BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 459| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 459 Author: Daly (D) Amended: 8/2/16 in Senate Vote: 21 SENATE INSURANCE COMMITTEE: 9-0, 6/10/15 AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez, Liu, Mitchell, Wieckowski SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16 AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski ASSEMBLY FLOOR: 79-0, 4/27/15 - See last page for vote SUBJECT: Insurance: insurable interest: declaratory relief SOURCE: Institutional Longevity Markets Association DIGEST: This bill authorizes an owner of record of a life insurance policy issued for delivery in California prior to January 1, 2010, and having a death benefit equal to or greater than $1,000,000, who believes that the insurer may challenge the policy for lack of an insurable interest, to bring an action for declaratory relief no later than January 1, 2018, seeking a court order declaring the policy to have a valid insurable interest. ANALYSIS: AB 459 Page 2 Existing law: 1) Provides that every person has an unlimited insurable interest in his or her own life, health, and bodily safety, and may take out a policy of insurance and have the policy payable to whomsoever he or she pleases, regardless of whether the beneficiary designated has an insurance interest. 2) Provides that if the insured has no insurable interest, the contract is void. 3) Provides that an insurable interest exists when based upon a reasonable expectation of pecuniary advantage through the continued life, health or bodily safety or another, or when engendered by a substantial interest engendered by love and affection in the case of individuals closely related by blood or law. 4) Provides that an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. 5) Provides that, beginning January 1, 2010, any device, scheme or artifice designed to give the appearance of an insurable interest where there is no legitimate insurable interest violates insurable interest laws. 6) Allows an insurer to rely upon all statements, declarations or representations made by an applicant for insurance relative to the insurable interest, and shall incur no legal liability by virtue of any untrue statements, declarations or representations so relied upon in good faith. 7) Provides that an individual life insurance policy is incontestable, except for non-payment of premiums, after it has been in force, during the lifetime of the insured, for a period of not more than two years after its date of issue. AB 459 Page 3 8) Specifies that trusts and special purpose entities that are used to apply for and initiate the issuance of policies of insurance for investors have no insurable interest unless the designated beneficiary of the policy has an otherwise valid insurable interest in the life of the insured. 9) Regulates generally, effective January 1, 2010, life settlements, and defines "life settlement contract" as a written agreement solicited, negotiated, or entered into in this state between a provider and an owner, establishing the terms under which compensation or anything of value will be paid, which compensation or thing of value is less than the expected death benefit of the insurance policy or certificate, in return for the owner's assignment, transfer, sale, devise, or bequest of the death benefit or any portion of an insurance policy or certificate of insurance for compensation, provided, however, that the minimum value for a life settlement contract shall be greater than a cash surrender value or accelerated death benefit available at the time of an application for a life settlement contract. 10)Defines entering into stranger originated life insurance (STOLI) as a fraudulent life settlement act. This bill: 1) Authorizes an owner of record of a life insurance policy who believes in good faith that the insurer may challenge the policy for lack of an insurable interest, to bring an action for declaratory relief seeking a court order declaring the policy to have a valid insurable interest. 2) Limits the right to bring an action only to life insurance policies issued for delivery in California prior to January 1, 2010 that have a death benefit equal to or greater than $1,000,000. AB 459 Page 4 3) Provides that if a court declares a policy invalid as a result of a lack of insurable interest, the owner of record of the policy or the insurer shall not commence any action against the named insured seeking damages or any other remedy. 4) Repeals the authority granted by this bill on January 1, 2018. Background An individual has an unlimited insurable interest in his or her own life. Individuals related by blood or marriage can also have an insurable interest. An employer can have an insurable interest in the life of its directors, officers or other key personnel, with the consent of the employee. An insurable interest must exist at the time the policy becomes effective, but does not have to exist at the time the loss occurs. An individual can always take out insurance on his or her self, and then transfer the policy to someone else. The question comes down to the intent at the time the policy is purchased. California statute provides that a life insurance policy is incontestable after it has been in force for two years except for non-payment of premiums, or unless an imposter was used to obtain the policy or there was no insurable interest at the time of inception of the policy. Generally the insurance company has those two years to identify any undisclosed or misrepresented facts that rise to the level of material misrepresentation, allowing it to rescind the policy. If the