My father, who owns his own legal practice, has a bunch of neat mementos he’s gathered over the years. One is a set of my baby shoes when I was only a year old. He used them as a dramatic prop to successfully defend his client, who had been wrongly accused of child abuse. Another is a rubber stamp that simply reads “BULLSHIT,” which in one infamous occasion, he used the stamp to reply, paragraph by paragraph to a spurious legal letter his office received. I am *this* close to ordering one for myself.
A third tchotchke is this weird little statue on his bookcase that is of a cartoonish old-time lawyer with heavily lidded eyes, pince-nez glasses, a barrister’s wig and a law book in the crook of his arm. On the base of the statue, it reads, “SUE THE BASTARDS.”
I often joke with my dad about that statue, because I think it plays to negative stereotypes people have about the legal profession. That goes double for my father, whose practice is mainly handling real estate settlements. Civil tort litigation only makes up a small percentage of what he does. And yet, the statue speaks to this vicarious thrill I think a lot of trial attorneys get when they bring a good case to bear. Whether it’s good because it’s getting justice for somebody who needs it, or whether it’s good because it brings in a nice paycheck, I can’t really discern.
I bring all of this up because of a series of newspaper articles I came across recently. They are from the Observer, a monthly publication from Shepherdstown, West Virginia, covering news in that state’s eastern panhandle–Jefferson County, to be specific. The Observer‘s publisher, Thomas Harding, had seen the photo National Underwriter ran of MassMutual CEO Roger Crandall when we profiled him last year. He had hoped to use the photo for his own publication, but we could not release it to him; we were using it with MassMutual’s permission. Only today did I see why Thomas wanted it: to cap off a three-part article series on a fairly serious case of misconduct going back a few years over the pushing of 412i plans on people who did not qualify for them. The upshot is the clients, taken in by their advisors, walked into what they thought was a on-the-level investment strategy for protecting income from taxation. What they got was millions of dollars in IRS fines (initially, at least, before the IRS wised up, realized there was a serious problem with 412i plans in general, and scaled back the penalties).
Now, I have to say that I think that overall, Harding’s articles were well done. Especially the first, which lays out a pretty compelling story of some folks who came into a lot of money, needed a way to protect it as much as they can, and ran afoul of a guy they trusted but who was wholly unworthy of that trust. What resulted was an all-too-familiar story for this industry: clients left holding the bag and forced to sue to get their money back. The culprit in the story says he did nothing wrong, but it sure doesn’t look that way. At best, he is guilty of gross incompetence. At worst, outright fraud. Frankly, I’m surprised they don’t have criminal charges pending.
But early on, the stories took another all-too-familiar turn for me: the sanctification of the victims and the vilification of the insurance industry. To be sure, the Lloyds, the first folks involved in Jefferson County’s multiple 412i problems, did not deserve to fall down the deep, dark rabbit hole of disastrous financial advice. But the Observer makes them out to be poor farmers who scrimped and saved their way into affluence, when in fact they got their big money the same way every other small farmer seems to make it these days: by selling off cropland to commercial real estate developers. There is nothing wrong with that. (Unless you lament the disappearance of our farmland to make way for more fast food outlets.) But if you’re going to cover these victims, do it properly. Don’t make them into something that they’re not.
But that is really just a nitpick. Take one look at 412i, and it looks like it was a bad fit for the families convinced to use it as a tax shelter. Where I have stronger issues with this story is in its third act, when the focus turns on trying to pin as much blame on MassMutual for all of this. Maybe I’m just reading into things, but it seems that once the lawyers smelled blood on this case – that there were multiple plaintiffs and a veritable gold mine of fees to reap, then the aim went from bleeding white the knuckleheads who pushed the bad strategy to going after the carrier itself. After all, MassMutual is the archetypical “deep pockets,” and when that lawsuit strategy began to unfold, then we see the editorial shift go to MassMutual as the bad guy. Interestingly, in the first two articles in this series – which were published in 2009 and 2010, respectively – MassMutual was always listed as the last defendant. A tack-on, if you will. Come the third article, and suddenly they are out in front. Why is that?
