Life, Health and Disability Insurance Law Blog : Life, Health and Disability Insurance Law Blog : California Disability Lawyer & Attorney : Barger & Wolen Law Firm : CA Life Insurance & ERISA Law, Life Health Disability

Effective July 29, 2010, less than a month after California’s first Stranger Originated Life Insurance (“STOLI”) legislation, Senate Bill 98, took effect, the California Department of Insurance (“DOI”) issued emergency regulations designed to implement the legislation. 

As previously reported, Senate Bill 98 proscribes STOLI transactions (defined as “act[s], practice[s], or arrangement[s] to initiate the issuance of a life insurance policy in this state for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest, under the laws of this state, in the life of the insured”) and restricts the transfer of life insurance policies during the first two years after their issuance.

The DOI’s proposed regulations delineate procedures for the licensing of life settlement providers and brokers, specify forms for provider and broker applications and set forth procedures for the filing of life settlement forms with the Insurance Commissioner prior to use. 

The proposed regulations also mandate certain disclosures to consumers, including the availability of alternatives to life settlement, the possible tax consequences of a life settlement and the potential limitations on the insured’s ability to obtain additional life insurance following a life settlement.

Other states continue to join California in enacting STOLI legislation; Wisconsin and New Hampshire passed similar STOLI legislation in May and June 2010, respectively.

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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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The National Association of Insurance Commissioners ("NAIC") is considering the adoption of disability claims best practices guidelines to augment its Unfair Claims Settlement Practices Model Act. The Consumer Protections & Innovations Working Group held a public hearing at the NAIC Winter National Meeting.  Consumers groups, lawyers representing insureds and the industry, the ACLI, various disability insurers and several states have offered their views and proposals.  Not unexpectedly, a split has emerged over the proposed disability claims best practices list.  At a recent meeting sponsored by the NAIC, plaintiffs attorneys, such as Mark DeBofsky, advocated for the creation of formal claims guidelines because “a substantial number of claimants … are not having positive experiences,” while representatives of the insurance industry point out that a variety of legislated claims guidelines already exist (e.g., the Unfair Claims Settlement Practices Act) and therefore a national “best practices list” is unnecessary.  Industry representatives further warn that a best practices list would create de facto regulation and act as a “template for trial lawyers.”

Should a best practices list be adopted by the NAIC, Maine Insurance Director Mila Kofman said she would give insurers about a year to implement the best practices list before attempting to codify the list into law.  As a carrot to the insurers, Kofman noted that adoption of the list could act as a “shield against lawsuits.”  

The latest version of the best practices guidlines were developed late last year and will continue to be developed this year.  

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