fraud was material and intentional-for example if there was no insurable interest at the time the policy was taken out-the insurer may attempt to contest the policy beyond the two year period. A life settlement is a complex financial transaction in which an owner of a life insurance policy sells the policy to a third party for more than the cash surrender value offered by the life insurance company. The purchaser becomes the new beneficiary of AB 459 Page 5 the policy at maturation (death of the insured) and is responsible for all subsequent premium payments. In order to purchase a life insurance policy from an insurer, the purchaser must have an "insurable interest" in the life of the person insured. The life insurance industry has claimed that the buying and selling of life insurance policies in a secondary market (life settlements) distorts the purpose of life insurance by breaking the "insurable interest" link between an insurer, policyholder and beneficiary. The U.S. Supreme Court established in 1911 in Grigsby v. Russell that a life insurance policy is the property of the policyholder and is fully transferable. This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. Notwithstanding the court's ruling, the market for life settlements did not gain much traction, or institutional investors, until the 1980s. During the 1980s, the so-called viatical settlement market developed in response to the AIDS crisis. These transactions involved the sale of life insurance policies by persons with a catastrophic or life threatening illness or condition (diagnosed as having a life expectancy of 24 months or less) for an amount less than the death benefit, but more than the cash surrender value, in order to raise funds to pay for end-of-life care. As a result of abuses, legislation was enacted in 1990 to regulate viatical settlements. The viatical market largely evaporated after medical advances dramatically altered the life expectancy of an AIDS diagnosis, leaving viatical settlement purchasers unable to collect on their investment within the anticipated timeframe, and on the hook to continue making premium payments or forfeit all money invested to that date. Life settlements-or the sale of policies by those not facing a terminal illness--were not regulated in California until legislation was enacted in 2009 (SB 98, Calderon, Chapter 343, Statutes of 2009). In the 2000's, the market for life settlements had taken off, and capital from hedge funds, investment banks and pension funds in search of higher returns began flowing into the life settlement market. The need for AB 459 Page 6 enough policies to satisfy investors led to widespread solicitation of seniors to take out life insurance for the sole purpose of selling it into the secondary market. The life insurance industry objected to many life settlement transactions at the time, particularly those transactions referred to as STOLI, because they claim they violated the requirement for an insurable interest. Many policies issued prior to enactment of SB 98 have been the subject of litigation by insurers who characterize them as STOLI and have denied benefits when the named insured dies, claiming they were void at issuance because of the lack of an insurable interest by the purchaser. The market for life settlements largely collapsed during the Great Recession, and is slowly rebounding governed by the new statutory requirements. Investors, however, have continued to pay the premium on many policies purchased at the market's height. They have sponsored AB 459 in an attempt to ensure that they will be able to collect on those policies, or stop paying premiums for life insurance policies that are found by the court to be invalid. Notably, the approximately 15,000 policies sold as life settlements in 2007, if they have not already been challenged by the insurer or owner of record or matured due to the death of the insured, will be up for death benefit payout review by the investors in two years (typically, these policies are reviewed at the 10-year mark). This bill potentially allows the investors, who purchased those life settlements and have been paying the insurance premiums for almost a decade, to reevaluate whether they should continue to pay premiums if the policy has not matured within the expected timeframe. If the life insurance policy survives an insurable interest challenge, the investors would have faith that they would eventually get the face value death benefit from the life insurance company, and hopefully make a profit on the investment. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified8/3/16) AB 459 Page 7 Institutional Longevity Markets Association (source) Fortress Investment Group OPPOSITION: (Verified8/3/16) None received ARGUMENTS IN SUPPORT: According to the Institutional Life Markets Association, AB 459 will provide much needed certainty to the $30 billion secondary life insurance market. It represents a reasonable and workable compromise that gives investors a legal procedure to immediately determine the validity of a policy prior to its maturation while also preserving the rights of insurers to assert available legal challenges to the policy. Without this legal procedure, investors are frequently left in an untenable situation of paying premiums on a policy for many years only to have the insurer challenge the policy's validity when a claim for benefits is ultimately made (and seek to keep the premiums). ASSEMBLY FLOOR: 79-0, 4/27/15 AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins NO VOTE RECORDED: Campos Prepared by:Erin Ryan / INS. / (916) 651-4110 8/3/16 19:17:51 AB 459 Page 8 **** END ****