The U.S. Supreme Court on Dec. 3 declined to hear a case that would have challenged the extent to which states can regulate life settlements. The move effectively allowed an appellate court decision in favor of the states to stand.
The Fourth Circuit Court of Appeals in Richmond had ruled on the case earlier this year, finding that states have the power to regulate life settlements and viaticals under language in the McCarran-Ferguson Act that gives the states authority over businesses that “relate to” insurance.
In the case, Life Partners Inc. v. Morrison, 07-261, a resident of Virginia had filed a complaint with the State Corporation Commission that Texas-based Life Partners Inc. had not paid her enough for her policy under state law.
According to a decision written by Judge Paul Niemeyer, the policyholder, referred to as Jane Doe, contracted with New Jersey-based broker Ideal Settlements, Inc. to bring a policy into the secondary market and ultimately to sell it to Life Partners. After rejecting two offers, Doe accepted a bid from Life Partners for $29,900, which represented 26% of the face value of the $115,000 policy.
However, Virginia law requires that viators receive a certain percentage of the policy’s face value based on their life expectancy, and under that law Doe was to receive far more, as much as 60% to 70%. Five months after the transaction was completed, according to the Judge Niemeyer’s ruling, Doe contacted Life Partners to demand more money. Life Partners offered to rescind the transaction, but Doe refused that and instead filed a complaint with the state.
As a result of the complaint, the Virginia State Corporation Commission issued a “show cause” order to Life Partners asking why it was conducting business in the state without having obtained a license and warning that if it did not comply with Virginia regulations, the company would be barred from transaction with state residents.
Life Partners challenged the order, claiming that it violated the Commerce clause of the constitution by asserting jurisdiction over all transactions involving Virginia viators. The state countered that its law was appropriate under the McCarran-Ferguson Act. A district court ruled against Life Partners while declining to rule on the McCarran-Ferguson question raised by the state. The decision was appealed by both parties, and the appellate court upheld the earlier decision on the Commerce clause while agreeing with the state’s arguments on the issue of McCarran-Ferguson.
Andrea Atwell, who is in charge of investor relations for Life Partners, said the company was “kind of testing the waters” with the case to see if the high court would rule on exactly how much authority states have to regulate settlements. However, she said Life Partners doesn’t expect the court’s decision not to hear the case to have any significant impact on the business.
The appeal had limited support from the Life Insurance Settlement Association. Doug Head, LISA’s executive director, said the group “contemplated” filing an amicus brief, but ultimately decided that, in the areas in which it agreed with Life Partners, the company had stated the case sufficiently. “The arguments regarding the conflict that exists between the jurisdictions we thought were well presented in the Life Partners case, and we didn’t have anything to add,” he said.
Overall, however, Head said that LISA “didn’t agree that it was a matter for federal regulation.”
While he didn’t agree with all of the state’s case, Head said, “we support state regulation quite firmly and were inclined to agree with Virginia in this case,” regarding state authority.
Among the areas where LISA differs from the state’s arguments, he said, was in the state’s contention that a life settlement creates a “tripartite deal” between the insured, the owners of a policy and the purchaser. “The insured is not part of the transaction,” he said.
Additionally, Head criticized the law that gave rise to the case in the first place, which guarantees minimum pricing for policies based on life expectancy. The legislation “was a bad idea and remains a bad idea,” he said, that creates “false expectations” for all parties in terms of the value of a policy.
In general, though, Head said that while he would have welcomed the chance to debate the issue further and the clarity a Supreme Court ruling would have provided, “we can live with it.”