OGC Opinion No. 10-12-11: Choice of Law for Life Settlements

OGC Opinion No. 10-12-11

The Office of General Counsel issued the following opinion on December 15, 2010, representing the position of the New York State Insurance Department.

RE: Choice of Law for Life Settlements

Questions Presented:

1. May a life insurance policy owner who is not a New York resident elect in writing to have the life settlement laws of the state in which the policy owner resides govern when the policy owner signs the life settlement contract in New York?

2. May the trustee of a trust that wishes to sell a life insurance policy elect in writing to have the life settlement laws of a state other than New York govern when the grantor resides both in New York and the other state, and the trustee signs the life settlement contract in that other state?

3. May the trustee of a trust that wishes to sell a life insurance policy elect in writing to have the life settlement laws of a state other than New York govern when the grantor resides in both New York and the other state and the trustee signs the life settlement contract in a third state?

4. Does Article 78 of the New York Insurance Law (McKinney Supp. 2010) govern when a trust wishes to sell a life insurance policy, the grantor resides only in New York, and the trustee signs the life settlement contract in a state other than New York?

5. May the trustee of a trust that wishes to sell a life insurance policy elect in writing to have the life settlement laws of a state other than New York in which the grantor resides govern when the grantor resides in both New York and another state and the trustee signs the life settlement contract in New York?

6. Which state’s life settlement laws govern when both New York and another state claim jurisdiction?

Conclusions:

1. Yes. A life insurance policy owner who is not a New York resident may elect in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement contract when the policy owner signs the contract in New York. However, even if the policy owner elects in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement contract, the life settlement broker and life settlement provider must be appropriately licensed under Insurance Law §§ 2137 and 7803 and comply with any other requirement set forth in Article 78 that does not pertain to the terms of the life settlement contract, because the life settlement broker and life settlement provider are engaging in the business of life settlements in New York.

2. and 3. Yes. The trustee of a trust that wishes to sell a life insurance policy may elect in writing to have the life settlement laws of a state other than New York govern the life settlement contract when the grantor resides both in New York and the other state, where the trustee signs the life settlement contract in that other state or in a third state and the life settlement contract was not made, proposed to be made, or solicited in New York.

4. Yes. Article 78 of the Insurance Law governs the life settlement transaction when a trust wishes to sell a life insurance policy, the grantor resides only in New York, and the trustee signs the life settlement contract in a state other than New York, because Insurance Law § 7819(a) states that Article 78 of the Insurance Law applies to any life settlement contract made, proposed to be made, or solicited with a resident of New York. Since the grantor resides in New York, the trust’s residence is also New York pursuant to Insurance Law § 7819(c)(2).

5. No. The trustee of a trust that wishes to sell a life insurance policy may not elect in writing to have the life settlement laws of a state other than New York in which the grantor resides govern the life settlement contract when the grantor resides in both New York and another state and the trustee signs the contract in New York, because the contract was not made, proposed to be made, and solicited outside of New York.

6. Article 78 of the Insurance Law does not expressly address this issue and the Insurance Department will not opine on the laws of other states. However, where Article 78 of the Insurance Law applies, the parties involved in the life settlement transaction must comply with Article 78 (except as provided under Insurance Law § 7819) even if another state’s life settlement laws also apply.

Facts:

The inquirer states that he is senior vice president and assistant general counsel at ABC, which is licensed as a life settlement provider in New York. The inquirer presents several scenarios for the Insurance Department’s consideration.

Scenario 1

In the first scenario, the inquirer reports that a life insurance policy owner who is not a New York resident signs the life settlement contract in New York. The inquirer states that he understands that the policy owner may elect in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement transaction, but because the policy owner signed the life settlement contract in New York, the life settlement broker and the life settlement provider must be licensed in New York.

The inquirer also included a sample form letter that he would accept from a policy owner in this scenario and that he believes comports with Article 78 of the Insurance Law. The sample form letter states in relevant part that:

I/We are the owner(s) of the above-referenced life insurance policy (the “Policy”). I/We are not residents of the State of New York, but I was/we were physically in the State of New York when I/we signed a life insurance policy purchase agreement to sell the Policy to you. Pursuant to Section 7819(B)(2) of the New York Life Settlements Act, I/we hereby elect to have the laws of the State of [__________] apply to the proposed life settlement transaction with you.

