Viatical Settlements

Here is something for life insurance lawyers to read. It is from the Texas Department of Insurance web-site.
Subchapter R. VIATICAL AND LIFE SETTLEMENTS 28 TAC §§3.1701 – 3.1717
The Commissioner of Insurance adopts amendments to §§3.1701 – 3.1703, 3.1705, 3.1707 – 3.1715, and new §§3.1704, 3.1706, 3.1716, and 3.1717 concerning regulation of viatical and life settlements. The sections are adopted with changes to the proposed text as published in the August 11, 2000 issue of the Texas Register (25 TexReg 7465).

The amendments and new sections are necessary to implement the provisions of Texas Insurance Code Article 3.50-6A, as amended by Acts 1999, 76th Legislature, in House Bill (HB) 792. Prior to HB 792, Code Article 3.50-6A applied only to viatical settlements, the sale of a life insurance policy on an individual with a catastrophic or life-threatening illness or condition. House Bill 792 amended Article 3.50-6A by addressing life settlements, which are defined as the sale of life insurance policies on individuals who do not have a catastrophic or life-threatening illness or condition. The adopted rule adds language to address life settlements, clarifies filing requirements, and requires additional disclosures, contract provisions, and reporting requirements.

The adopted sections are necessary to provide additional consumer protections; establish requirements for registration, disclosure, and form approval for persons engaged in the business of viatical and life settlements; streamline the process for renewal and registration, disclosure, and form approval; more clearly define prohibited practices; ensure that a viator´s, life settlor´s, and owner´s rights remain protected in the event the life insurance policy or certificate is re-sold or transferred to another person, or when the viatical or life settlement provider, provider representative, or broker elects to no longer engage in the business; protect the confidentiality of the personal information of viators, life settlors, and owners; designate the responsibilities of viatical or life settlement providers, provider representatives, and brokers; and provide enforcement mechanisms to ensure compliance with the Insurance Code and this subchapter.

While all of the adopted sections (§§3.1701 – 3.1717) become effective 20 days after the date the rule is filed with the office of the Secretary of State, the department recognizes the need for preliminary actions to be undertaken by viatical and life settlement providers, provider representatives, and brokers to implement the reporting requirements of §3.1705, and to implement other sections of the rule including, but not limited to §§3.1706 – 3.1710, that will require changes to some forms used to effect viatical or life settlements. Therefore, providers, provider representatives, and brokers must begin collecting data pursuant to §3.1705 not later than May 1, 2001, and include such data in any report filed on or after May 1, 2001, as well as file any such report in the format prescribed by §3.1705. Additionally, any forms used, issued, or delivered on or after May 1, 2001, must comply with the new regulations. Filings received by the department on or after May 1, 2001 must be accompanied by the completed transmittal checklist prescribed by the department.

The commissioner held a public hearing on the proposed rule on September 27, 2000, under Docket No. 2460.

