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. 11-02-10

The Office of General Counsel issued the following opinion February 10, 2011, representing the position of the New York State Insurance Department.

Article 78 of the Insurance Law and Life Settlement Servicing Entities

Question:

What are the responsibilities of a “life settlement servicing entity” under Article 78 of the New York Insurance Law?

Conclusion:

Article 78 of the New York Insurance Law does not define the term “life settlement servicing entity” and there is no requirement for the licensure or registration of any such entity that is involved in the business of life settlements in the limited manner described in your inquiry. Nevertheless, to the extent that a life settlement servicing entity knows the identity of the insured under a settled policy, the life settlement servicing entity must abide by the privacy provisions of Article 78. Furthermore, unless the life settlement servicing entity is the authorized representative of a licensed life settlement provider or licensed life settlement broker, the life settlement servicing entity must not contact the insured for the purpose of determining the insured’s health status.

Facts:

ABC, LLC (“ABC”) is a “life settlement servicing entity” that handles premium payments, tracking, monitoring, death claims and similar administrative functions on behalf of policy owners. ABC is retained by policy owners that have obtained the policies subsequent to the initial settlement of the policy by a life settlement provider and that these policy owners are generally hedge funds, financing entities, or other commercial investors that are often the third or fourth owners of the settled policy. In certain instances the original life settlement provider may no longer be in existence.

It is represented that ABC, in the course of providing its services, does not have any contact with the insureds under the settled policies. Rather, ABC only contacts its own clients (the current owners of settled policies). ABC obtains the information that it needs to perform its services through the use of data-mining search programs to obtain information through the internet. Finally, ABC has no financial interest in any settled policies or the proceeds thereof.

Analysis:

The inquiry pertains to New York’s recently enacted life settlement law (Article 78 of the New York Insurance Law). Of particular relevance are New York Insurance Law §§ 7802, 7810, and 7813 (McKinney Supp. 2010). Insurance Law § 7802 defines the terms used in the life settlement law, including, inter alia, the various participants to life settlement transactions as well as what constitutes the business of life settlements. That section provides, in pertinent part, as follows:

(c)(1) “Business of life settlements” means an activity involving, but not limited to, offering to enter into, soliciting, negotiating, procuring, effectuating, monitoring, or tracking life settlement contracts.

* * * *

(j) “Life settlement broker” means a person who, for compensation, solicits, negotiates or offers to negotiate a life settlement contract; except that such term shall not include a licensed life settlement provider, or representative thereof, licensed attorney at law, certified public accountant, or financial planner that is accredited by a nationally recognized accreditation agency acceptable to the superintendent, who is retained in his or her professional capacity, does not advertise as being in the business of life settlements and is compensated without regard to whether a life settlement contract is effectuated.

* * * *

(k)(1) “Life settlement contract” means 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.

* * * *

(3) “Life settlement contract” shall not include:

* * * *

(G) an agreement to assign, transfer or pledge a settled policy, or any interest therein, to a licensed life settlement provider, an accredited investor or qualified institutional buyer, financing entity, special purpose entity, or related provider trust... .

* * * *

(l) “Life settlement intermediary” means a person who maintains an electronic or other facility or system, for the disclosure, through a forum of offers and counteroffers, to sell or purchase a policy pursuant to a life settlement contract; and delivers to:

(1) a life settlement provider an offer from a life settlement broker or owner to sell a policy; or
(2) an owner or life settlement broker an offer from a life settlement provider to purchase a policy.

* * * *

(m) “Life settlement provider” means a person who enters, or offers to enter, into a life settlement contract with the owner.

Insurance Law § 7810 sets forth the privacy provisions of the life settlement law and provides, in pertinent part, as follows:

(a) Except as otherwise permitted or required by law, no life settlement provider, life settlement broker, or life settlement intermediary, or any authorized representative thereof, insurer, information bureau, rating agency or company, or any other person with actual knowledge of an insured or owner's identity, shall disclose the identity of the insured or owner, or any information that there is a reasonable basis to believe could be used to identify the insured or owner, or the insured's financial or medical information, to any person unless the disclosure is:
(1) necessary to effect a life settlement contract between the owner and a life settlement provider and the owner and insured have provided prior written consent to the disclosure;
(2) necessary to effectuate the sale or transfer of a life settlement contract or a settled policy, or interest therein, provided that every sale is conducted in accordance with applicable state and federal law and provided further that the owner and the insured have both provided prior written consent to the disclosure;
(3) provided in response to an investigation or examination by the superintendent, any other governmental officer or agency, or a self-regulating entity established pursuant to federal securities law;
(4) a term or condition to the transfer of a policy by one licensed life settlement provider to another licensed life settlement provider, in which case the receiving life settlement provider shall be required to comply with the confidentiality requirements of this section;
(5) necessary to allow the life settlement provider or life settlement broker, or any authorized representative thereof to administer the insurance policy, or to make contacts for the purpose of determining health status as authorized by subsection (k) of section seven thousand eight hundred thirteen of this article. For the purposes of this article, the term “authorized representative” shall not include any person who has or may have any financial interest in the life settlement contract other than a licensed life settlement provider, licensed life settlement broker, financing entity, related provider trust or special purpose entity; further, a life settlement provider or life settlement broker shall require its authorized representative to agree in writing to adhere to the privacy provisions of this article;
(6) required to purchase insurance; or
(7) otherwise permitted by regulation promulgated by the superintendent.

