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Life Health > Life Insurance

Compact Wording Spurs Property Rights Debate

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Efforts to develop product standards for the new Interstate Insurance Product Regulation Commission have triggered a debate about policyholder property rights.

Members of a working group at the National Association of Insurance Commissioners, Kansas City, Mo., are talking about whether insurers can ask if applicants have discussed the possibility of a life settlement and whether insurers can include ‘right of first refusal’ clauses in life insurance contracts.

The working group is developing the standards the IIPRC will need to process life product filings for states participating in the Interstate Insurance Product Regulation Compact.

Working group members have agreed to let insurers ask in an application whether an applicant already has entered into an agreement to settle a contract. Carriers also could also ask if a policyholder has ever sold other contracts.

Representatives for the American Council of Life Insurers, Washington, say insurers should be able to ask about applicants’ intent to sell policies to life settlement companies.

An insurer has a right to evaluate an application and decide if it wants the applicant’s business, says Michael Lovendusky, an ACLI associate general counsel.

All jurisdictions have been approving questions about applicants’ intent to settle policies, says Miriam Kroll an ACLI vice president.

But Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, is objecting to the idea of letting insurers ask broad questions about applicants’ interest in selling policies.

“Don’t take away the basic rights to viaticate or settle policies,” Birnbaum says.

If insurers are worrying about speculators financing the purchase of policies simply to create life settlement opportunities, application questions should address that specific issue, Birnbaum says.

Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., points out that, under current law, insurers cannot deny an application simply because the applicant plans to sell the policy.

If an applicant has a contract to sell a policy before even applying for the policy, “that’s wrong,” Head says.

But, if consumers merely discuss the possibility of selling a policy before applying for coverage, that is none of the insurer’s business, Head says.

Meanwhile, regulators who have been drafting the product approval standards seem to agree that they should avoid letting life insurers include “right of first refusal” provisions in policies.

The provisions require policyholders to offer an in-force policy to the issuer before trying to sell the policy to other buyers.

Unless there are specific tax or legal reasons for including the ‘first refusal’ language, the policy is the property of the contract holder, and contract holders should have the right to use their policies as they see fit, regulators say.

Requiring a Chevy owner to sell his car back to a Chevy dealership would be a bad idea, says Jim Walker, a Florida regulator.

Kroll, the ACLI representative, says allowing policyholders to sell some products could create administrative burdens for the insurer.

But Head says the IIPRC should make unrestricted assignment and ownership rights the standard unless insurers can show why restricting those rights would help consumers.

“Most consumers assume they have these rights now,” Head says.


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