There can be no doubt that one of the hottest issues in the life insurance and annuity industry is stranger-originated annuities. Last week’s [opinion] from the RI Federal District Court is getting lots of attention, see e.g. [Insurance Compliance Insight’s June 7, 2010 edition]. Personally, I found the bases on which the litigation was allow to proceed as interesting as the bases on which the motion to dismiss was granted, and it wasn’t only the reference to Harry Potter’s invisibility cloak that made it so, though I do like culturally relevant judicial opinions! See page 25. What was interesting is that the surviving claims are ones that many of us can take action on now as they do not need legislative changes.
But first….Motions Granted, i.e. the Insurer’s causes of action were dismissed:
Insurable Interest - The Court said that RI’s insurable interest statute does not apply to annuities.
Incontestability - The incontestability provisions of the contract are enforceable and do not violate public policy. The allegation of fraud does not bring the claim outside the incontestability provision.
Civil liability for the crime of insurance fraud - like insurable interest, the court held that the specific insurance fraud statute applies to life insurance only and not annuities.
Negligence - the negligence claim could not survive because the plaintiff companies did not assert any physical or emotional damages.
Now…Motions Denied, i.e. insurers can proceed with their case:
Fraud - The Court allowed the claims that the program sponsors, agents and brokers committed fraud as well as conspiracy and unjust enrichment to stand.
Breach of Contract - Also generally allowed to stand was the breach of contract against the brokers for violating the terms of the selling agreements with the plaintiff insurers.
While these synopses are obviously simplified and the whole opinion should be reviewed, one of the clear take-aways from this is that the contracts between annuity producers and insurers need to be brought up-to-date as quickly as possible because they may be the most effective line of defense for insurers.
Many of the Plaintiffs’ claims were defeated because of statutory language that impacted the outcome of claims such as incontestability and insurable interest. Changes to those statutes may be long term efforts, but selling agreements are another story. They can be modified much more easily to provide more definition to the duties that run from agent to principal. Judge Smith here found that “fraud could create liability under at least two contract provisions cited in the Complaints.” p. 42. Shouldn’t there be more than two contract provisions that would create liability for fraud?
This case is a clear reminder that selling agreements should leave no doubt that a producer committing fraud, or allowing it among sub-agents, is liable to the company for damages.
No doubt, as this case proceeds, there will be more to learn about this new issue. Also, it seems certain there will be more cases to follow analyzing more state statutes and regulations on the causes of action that were dismissed based on Rhode Island law. But for now we can look to selling agreements and do what we can in that arena to protect against fraud, wherever it may occur, not only in the arena of stranger-originated annuities.