(Emphasis added.)

The Legislature enacted New York’s life settlement law to regulate the sale of life insurance policies by owners of the policies and the subsequent sale and exchange of such settled policies in the secondary market. Prior to the law’s enactment, transactions of this type were completely unregulated in New York State unless they qualified as viatical settlements. 1 The law was motivated by the need to protect insureds seeking to sell their policies. Toward that end, the life settlement law requires that life settlement brokers and providers be licensed and that they make extensive disclosures to owners and insureds. The law also aims to guarantee the privacy of insureds and policy owners by imposing restrictions on the disclosure of the identity or other personally identifying information of the insured or owner. The law also imposes reporting requirements on life settlement providers; requires that life settlement contract forms be filed with and approved by the Superintendent; specifically prohibits certain practices; and sets forth certain additional general rules governing the conduct of the business of life settlements in this state. Finally, the law expressly codifies the prohibition on stranger-originated life insurance (“STOLI”).

The definition of “business of life settlements” set forth in Insurance Law § 7802(c)(1) includes the monitoring and tracking of life settlement contracts. ABC, which is described as a life settlement service provider, is engaged in these activities, and, accordingly, can itself be said to be engaged in the business of life settlements. It is not, however, based upon a description of its activities, acting in the capacity of a life settlement broker, life settlement provider, or life settlement intermediary as defined under the Insurance Law. The Insurance Law does not impose any specific duties, limitations, or restrictions upon life settlement service providers; neither does it define that term. This does not mean, though, that life settlement service providers can operate without regard to the law. Notably, the privacy protection provisions of Insurance Law § 7810(a) apply to “any … person with actual knowledge of an insured or owner’s identity… .” Accordingly, ABC is subject to the privacy provisions of that section.

Another issue raised in the inquiry is that of contacts with the insured. Insurance Law § 7813(k) governs such contacts and provides as follows:

(k) Contacts with the insured for the purpose of determining the health status of the insured by a licensed life settlement provider after the life settlement contract has been executed shall be made only by the licensed life settlement provider or licensed life settlement broker, or any authorized representative thereof, and shall be limited to once every three months for an insured with a life expectancy of more than one year, and to no more than once per month for an insured with a life expectancy of one year or less.

The statute sets forth limits on the frequency of such contacts after a life settlement contract has been executed, and specifies that only the licensed life settlement provider, life settlement broker or the authorized representative thereof may make such contact. Based on the facts set forth in the inquiry, ABC does not qualify as a licensed life settlement provider or life settlement broker. Accordingly, it may not make contact with any insured under a settled policy unless it is acting as the authorized representative of a licensed life settlement provider or life settlement broker.

The inquiry stated that the limitation set forth in § 7813(k), if interpreted as applying only to the original life settlement provider and/or broker, may not be practical given the fact that entities such as ABC usually work for institutional owners that are often the third or fourth owner of the policy. This, in addition to the fact that in many cases the life settlement provider that effected the settlement of the policy may no longer exist, would make it at best difficult or, more likely, impossible for ABC to become the authorized representative of the original life settlement provider or life settlement broker. In our view, however, the limitation in § 7813(k) is not restricted to the original life settlement provider and/or broker. This interpretation is supported by Insurance Law § 7813(o), which addresses subsequent sales of settled policies, and states as follows:

(o) A life settlement provider may sell, assign, pledge or otherwise transfer the ownership of a settled policy only to a licensed life settlement provider, an accredited investor or qualified institutional buyer, financing entity, special purpose entity, or related provider trust; provided, however, a life settlement provider may sell, assign, pledge or otherwise transfer a beneficial interest in a settled policy to someone other than a life settlement provider licensed in this state, an accredited investor or qualified institutional buyer, financing entity, special purpose entity, or related provider trust if a licensed life settlement provider continues to administer and service the settled policy and protects the privacy of the insured and owner pursuant to section seven thousand eight hundred ten of this article.

Thus, in cases where the potential purchaser is not a qualified purchaser, only a beneficial interest in the settled policy may be sold, and a life settlement provider must remain the administrator and servicer of the settled policy. Notably, § 7813(o) does not mandate that the original life settlement provider remain the administrator.

In conclusion, ABC is not required to be licensed under the Insurance Law. It is, however, engaged in the business of life settlements and must abide by the privacy provisions of Insurance Law § 7810(a). Finally, pursuant to Insurance Law § 7813(k), it is not permitted to make contact with any insured under a settled policy, unless it does so as the authorized representative of a life settlement provider or life settlement broker.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.

____________________________________________________________________________________________________________

1 A viatical settlement is the sale of a life insurance policy insuring the life of an individual who has a catastrophic or life threatening illness or condition. Viatical settlements thus represent only a subset of the life settlement market.