In response to comments, the following changes have been made to the sections: §3.1702 – The term “captive broker” has been deleted throughout the rule and has been replaced with the term “viatical or life settlement provider representative,” and a definition of that term has been added. This change necessitated deletion of the term “independent broker” which was previously needed due to the existence of “captive broker” in the rule. The terms “viatical settlement company” and “life settlement company” have been changed throughout the rule to “viatical settlement provider” and “life settlement provider.” The definition of “business of viatical or life settlements” has been changed to include language addressing persons who perform the acts of a viatical or life settlement provider, provider representative, or broker. The definition of “catastrophic or life-threatening illness” was changed to be more consistent with similar definitions relating to viatical and life settlements in the Internal Revenue Code. The definition of “certificate holder” was changed for clarification. The definition of “mature or matured” was changed to remove the word “matured,” and to add language to the definition necessitated by changes in §3.1704(e) – (g). The definition of “owner” was changed to more accurately describe the rights that an owner has under a policy or certificate. The definition of “referral agent” was reinstated and changed to address persons who make viatical or life settlement referrals, including referrals for a fee. This change also necessitated a change to §3.1703(a) to recognize that a person is not required to obtain a certificate of registration with the department when that person´s sole involvement in a viatical or life settlement is restricted to the acts of a referral agent, and any fee received for the referral consists of a nominal, fixed, one-time fee that is not contingent upon the purchase or sale of the product for which the referral is made. The definition of “viatical or life settlement broker” was changed to include language that indicates that brokers represent the viator, life settlor, or owner in a viatical or life settlement, and negotiate the settlement on the viator´s, life settlor´s or owner´s behalf. Language relating to referring or introducing a viator, life settlor, or owner was removed. The definition of “viatical or life settlement provider” was changed to recognize that an authorized or eligible insurer that issues stop loss coverage to a viatical or life settlement provider is not included within the definition of “viatical or life settlement provider.” A definition of “provider representative” was added in response to comments to delete the term “captive broker”. Many of the definitions in this section were renumbered in response to removal and addition of other definitions. §3.1703 – Language was added to subsection (j) to clarify that the secretary of state is the applicant´s domiciliary secretary of state. Subsections (l) and (m) were changed to clarify that the secretary of state in those provisions means the Texas Secretary of State, and to simplify the application process by requesting a copy of the applicant´s certificate of existence from the Texas Secretary of State. §3.1704 – Subsection (e) was changed to give viatical or life settlement providers the option to appoint a Texas registered broker or one of their provider representatives when the provider has viatical or life settlements that will not mature by the date the provider´s current certificate of registration expires, or is surrendered, and the provider does not intend to renew its registration. Language was also added where necessary regarding brokers and provider representatives when they surrender or nonrenew their certificate of registration. §3.1705 – Subsections (a) and (c) were changed to require persons submitting a report under §3.1705 to only file an electronic copy. Subsection (c)(1)(C) was changed to require the A.M. Best rating “at the time of settlement contract.” Subsections (c)(1)(M) and (c)(2)(H) were changed to require the primary ICD Diagnosis Code “at the time of settlement contract.” Subsection (c)(4) was added to require the name and address of any person who was given a fee for a referral. Subsection (c)(9) was changed to allow a viatical or life settlement provider conducting in-house tracking to use the abbreviation “IH” in the report. §3.1706 – Subsection (g) was changed to remove language referring to a company or broker being “lawfully registered in this state to conduct both viatical and life settlement business,” as such language is no longer necessary since the department will not issue separate registrations, but will only distinguish between registrations for providers, provider representatives, and brokers. The phrase “to the best of their knowledge” was added to this subsection and §3.1709(c)(11) since it will not always be apparent when some forms are used whether the transaction will be a viatical settlement or life settlement. §3.1708 – Subsection (b)(2)(E) was changed to permit a general description or identification of the type of person to whom confidential information will be released, as opposed to the specific name or identity of the person to whom such information may be released. A similar change was made to §3.1714(a) since financing entities could ultimately obtain confidential information pursuant to a consent form. Subsection (b)(2)(F) was changed to require disclosure that a medical release form may be used to track ongoing health status of the viator, life settlor, or owner, and that the viator, life settlor, or owner may withdraw their consent pursuant to applicable law. Subsection (b)(2)(M) was changed to remove language referring to a future increase in the death benefit. This change was necessary to remain consistent with model laws which allow future increases in the death benefit to be purchased as part of a viatical or life settlement. Similar changes were made to § §3.1709(e) and 3.1710(d). In lieu of a prohibition of the sale of such a benefit, the department opted for disclosure in paragraph (L) informing a viator, life settlor, or owner that he/she may wish to inquire if his/her policy contains such a provision, and whether the price paid for the policy includes the value of the provision. Remaining paragraphs were renumbered. Paragraph (P) was changed to use language that is more consistent with the definitions of “viatical or life settlement broker,” and “viatical or life settlement provider representative.” §3.1709 – The reference to “executive officer” in subsection (c)(1) was changed to recognize executive officer “designated in the settlement contract with authority to bind the provider.” Subsection (c)(7) was changed to only require a viatical or life settlement provider to disclose that the provider has the right to assign, sell, or otherwise transfer the policy without the viator´s, life settlor´s, or owner´s consent. Language was added to subsection (f) to clarify that viatical and life settlement contracts must contain the name of the insurance company underwriting the policy “at the time of contract.” A similar change was made to subsection (g) in relation to escrow/trust agreements. §3.1710 – Subsection (c)(2) was changed to recognize that a viatical or life settlement provider, provider representative, or broker may need to obtain the name of a viator´s, life settlor´s, or owner´s family member (for later use to obtain a death certificate) by removing the prohibition against obtaining such information. In lieu of an outright prohibition against obtaining such information, the department instead prohibited use of the information to directly or indirectly contact such family members unless the family member is designated as a contact person under §3.1709(c)(5). A change was made to subsection (c)(6) to clarify that the criteria used to determine if a payment is “just” includes data that is submitted in the reports required by §3.1705. Subsection (c)(12) was changed to allow use of a power-of-attorney form if the form is a special or limited power-of-attorney and is restricted only to purposes related to the settlement. §3.1712 – A change was made to subsection (b) to remove reference to the language “as determined at the time of viatical or life settlement contract” since a viator´s or life settlor´s life expectancy may change. §3.1713 – Language was added to subsection (b) to allow providers to continue to track a viator´s or life settlor´s health status, even after assigning, selling, or otherwise transferring its interest in a policy. §3.1714 – Subsection (b) was changed to remove a restriction prohibiting written consent forms from providing for the release of information for any period greater than 12 months, and prohibiting the use of such forms for tracking purposes. In lieu of a prohibition, the department has opted for a disclosure requirement in this section and in §3.1708(b)(2)(F). §3.1715 – The prohibitions in subsections (b) and (c) concerning escrow agent licensure were deleted. §3.1717 – Subsection (b) was changed to require providers, provider representatives, and brokers to maintain records of each viatical or life settlement in which it participates, until three years after the “date the viatical or life settlement has matured.”

