Copyright 2010 SNL Financial LCAll Rights Reserved SNL Insurance Daily
August 12, 2010 Thursday
Life settlement firm accuses insurer of impeding secondary market in lawsuit
A new lawsuit accuses an insurer that previously expressed wariness of stranger-originated life insurance schemes of repeatedly seeking to frustrate or prevent secondary market transactions involving life insurance policies.
Life settlement company Coventry First LLC alleged in an Aug. 10 lawsuit that AXA unit AXA Equitable Life Insurance Co. has systematically impaired policyholders’ ability to exercise their right to seek fair market value for unwanted policies through its supposed efforts to frustrate or prevent secondary market transactions.
Fort Washington, Pa.-based Coventry First filed the complaint in response to two specific instances of what the company claimed had been AXA Equitable’s unlawful undermining of the sale of life policies, but it described the practice as “repeated.” Coventry First alleged that AXA Equitable has implemented corporate policies to prevent its affiliated financial professionals from participating in any life settlement activity and provided false statements in response to the company’s requests for verifications of coverage as it evaluates policies for purchase.
“AXA Equitable … dislikes the secondary market because it cuts into the windfall profits it reaps when a policy owner allows his or her policy to lapse after many years of making payments,” the complaint alleged. “When that happens, AXA Equitable retains the premiums paid since the policy’s inception without ever having to honor its commitment to pay a death benefit when the insured dies.”
Coventry First said AXA Equitable is not alone among its life insurance industry peers in engaging in that alleged behavior. In fact, the life settlement company claimed, “AXA’s providing false information to Coventry First is simply one manifestation of the carriers’ concerted efforts to maintain their windfall profits they receive when a policy lapses.”
An AXA Equitable spokesman told SNL that the company had not yet been served with the Coventry First suit and, as a result, could not provide comment. But the insurer’s April response to a suit filed in October 2009 by another life settlement company alleging that it wrongly refused to pay a $5 million death benefit claim may offer some relevant perspective. Boynton Beach, Fla.-based Settlement Funding LLC brought charges against AXA Equitable under New York law for breach of contract and recovery of insurance proceeds; the causes of action in the Coventry First complaint, in contrast, include alleged violations of the Nevada Viatical Settlement Act and the New Jersey Viatical Settlements Act.
AXA Equitable sought to declare void the policy at issue in the Settlement Funding case because, it alleged, the trust that delivered the policy to the life settlement company had not been validly formed and an invalid trust cannot own or transfer property. The insurer also brought a counterclaim against the life settlement company stemming from its acquisition of the beneficial interest in the life insurance policy at issue in the suit – a policy that, AXA Equitable alleged, had been fraudulently procured.
AXA Equitable alleged that the true purpose of the policy had been for use in a secondary market transaction, even though the policy owner had responded “no” to a question to that effect on the application form. The insurer alleged that the face amount of the policy was “vastly greater than necessary for estate protection.” It claimed that Principal Financial Group Inc. unit Principal Life Insurance Co. and Manulife Financial Corp. unit John Hancock Life Insurance Co. had also issued $5 million policies on the same life and had been forced to take legal action to have those policies declared void. (AXA Equitable had also brought a similar action – prior to Settlement Funding’s filing of its federal suit – in Ohio state court.)
While AXA Equitable alleged that application for the policy at issue in the Settlement Funding complaint contained additional material misrepresentations and forgeries specific to that case, the insurer decried the emergence in recent years of stranger-owned life insurance, or STOLI, on behalf of speculative investors seeking to obtain interests in policies on the lives of individuals with whom they had no prior relationship.
“STOLI investors seek out the highest anticipated rates of return when choosing the life insurance policies,” AXA Equitable claimed. “This means the typical life insurance policy to which STOLI investors gravitate insures the life of an individual aged seventy or older, with a net worth in excess of $1 million. These individuals can obtain large value policies, and, actuarially speaking, are expected to have a relatively limited lifespan. For these and other reasons, these individuals are targeted by STOLI investors. In even more egregious situations, STOLI investors will misrepresent the net worth of an elderly individual to mislead the insurer into issuing a policy with a high face value insuring the life of an individual who has no need or basis for securing such a policy. … While there are many other variations, all STOLI programs have one thing in common: their objective is to give investors who have no insurable interest in the life of the insured a stake in the life insurance policy of a complete stranger.”
The Coventry First matter is pending in the U.S. District Court for the Eastern District of Pennsylvania. The Settlement Funding case is pending in the U.S. District Court for the Southern District of New York.
August 18, 2010