[who]

By Frank N. Darras
Shernoff Bidart Darras The viatical settlements, or life settlements, industry was born in the 1980s in response to the AIDS crisis, as dying patients desperately needed cash to pay for expensive treatment. As AIDS became a more treatable disease, the industry expanded to include other terminal illnesses. People suffering from cancer, heart disease, Alzheimer’s disease and other progressive illnesses, as well as seniors in need of funds for assisted living, found viatical settlements to be a useful source of immediate cash. By the late 1990s, the industry had expanded to include the swelling ranks of generally healthy seniors interested in profiting from their life insurance policies before they die.1

Today, the industry is growing exponentially. It is estimated that $13 billon worth of life insurance policies were sold by policyholders to investors in 2005 — up from $5 million in 1989 and $200 million in 1998 — and it is projected that by 2030, that number could reach $160 billion.2

Here’s how the settlements work: an individual sells his or her life insurance policy to a company (on behalf of investors) for a deep discount — the shorter the life expectancy, the higher the payout. The company takes over payment of premiums and collects the full benefits when the insured dies.

Because of the need to protect insureds and create a transparent and fair viatical settlements market, the National Association of Insurance Commissioners (NAIC) developed the Viatical Settlements Model Act in 1993 and Viatical Settlements Regulations in 1994 to guide states in their regulation of the viatical settlements industry. To date, approximately 38 states have adopted a version of the Model Act or similar legislation.

Virginia enacted its Viatical Settlements Act in 1997 to address the state’s concern with the “potential for exploitation of vulnerable and seriously ill individuals.”3 The core provisions of the act ensure that companies purchasing life policies are reliable, protect the privacy of insureds and prohibit fraud. The act requires that viatical brokers and providers be licensed by the state of Virginia in order to contract with a resident in connection with a viatical settlement. It also imposes extensive disclosure obligations on providers and requires them to pay a minimum percentage of the face value of the insurance policy, depending on the insured’s life expectancy.4

That law was tested recently in Life Partners Inc. v. Morrison,5 when the U.S. Court of Appeals for the Fourth Circuit ruled that the McCarran-Ferguson Act, a federal law giving states authority to regulate insurance matters, also covers viatical settlements.

In Life Partners, a terminally ill resident of Virginia with six to 18 months to live sold her $155,000 policy to Texas-based Life Partners Inc. for $29,900, or 26 percent of the policy’s face value. The Act, however, requires such companies to pay 60 percent to 80 percent. The insured later demanded more money, claiming she was entitled to at least $69,000 based on Virginia law. When the company refused, the insured complained to the State Bureau of Insurance, which demanded that Life Partners adhere to the state’s regulatory scheme. Life Partners sued, alleging that Virginia’s scheme was so broad that it affected commerce occurring outside the state in violation of the U.S. Constitution.6

The court disagreed, holding that the Act was properly enacted for the purpose of regulating the business of insurance.7 The court explained that “the subject of every viatical settlement is an insurance policy… the viatical settlement is not collateral to the policy. Rather, it modifies it, changing the parties’ obligations and benefits, while yet leaving the insurance — i.e., the transfer of the specified risk — in place.”8 Moreover, the Act managed and controlled the relationship between insurer and insured, and did not address the relationship between viatical settlement providers and their investors.9

Life Partners filed a petition for Supreme Court review, asking the high court to decide whether the act regulates the “business of insurance” under the McCarran-Ferguson Act, notwithstanding the fact that a viatical settlement is not a transaction between an insurance company and an insured.

Significantly, the U.S. Supreme Court denied Life Partners’ petition to review the decision. As such, this federal appeals court decision holding that states have the power to regulate viatical settlements will likely have broad implications across the United States, particularly for life settlement companies that may do business in states where, by law, they must be licensed but are not.