The department has determined that the following grammatical or clarification changes are also necessary. §3.1702 – The definition of “escrow agent or trustee” was changed to more accurately address persons who are licensed to provide escrow or trust services. §3.1703 – Language was added to subsection (e) to clarify that any name, not just such persons’ assumed names, used by a viatical or life settlement provider, provider representatives, or broker is subject to the requirement of §19.901. §3.1706 – The date of December 1, 2000 was changed to May 1, 2001. §§3.1708(b) and 3.1709(c) – Changes were made to clarify that if the viator or life settlor dies at any time prior to the end of the rescission period, the viatical or life settlement contract will be deemed to have been rescinded. §3.1709 – The word “owner” was added to subsection (c)(10) where it had been inadvertently omitted. §3.1710 – A change was made to subsection (c)(8) to clarify that a provider, provider representative, or broker is prohibited from entering into any settlement with a viator, life settlor, or owner in this state in which any form used to effect the settlement contains a provision requiring or limiting such person to specify a particular city, county, or locality in Texas or elsewhere as the legal forum for resolving a dispute. As elderly persons and sick persons are commonly solicited for viatical and life settlements, it was the department´s intent to prohibit forms that contain clauses that require viators, life settlors, or owners to resolve a legal dispute in a locality far removed from their residence at the time of contract. Other non-substantive changes were made throughout the rule for grammar, consistency, or clarity. Contemporaneous with the adoption of these amendments and new sections, the repeal of §§3.1704, 3.1706, and 3.1716 – 3.1718 is published elsewhere in this issue of the Texas Register.

Section 3.1701 applies the subchapter to life settlors, life settlements, and owners. Section 3.1702 adds, deletes, or modifies various definitions. The definition of “owner” in this section clarifies that, in some situations, the owner, viator, or life settlor are separate persons under an insurance policy. Section 3.1703 sets forth requirements for obtaining a certificate of registration to operate as a viatical or life settlement provider, provider representative, or broker, including doing business under an assumed name, or having more than one business location. Amendments to this section create a new structure for paying fees to obtain a certificate of registration, and change the certificate of registration from a one-year certificate to a two-year certificate. Prior to the amendment fees were paid annually at a rate of $250.00 for company registrations and $125.00 for broker registrations. Under the amendments, the same fee is charged, but payment of the fee is made every two years since the certificate will be valid for two years. As such, a provider will pay $500.00 every two years and a provider representative or broker will pay $250.00 every two years. The amendment also sets forth requirements for notifying the department of a change in information both during the application process and any time a change occurs in the application thereafter. Section 3.1704 sets forth the requirements for renewing, nonrenewing, or surrendering a certificate of registration. Amendments to §3.1705 modify the content and format of the reports required to be filed with the department.

Section 3.1706 sets forth the requirements for the filing of viatical or life settlement forms, and the process for departmental action on forms filed with the department. Section 3.1707 addresses life settlements in the filing requirements for advertising, sales, and solicitation materials. Section 3.1708 modifies existing requirements, and adds new required disclosure materials. The amendments to §3.1709 both modify existing, and add new, mandatory contract and application provisions, including those provisions that allow the owner of a policy to retain an interest in the policy. The section also addresses acknowledgement forms, escrow and/or trust agreements, and the provisions that must be contained in those forms.

Additional prohibitions are added in §3.1710 to the current list of prohibited practices related to advertising and solicitation of applications and contracts for viatical and life settlements. The amendments to §3.1711 address prohibited practices relating to the payment of commissions and other forms of compensation, modify the section to add life settlement terminology, and create a fiduciary duty between a viatical or life settlement broker and the viator, life settlor, or owner whom the broker represents.

Section 3.1712 sets forth new guidelines outlining prohibited practices when contacting a viator, life settlor, or owner for personal information, including contacts for health status inquiries after the settlement contract has been entered into and the proceeds have been paid to viators, life settlors, or owners. Section 3.1713 is amended to address the assignment, sale, or transfer of insurance policies subsequent to the initial purchase of the policy by the viatical or life settlement provider. Amendments to §3.1714 set forth the limits and practices relating to obtaining confidential information, such as prohibiting the disclosure of an owner´s, viator´s, or life settlor´s confidential information without first obtaining proper written consent.

Section 3.1716 sets forth the authority and the procedures for the commissioner to deny, suspend, or revoke a certificate of registration, or take other enforcement action. Section 3.1717 authorizes the department to examine the business and affairs of any provider, provider representative, or broker engaged in the business of viatical or life settlements in this state, with expenses for such examinations to be paid by such persons.

In conjunction with these amendments and new sections, the commissioner is repealing existing §§3.1704, 3.1706 and 3.1716 – 3.1718. Adoption of the repeal is published elsewhere in this issue of the Texas Register.