I/We understand that this election could affect certain protections of the New York Life Settlements Act which I/we would otherwise be entitled to in connection with such transaction, which include but are not limited to certain disclosures such as disclosure of broker compensation, and statutorily mandated rescission periods. However, we understand that because the life insurance policy purchase agreement was signed by me/us in the State of New York, you as a settlement provider, as well as any settlement broker that assisted us with the transaction, must be appropriately licensed in the State of New York.

Scenarios 2 and 3

In the second scenario, the inquirer reports that a trust wishes to sell a life insurance policy, the grantor resides in both New York and another state that regulates life settlements, and the trustee signed the life settlement contract in the other state. In the third scenario, the inquirer reports that a trust wishes to sell a life insurance policy, the grantor resides in both New York and another state, and the trustee signed the life settlement contract in a third state.

The inquirer states that he understands that if the trustee signs the life settlement contract in such other state or third state, then the trustee may elect in writing to have the other state’s or third state’s life settlement laws govern. The inquirer also included a sample form letter that he would accept from the trustee in these scenarios and that he believes comports with Article 78 of the Insurance Law. The sample form letter states in relevant part that:

We are the trustee(s) and grantor(s), respectively, of the…Family Irrevocable Life Insurance Trust dtd. 1/1/1995 (the “Trust”). The grantor(s) of the Trust are residents of the States of New York and [__________]. We hereby confirm for you that the trustee(s) of the policyowner were not physically in the State of New York when he/she/they signed a life insurance policy purchase agreement to sell the Policy to you and that such life insurance policy purchase agreement was not made, proposed to be made, or solicited in the State of New York.

Pursuant to Section 7819(C)(2) of the New York Life Settlements Act we hereby elect to have the laws of the State of [__________] apply to the proposed life settlement transaction with you.

We understand that this election could affect certain protections of the New York Life Settlements Act that the Trust would otherwise be entitled to in connection with such transaction, including but not limited to broker licensing, disclosure of broker compensation, and statutorily mandated rescission periods.

Scenario 4

In the fourth scenario, the inquirer states that a trust wishes to sell a life insurance policy and that the grantor resides only in New York. However, the trustee signs the life settlement contract in a state other than New York. The inquirer questions whether Article 78 of the Insurance Law governs.

Scenario 5

In the fifth scenario, the inquirer reports that a trust wishes to sell a life insurance policy, the grantor resides in both New York and another state, and the trustee signs the life settlement contract in New York. The inquirer states that he understands that the trustee may elect in writing to have the life settlement laws of the other state in which the grantor resides govern, and that the life settlement broker and life settlement provider would need to be licensed in New York, because the trustee signed the life settlement contract in New York.

Analysis:

1. Scenario 1

The inquirer first asks whether a life insurance policy owner who is not a New York resident may elect in writing to have the life settlement laws of the state in which the policy owner resides govern when the policy owner signs the life settlement contract in New York.

Insurance Law § 7819(a) states that Article 78 of the Insurance Law “shall apply to any life settlement contract made, proposed to be made, or solicited with a resident of this state or any owner physically in this state.” Insurance Law § 7819(b)(2) provides that:

A life settlement contract entered into with an owner who is a resident of another state may be governed by the laws of the other state provided that the owner elects in writing to be governed by the laws of the other state, and if the owner is also a resident of this state, the life settlement contract is made, proposed to be made and solicited outside this state.

Thus, a life settlement contract entered into with a policy owner who is a resident of a state other than New York may be governed by the laws of that other state if the policy owner elects in writing to be governed by the laws of that state.

In the scenario presented here, a life policy owner who is not a New York resident, but signs the life settlement contract in New York, may elect in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement contract.

However, Insurance Law § 2102(a)(1) prohibits any person, firm, association, or corporation from acting as a life settlement broker in New York without having authority to do so by virtue of a license issued and in force pursuant to the Insurance Law, and Insurance Law § 2137 sets forth licensing requirements for life settlement brokers. In addition, Insurance Law § 7803(a) prohibits a person from engaging in the business of life settlements as a life settlement provider in New York without having authority to do so by virtue of a life settlement provider license issued and in force pursuant to Article 78 of the Insurance Law.

