OGC Opinion No. 08-11-08

The Office of General Counsel issued the following opinion on November 26, 2008, representing the position of the New York State Insurance Department.

RE: Life Settlements

Question Presented:

Does New York Insurance Law prohibit an entity, such as a trust, corporation, or partnership, that owns a life insurance policy covering an individual insured who is not chronically or terminally ill from selling the insurance policy to a third party?

Conclusion:

No. The Insurance Law would govern the transaction if it were a viatical settlement as defined in N.Y. Ins. Law § 7801 (McKinney 2000). This transaction however, is not a viatical settlement because the insured does not have a catastrophic or life-threatening illness.

Facts:

The inquirer presents this inquiry as one of a general nature, without reference to particular facts.

Analysis:

The inquirer asks whether an entity that owns a life insurance policy may sell that policy to a third party when the person whose life is insured is not chronically or terminally ill. For the sake of analysis, the Department assumes that at the time the policy was issued, the transaction was in compliance with the insurable interest requirements of Insurance Law § 3205. But if the entity was used to take an ownership interest in the policy solely for the purpose of selling the policy to a third party, the original purchase of the policy may not meet the insurable interest requirements of Insurance Law §3205. See Opinion of Office of General Counsel Nos. 08-05-02 (May 6, 2008) and 05-12-15 (December 19, 2005).

Insurance Law §3205(b)(1) states that any person of lawful age on his or her own initiative may purchase insurance covering his or her life. Insurance Law § 3205(b)(1) further states that nothing in that statute prohibits the purchaser from making an immediate transfer or assignment of such a policy. Although by its terms, Insurance Law § 3205(b)(1) expressly allows an individual to procure and immediately transfer or assign a policy on his own life to another person, whether or not the assignee has an insurable interest (see Hota v. Camaj, 299 A.D.2d 453 (2d Dep’t 2002)), procurement of insurance solely as a speculative investment for the ultimate benefit of a disinterested third party is contrary to the long established public policy against “gaming” through life insurance purchase. See Opinion of Office of General Counsel No. 05-12-15 (December 19, 2005). Further, a policy that is purchased for the purpose of immediately transferring it to another as an investment is not necessarily procured at the person’s “own initiative,” as the statute requires.

Insurance Law § 3205(b)(2) prohibits any person from purchasing or causing to be purchased a life insurance policy covering the life of another person, unless the policy benefits are payable to the person whose life is insured, that person’s personal representative, or any other person with an insurable interest at the time the policy is issued. Insurance Law §3205(b)(2) does not prohibit the transfer of ownership of the policy and change in beneficiary, provided that the changes take place after issuance of the policy, and are not suggested at the time of policy application. See Opinion of General Counsel No. 03-07-24 (July 21, 2003).

Turning to the specific question posed, the sale of an insurance policy by a viator would be regulated as a viatical settlement under Article 78 of the Insurance Law. But there is no indication that the transaction that the inquirer describes would be a viatical settlement. Insurance law §7801(c) defines a viatical settlement as an agreement between a viator and a viatical settlement company to sell a life insurance policy. Insurance Law §7801(b) defines a "viator" as 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.¹ Therefore, a critical element of a viatical settlement is that the insured individual must have a catastrophic or life-threatening illness at the time that the policy is sold to a third party.

In the absence of a catastrophic or life-threatening illness, the agreement will not be considered a viatical settlement. See Opinion of the Office of the General Counsel No. 02-04-24 (April 24, 2002). Rather, the transaction appears more similar to a life settlement transaction. A “life settlement " is generally considered to be the sale by a policy owner of a life insurance policy insuring the life of an individual who is not suffering from a terminal illness. See Opinion of the Office of the General Counsel No. 08-06-08 (June 16, 2008). The New York Insurance Law does not currently specifically address life settlement transactions. However, the Department has introduced legislation to regulate all life settlement contracts, and a different but related bill passed the State Senate earlier this year. It is anticipated that further legislative action may be taken in 2009.

For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.

¹ No person other than the insured may act as a viator to sell an insurance policy to a viatical settlement company. See Opinion of General Counsel No. 02-02-25 (February 19, 2002).