NAIC to Address Stranger-Owned Annuities in Public Hearing

Posted on April 20, 2010 by Ophir Johna

One month from today, the National Association of Insurance Commissioners (“NAIC”) will hold a meeting to address Stranger Originated/Owned Annuities (“STOA”). Similar to Stranger Originated/Owned Life Insurance (“STOLI”), STOA transactions often involve seniors and terminally ill individuals who were induced to purchase annuities largely for the benefit of an investor. The NAIC is “determined to address how individuals are being affected by these new transactions and whether new or modified current laws or regulations are necessary to protect consumers,” stated Thomas R. Sullivan, NAIC’s Life Insurance and Annuities Committee Chairman and Connecticut’s Insurance Commissioner. The May 20th public hearing in Washington, D.C. is expected to include testimony from consumers, state regulators and industry representatives.

State legislatures across the country have focused in recent years on the enactment of STOLI regulations. For example, California enacted its first legislation in October 2009, classifying the underlying transactions as fraudulent. Experts report that STOA could be the subject of similar legislation in the near future. However, the NAIC’s investigation and possible regulation of STOA would be limited to transactions involving insurance, because transactions involving variable annuities are outside the state insurance commissioners’ regulatory authority; they are instead regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
 

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Assembly's Insurance Committee to Hold Hearing Today on Legislation Voiding Discretionary Clauses in Disability and Life Insurance Policies

Posted on April 7, 2010 by Robert Renner

The California Assembly’s Insurance Committee is scheduled to conduct its first hearing today on AB 1868, a bill outlawing clauses in insurance policies and other related documents that purport to vest the insurer with discretionary power to determine eligibility for benefits or to interpret the terms of the policy.

Under the proposed legislation introduced by Assemblyman Dave Jones (D-Sacramento), any provision in an insurance policy, contract, certificate or agreement providing or funding life insurance or disability insurance coverage that purports to reserve discretionary authority with the insurer would be void and unenforceable. The bill would also require that the Insurance Commissioner disapprove of any disability policy containing such a provision.

To effect its purposes, the bill would both amend Insurance Code Section 10291.5 (to address the Insurance Commissioner’s disapproval of a disability insurance policy) and add Section 10116.2 (to confirm the unenforceability of that provision in a life or disability insurance-related document).

Assemblyman Jones originally introduced AB 1868 on February 12, 2010, but the bill was amended on April 5, 2010.

Efforts to invalidate discretionary clauses are not new in California. In February 2004, then-Insurance Commissioner John Garamendi issued a Notice to Withdraw Approval of any disability insurance forms that contained discretionary clauses, stating that the provisions were objectionable under Insurance Code Section 10291.5(b)(1) and "effectively deprive California insureds of protections under California law.”

Garamendi’s Notice was also accompanied by the Insurance Department’s contemporaneous opinion letter, expressing that “the discretionary clause effectively negatives operative terms of the contract” because it “makes those payments contingent on the unfettered discretion of the insurer, thereby nullifying the promise to pay and rendering the contract potentially illusory.”

However, subsequent cases severely limited the scope of the Department’s Notice and opinion letter, with courts consistently confirming that any invalidation of discretionary clauses through these administrative actions could be applied prospectively only, and not retroactively. See, e.g., Firestone v. Acuson Corp. Long Term Disability Plan, 326 F. Supp. 2d 1040 (N.D. Cal. 2004), Mitchell v. Aetna Life Ins. Co., 359 F. Supp. 2d 880 (C.D. Cal. 2005) and Horn v. Provident Life and Accident Ins. Co., 351 F. Supp. 2d 954 (N.D. Cal. 2004).
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