity is not involved in the life settlement transaction. The Department reasoned that the disclosure requirements set forth in Insurance Law § 7811 are intended to ensure that the policy owner has the information necessary to make a fully-informed decision when selling the policy. See OGC Opinion 10-08-03. The Department further opined that while the requirement that a life settlement provider or life settlement 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 has such an affiliation or contractual arrangement, and that the more transparent the life settlement market, the more likely that the owner will make a fully-informed decision. See id.

The Department strongly supported transparency requirements in Article 78 of the Insurance Law when negotiating the bill that enacted Article 78. The Department believes that it is critical for policy owners to be aware of any affiliations or contractual arrangements with any other life settlement provider, life settlement broker, life settlement intermediary, or party financing the transaction that may have a financial interest in a particular life settlement transaction. However, after further consideration, the Department does not believe that the disclosure requirements set forth in § 7811(a)(13) should apply where, as here, a life settlement provider enters into boiler-plate agreements with unaffiliated life settlement brokers that govern the manner in which the provider and a life settlement broker will conduct business if the provider agrees to pursue a life settlement application submitted by a life settlement broker, and the life settlement broker is not actually engaged in the life settlement transaction. In some cases, the provider may have such boiler-plate agreements in place with hundreds of brokers that have no involvement in the particular life settlement transaction and have no other affiliation with the provider. The policy owner would likely gain little or no benefit by receiving a disclosure that the life settlement provider has boiler-plate agreements with hundreds of life settlement brokers, where the agreements merely establish rules or guidelines for all brokers that may submit life settlement applications to the provider, even though those other brokers have no other connection to the provider or the specific transaction. In fact, such disclosure may serve to obscure information pertaining to any life settlement brokers actually involved in the transaction.

Therefore, in the Department’s view, ABC need not disclose to a policy owner that it enters into boiler-plate agreements with unaffiliated life settlement brokers that govern the manner in which ABC and a life settlement broker will conduct business if ABC agrees to pursue a life settlement application submitted by the life settlement broker, when the life settlement broker is not actually engaged in the life settlement transaction. To the extent that OGC Opinion 10-08-03 appears to state otherwise, it should no longer be followed. However, the Department cautions that a court may construe the language more broadly.

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 ABC currently has a life settlement provider licensing application pending with the Insurance Department. Pursuant to the transition provisions of Chapter 499 of the Laws of 2009 (the “Act”), entities that were doing business in New York legally before the Act took effect and have met specific requirements under the Act may continue to operate as life settlement providers pending the disposition of their license applications.