Even if a policy owner elects in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement contract, the life settlement broker and life settlement provider must be appropriately licensed under Insurance Law §§ 2137 and 7803 and comply with any other requirement set forth in Article 78 that does not pertain to the terms of the life settlement contract, because the life settlement broker and life settlement provider are engaging in the business of life settlements in New York.

The sample form letter that the inquirer attached to his inquiry states in relevant part that:

While rescission periods pertain to the terms of the life settlement contract, the disclosures required of a life settlement provider or life settlement broker pursuant to Insurance Law § 7811 do not. Therefore, under this scenario, a life settlement provider or life settlement broker must make the disclosures required by Insurance Law § 7811, and the inquirer was directed to amend the sample form letter accordingly.

2. and 3. Scenarios 2 and 3

In the second scenario, the inquirer reports that a trust wishes to sell a life insurance policy to a life settlement provider licensed in New York, the grantor resides in both New York and another state, and the trustee signs the life settlement contract in the other state. In the third scenario, the inquirer further reports that a trust wishes to sell a life insurance policy to a life settlement provider licensed in New York, the grantor resides in both New York and another state, and the trustee signs the life settlement contract in a third state.

As stated previously, Article 78 of the Insurance Law applies to any life settlement contract made, proposed to be made, or solicited with a resident of New York or any policy owner physically in New York. Insurance Law § 7819(c) states in pertinent part that:

For the purposes of this section, with respect to any person other than a natural person, the state of residence shall be:

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(2) with respect to a trust, a state in which the grantor resides.

Pursuant to Insurance Law § 7819(c)(2), the state of residence of a trust is the state in which the grantor resides and not the situs of the trust. Therefore, the situs of the trust is not relevant to a choice of law analysis under Insurance Law § 7819.

In both of these scenarios, where the life settlement provider is licensed in New York, the trustee may elect in writing to have the life settlement laws of the state other than New York in which the grantor resides govern the life settlement contract, so long as the life settlement contract was not made, proposed to be made, or solicited in New York. The sample form letter that the inquirer reports that he would accept from the trustee in these scenarios states that “the life insurance policy purchase agreement was not made, proposed to be made, or solicited in New York.” Assuming this is the case, the sample form letter would be acceptable under these conditions.

4. Scenario 4

In the fourth scenario, the inquirer states that a trust wishes to sell a life insurance policy to a life settlement provider licensed in New York and that the grantor resides only in New York. However, the trustee signs the life settlement contract in a state other than New York.

Here, where the life settlement provider is licensed in New York, Article 78 of the Insurance Law govern the life settlement transaction, because Insurance Law § 7819(a) states that Article 78 of the Insurance Law applies to any life settlement contract made, proposed to be made, or solicited with a resident of New York. Since the grantor resides in New York, the trust’s residence is also New York pursuant to Insurance Law § 7819(c)(2).

5. Scenario 5

While in this scenario the grantor resides in both New York and another state, the trustee may not elect in writing to have the life settlement laws of the other state in which the grantor resides govern the life settlement contract, because the trustee signed the contract in New York. Pursuant to Insurance Law § 7819(b)(2), a policy owner who is a resident of New York and another state only may elect in writing to have the life settlement laws of the other state in which the grantor resides govern the life settlement contract if the contract is made, proposed to be made, and solicited outside of New York. That is not the case here, because the signing of the contract in New York means that the contract was “made” in New York.

6. New York and Another State Claiming Jurisdiction

The inquirer further asks which state’s life settlement laws govern when both New York and another state claim jurisdiction. Article 78 of the Insurance Law does not address this issue. Further, the Insurance Department will not opine on the laws of other states. Where Article 78 of the Insurance Law applies, the parties involved in the life settlement transaction must comply with Article 78 (except as provided under Insurance Law § 7819) even if another state’s life settlement laws also apply. However, in most cases, the Department anticipates that the parties would be able to satisfy both Article 78 and the other state’s life settlement law. If there are any specific concerns or actual conflicts between the laws, then the inquirer was directed to bring them to the Department’s attention.

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City Office.