Wall Street Journal: Insurers, Investors Fight Over Death Bets

Jul 9, 2011

The following article was published in the Wall Street Journal on July 9, 2011:

Insurers, investors fight over death benefits

by Leslie Scism

After Esther Adler died in 2009, the insurer that was on the hook to pay a $5 million death benefit discovered she wasn’t all she had appeared.

Instead of the $12 million estate listed in her application, the insurer alleged in a federal-court civil suit, Ms. Adler had assets of less than $100,000, relied on Social Security checks for income and had sought help from a program that helps pay for medicine.

Last fall, jurors in a courthouse in Manhattan heard the details as investors who bought the policy while Ms. Adler was still alive fought to force AXA SA’s AXA Equitable unit to honor the contract.

The insurer wanted to void the policy, citing alleged fraud, even though it conceded during the trial that it “did not do everything perfectly.” The jury’s verdict: a full payout to the investors.

Collecting on Death

Key steps in sales of some death-benefit policies

  • Agent talks older person into applying for policy
  • Agent submits application, citing ‘estate planning’ needs
  • Some insurers lightly vet ‘estate’ details, and issue policy
  • Investors buy policy from older person, assume responsibility for premium and collect when the insured dies

Across the U.S., hundreds of disputes are playing out in the legal wreckage caused by the collapse in what was once a booming secondary market for life-insurance policies. A key question in many, according to court records, is whether insurers did enough to vet applications.

At stake are billions of dollars of insurance that older people took out on their own lives from 2004 to 2008—and then sold to investors for cash. Typically, investors pay the insured person a small percentage of the face value of the policy and then assume responsibility for the premiums, aiming to collect the death benefit. Many of the lawsuits relate to unexpectedly early deaths that triggered costly payouts for insurers.

Insurers allege they were sometimes duped into the sales by complicated plots by commission-hungry agents and other middlemen that hid the involvement of investors. The insurers contend the policies amount to unlawful bets on strangers’ lives.

For their part, investors claim that insurers, hungry for premiums that often exceed $100,000 a year, sometimes skipped steps such as credit checks or authenticating documents, which could have shown the applicants couldn’t afford the policies, and were likely candidates for flipping. They also say some insurers ignored warning signs that did pop up on credit reports.

In the AXA Equitable case, a company official confirmed in testimony that the insurer’s guidelines called for credit reports of buyers of $5 million policies, but that its staff could skip them if they were satisfied with other materials.

A credit report wasn’t ordered up for Ms. Adler, and investors argued to the jury that this was one of numerous missed opportunities in the vetting process that would have helped the insurer learn she neither needed a big estate-planning policy nor could afford premiums topping $300,000 a year.

Court filings show AXA Equitable had relied partly on an accountant’s statement to verify Ms. Adler’s wealth. Only after her death did the insurer check state licensing records to learn the “accountant” was a fake, the filings show.

The $5 million payout went to an investment entity, Settlement Funding LLC, which told jurors it was an innocent party that hadn’t been involved in any of the alleged fraud at the policy’s inception.

An AXA Equitable spokesman said the insurer assessed the application appropriately and hadn’t missed any red flags, as it had been scrubbed carefully to hide signs it was headed to investors’ hands.

“Combating insurance fraud is an endless learning process, because each new scam we detect and shut down often spawns even more sophisticated scams,” the AXA Equitable spokesman says.

David McDowell, a lawyer for insurers American International Group Inc. and Phoenix Cos., says the industry has continually tried to improve procedures for identifying policies destined for investors’ hands. “Companies are a lot better today at separating the good from the bad,” he says.

In some cases, investors are using the legal-discovery process to turn up internal emails to bolster their contentions. In a federal-court lawsuit in New Jersey, emails show that an employee at an AIG unit expressed concern in 2006 about issuing a $10 million estate-planning policy that the insurer now is seeking to void.

The employee cited “conflicting financial info,” among other things, but a colleague suggested proceeding with the sale, the emails show.

After the Brooklyn, N.Y., man died in 2008, AIG’s American General sought to void the policy, alleging vast overstatement of the man’s estate and other problems.

In December, the court allowed investors to proceed with their own fraud claim, alleging American General deliberately overlooked potential problems in applications so that it could use them later when trying to avoid paying out on policies.

In a filing, American General called the claim “patently false.”

Some of the shortcomings in vetting are surfacing within the insurance companies themselves. In 2007, an ING Groep NV unit issued a $10 million policy on the life of a Philadelphia man purportedly worth $46 million, despite a “HIGH RISK FRAUD ALERT” on a credit report, according to court records and people familiar with the matter.

The alert said the Social Security number used on the application belonged to a person who died in 1982. His credit history also showed bankruptcy filings by the man in 2002 and 2005.

Months after issuing the policy, an internal investigation unit took a closer look and turned the matter over to authorities, filings show. Federal authorities have accused the policyholder and his purported accountant of participating in a gang that allegedly defrauded three insurers, court filings show.

One of the men has pleaded not guilty, and the other has been in plea-agreement negotiations, the filings show. An ING spokesman says the company’s “procedures, policies and training for detecting” misrepresentations “have improved considerably” since the mid-2000s.

In a case involving insurer Phoenix, a federal judge agreed last year to void a $10 million policy on the basis of alleged fraud, and this spring awarded the nearly $485,000 in paid premiums to investors, citing shortcomings by the insurer in vetting the application.

The applicant was an elderly Florida man supposedly worth $1.2 billion, mostly in the form of emeralds recovered from a sunken Spanish ship.

While assessing the application in 2007, Phoenix employees had unsuccessfully searched online to confirm the treasure hunter’s exploits, according to an email in federal court in Atlanta.

One employee asked the sales agent to provide his client’s tax returns, but the agent nixed the idea, according to another email, and supplied letters from a gemologist and a warehouse.

After issuing the policy, Phoenix learned that the gemologist’s letter was a forgery, its court filings state. In a sworn statement, the policyholder, Faye Keith Jolly, asserted his Fifth Amendment rights in response to most questions from Phoenix about his finances and the emeralds.

In his ruling awarding premiums to the investors, the judge said Phoenix had failed to determine if the agent-supplied documents “were actually real documents or if they were, instead, fabricated or forged,” among other shortcomings. Phoenix is appealing the ruling on the premiums.

Mr. Jolly died in February; an obituary didn’t mention treasure-hunting.