BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                        AB 459|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   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:  










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          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.







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           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.








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           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  







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          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  







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          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)








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          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







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