In January, a Rancho Mirage couple filed a class-action lawsuit against Lincoln National Life Insurance Company for failure to disclose the life settlement option. A U.S. District Court filing in Riverside County reveals allegations of fraud, elder abuse and unfair and fraudulent business practices, and seeks punitive damages and injunctive relief on behalf of the class.
In a 21-page complaint, plaintiffs Larry and Joan Grill, and Steven Grill, the trustee for the Grill’s estate, allege that Lincoln forbids its agents from talking to clients about life settlements. The lawsuit continues that “active concealment” of the settlement option is pervasive amongst life insurance carriers because surrendered and lapsed policies are key sources of profitability.
In 2007, the life settlement industry introduced legislation to address this issue. The NCOIL Life Settlement Model Act requires carriers to disclose the settlement option to individuals over age 60 who are considering policy surrender. Facing opposition from the life insurance industry, however, the pro-consumer initiative gained limited traction, with only seven states officially adopting the Act and signing it into law.
California was not one of those states. Although Senate Bill 98, the state’s comprehensive life settlement legislation, is based largely on the NCOIL Act, the provision for carrier disclosure of life settlements was not included in the final statute adopted by California.
Lincoln mentions the California exclusion in its motion to dismiss, alleging that the lawsuit is “…an effort to impose upon insurers a life settlement disclosure obligation” that does not exist under California law. Lincoln further contends that its policy change form, which the Grills signed to reduce the face amount of their coverage from $7.2 million to $2 million, “explicitly asks about…the possible sale or assignment of this policy to a life settlement, viatical, or other secondary market provider.”
Lincoln also argues that insurers are not fiduciaries under California law. In his article “What Are the Fiduciary Duties of Insurance Agents and Brokers?,” Mher Asatryan, a Los Angeles-based attorney, points out that the California Supreme Court concurs with Lincoln’s position. He notes that in Vu v. Prudential Property & Casualty Company (Vu v. Prudential Prop. & Casualty Ins. Co., 26 Cal. 4th 1142 (2001)), the court held that the “insurer-insured relationship…is not a true ‘fiduciary relationship’ in the same sense as the relationship between trustee and beneficiary, or attorney and client.” In Vu, the court went on to explain that duties imposed on carriers are only fiduciary-like duties because of the unique nature of the insurance contract, not because the insurer is a fiduciary. As such, insurers are not de facto fiduciaries.
The question of fiduciary duty may not be so clear cut for insurance agents and brokers in California. Contrary to popular belief that agents owe clients a fiduciary duty, Asatryan maintains that California courts have treaded warily around the issue, hesitant to offer a definitive ruling.
The decision in Kotlar v. Hartford Fire Insurance Company (Kotlar v. Hartford Fire Ins. Co., 83 Cal. App. 4th 1116 (2000)) sheds some light on California’s thought process. Here, the court made the distinction between insurance brokers and attorneys, noting that unlike lawyers, who do not represent both parties to a transaction, insurance brokers can be dual agents, representing the insurer and insured.