New York life settlement brokers: licensing, advertising, privacy, and prohibited practices (Ins. Law 2137, art. 78)

New York Life Settlement Brokers: Licensing, Advertising, Privacy and Prohibited Practices

A life settlement is the sale of an existing life insurance policy by its owner to a buyer, for more than the cash surrender value but less than the death benefit. In New York the whole transaction is governed by Insurance Law article 78, which calls itself the "life settlements act" (§ 7801). The person on the owner's side of that sale is the life settlement broker, and this lesson is about what New York requires of that broker.

The players

• The owner is the policyowner who enters, or seeks to enter, a life settlement contract (§ 7802(n)).
• The life settlement provider is the buyer: the person who enters, or offers to enter, a life settlement contract with the owner (§ 7802(m)).
• The life settlement broker works for the owner. For compensation, the broker solicits and negotiates offers from providers on the owner's behalf.
• A life settlement intermediary runs an offer forum, passing offers between providers and owners or brokers. An intermediary may not represent, solicit, negotiate or act on behalf of an owner, a provider or a broker, and may not act as a provider or a broker (§ 7814(e)).

Whose side is the broker on?

The owner's, and only the owner's. A New York broker represents exclusively the owner, not the insurer, not the provider and not anyone else. The broker owes the owner a fiduciary duty, including a duty to follow the owner's instructions and to act in the owner's best interest (§ 7811(a)(14)). That duty has to be stated in writing to the owner.

Licensing under section 2137

The superintendent may license an individual, firm, association or corporation as a life settlement broker (§ 2137(a)).

• A firm or association license authorizes only the members named in it as sub-licensees. A corporate license authorizes only the officers and directors named as sub-licensees. Every sub-licensee acts only in the name of the licensee (§ 2137(b)).
• Every individual applicant and every proposed sub-licensee must be at least 18 when the license is issued (§ 2137(c)).
• The application must be on file before the license issues. A business entity names the sub-licensee(s) responsible for its compliance, and must disclose its stockholders, partners, officers, members, directors and controlling persons. The only carve-out is stockholders holding fewer than 10 percent of the voting shares of a publicly traded broker. The superintendent may refuse an entity license if anyone who may materially influence it falls short of the standards (§ 2137(d)(1)).

Licensing matters for money too. No one may pay compensation to a person acting as a life settlement broker in New York, and no one may accept it, unless that person is licensed under § 2137 (§ 7814(a)(7)).

Disclosures: the broker's paperwork

Before or at signing, the owner gets a separate, conspicuous written disclosure from the provider or broker (§ 7811(a)). It covers alternatives such as accelerated benefits, possible taxation, exposure to creditors, possible loss of public assistance, a rescission right lasting until 15 days after the owner receives the proceeds, and payment of proceeds within 3 business days after the provider has the insurer's acknowledgment of the transfer. It also covers the possible loss of conversion rights and waiver of premium, and the gross offer, net amount and every intermediary's compensation.

The broker must also give the owner its own separate document, signed by owner and broker. It states the broker's name, business address, telephone number and e-mail address, and gives a full, complete and accurate description of all offers, counter-offers, acceptances and rejections (§ 7811(c)). The insured signs a separate document of his or her own (§ 7811(b)). Every one of these must be signed no later than the date the contract is signed by all parties. If a broker does work the law assigns to the provider, the provider is treated as having done it (§ 7813(e)).

Privacy

No broker, provider, intermediary or authorized representative may disclose the identity of the insured or owner, information that could identify them, or the insured's financial or medical information, except as article 78 allows (§ 7810(a)). The main exceptions:

• what is needed to effect the settlement, with prior written consent of both owner and insured;
• responding to an investigation by the superintendent or another government agency.

A broker must make its authorized representatives agree in writing to the privacy rules. Medical information is also protected by the public health law's confidentiality rules, and the stricter rule governs (§ 7813(f)). Follow-up contact with the insured is capped: once every three months if life expectancy is over one year, and once a month if it is one year or less (§ 7811(b)(1)).

Advertising

Life settlement advertising must be truthful and not misleading, in what it says and in what it leaves out. It must not misstate what an owner will receive, imply that a settlement is the only option, or hide that the advertiser is paid. Any act the superintendent determines to be unfair or deceptive is a prohibited practice (§ 7814(a)(10)).

Prohibited practices

Under § 7814 a broker may not:

• as a condition of the life settlement contract, request or require the insured to take a medical exam at any time after the policy is settled (§ 7814(b));
• join agreements that fix or limit the value paid to owners, restrict competitive bidding, or otherwise restrain trade (§ 7814(d));
• take compensation except for a specific contract, clearly disclosed to the owner (§ 7814(a)(9));
• pay or accept referral or finder's fees to the owner's physician, attorney, accountant, insurance producer or other adviser (§ 7814(a)(8));
• conceal records from the superintendent, or file materially false documents (§ 7814(a)(11), (13)).

Two more rules round this out. Stranger-originated life insurance (STOLI) is prohibited (§ 7815(c)). And an insurer may not stop its agent from telling a client that life settlements exist (§ 7814(f)). A violation of § 7814 or § 7815 is a defined violation under article 24 (§ 7814(g), 7815(d)).