The Observer contends that MassMutual did a poor job of policing its sales force, and that in this case, they knew they had a dodgy operator on their hands and failed to do something about it until it is too late. Sorry, MassMutual, but it looks like they have you there. But, there is a world of difference between a compliance department acting too slowly on something and an intentional effort to drag feet because apart from current lawsuits, the 412i thing was making money. If that’s the case, then MassMutual would be in a lot of trouble. However, the Observer does not make that case convincingly. It doesn’t stop it from suggesting it, though, and gauging by the comments left by Observer readers, it appears that in the eastern panhandle of West Virginia, people have already decided who is ultimately to blame. The multi-billion-dollar insurance company, that’s who.
The Observer even goes so far to cast aspersions on MassMutual’s declining to comment on the story, even though they were the ones to settle first. They settled! And early on, too. It seems unfair to go a few years and then look sideways at the company for staying quiet about it. More to the point, it seems irresponsible to suggest that MassMutual is up to something more than a conservative legal and PR strategy. They have a lot to protect. West Virginia has a well-deserved reputation as a judicial hellhole, where soaking multinationals might rank as a leading industry, were its numbers so compared. So I guess I’m not surprised to see the Observer finally turn to vilifying a big insurer without enough evidence to do so credibly. But I am still disappointed by it.
Insurance world, take note. There is nothing unusual going on here. We have all seen this same scenario play out before and we’ll see it play out again. But every single time this happens, it undermines the collective good faith you folks have earned with the public. For every 100, 500 or 1,000 positive impacts made by a L/H agent or rep, it takes exactly one bad news story or one high-profile lawsuit to wash it all away. The problem is magnified in the L/H side of things, since there is a need for innovation that I think lends itself to running afoul of both clients and regulators.
As I told the Observer in a letter I wrote, the agency-driven distribution model spurs independent producers, who often act with little oversight from the home office. As such, we see this cycle where market conditions give rise to a need – to protect assets from taxation, say. The industry comes up with a product that tries to do that, it takes off, and either it’s based off of questionable legality or it’s the kind of thing (as in the case of life settlements) where it encourages certain operators to take a legally defensible product and push it into the realm of the indefensible (ala STOLI). The inevitable regulatory and legal crackdown occurs. The Observer goes to far as to suggest that the industry wants it this way: create a dodgy product, make a mint and when the regulators finally fine you for it, pay it off and still make a hefty product. That’s cynical. It is also a hell of a thing to say without any hard evidence. Business cycles and the insurance world’s inability to prevent itself from keep making the same mistakes are one thing. Premeditated villainy is something else.
The last thing here that offends me is hypocrisy. By the third Observer article, we are given the notion that the industry is in the practice of figuring out ways of denying the government tax revenue. Indeed, it is. That is a huge selling point of the L/H world. But why is it somehow nefarious for an insurance company to devise a way to protect your assets from taxation, but when some soybean farmer takes advantage of it, he’s just protecting what’s his? It’s either tax evasion, or it isn’t. And if you’re taking part in it, then you’re complicit. The Observer is trying to have it both ways by suggesting that the plaintiffs in these cases were just good folk taken for a ride, and that at the same time, the insurance world was in the wrong for even offering tax-protection strategies. What if the 412i advice was actually sound and appropriate, and the families that paid into it preserved a greater portion of their wealth for themselves and their families for generations to come? Would the Observer then be raising an eyebrow at these local families taking advantage of that? Somehow, I doubt it. After all, life insurance does the exact same thing and nobody thinks of that as evil.
Again, as I told the Observer, I don’t like apologizing for the insurance industry. But I do take issue when it is unnecessarily vilified. Sure, MassMutual screwed up by failing to reign in a rogue operator. But to suggest a bigger problem than that mainly by relying on on commentary from legal experts with a potential incentive to vilify the insurance business is a bit much.
Having thus vented my spleen, let me finish by saying that the Observer is to be commended for approaching this story in the first place. By its own reporting, this is the biggest legal case to hit Jefferson County, and the magnitude of it demands coverage. That most folks would not really understand the arcane details of it, makes the story that much more worthy of coverage, and the Observer does a good job of boiling down many of the details that matter into a form that anybody can understand. Every industry, especially one that moves as much money as the insurance business, deserves media scrutiny. You just need to be fair about it, and to put aside one’s deeply held sense that on any given day, the insurance industry is up to no good. Perhaps the Observer did not think that when it published these articles, but in the end, that’s how it comes off. And that is where this series of articles goes from a regional publisher cracking a big, meaningful story, to just another case of the media taking easy potshots at the insurance world.