The life settlement market has seen a few litigation cases in the state of Delaware in recent years whereby the estate of a deceased has brought a claim against a life settlement asset manager to recover the death benefit of the life insurance policy.
In these cases, plaintiffs argued that because these policies specifically were purchased using a premium finance arrangement (under which the insured borrows money to pay the premiums) they violated Delaware law on insurable interest when they were issued.
Recent Delaware decisions suggest that in these situations, the death benefit should go to the estate, so the consequence of these cases has been that the court has sided with the plaintiff, meaning that the asset manager, despite paying the premiums to keep the policies in force – often, for many years – has had to return the death benefit in full to the estate of the insured.
A recent decision in the 5th Judicial Circuit Court for Marion County, FL, however, provided something of a welcome ‘win’ for the space.
In U.S. Bank, N.A. v. Estate of Albart, judge Steven Rogers of the Circuit Court of Florida, Fifth Judicial Circuit (Marion County) ruled that, while the death benefit was due to be repaid to the estate, it must be done net of the premiums paid to the insurer for coverage. U.S. Bank is acting as the securities intermediary for Viva Capital 3 L.P., which is ultimately owned by affiliates of Blackstone.
Life Risk News understands that the decision is the first of Delaware cases to permit an offset for premiums paid, something that could be significant for any additional cases brought before the courts.
“It’s important to bear in mind that the offset for premium can be significant since the policies being litigated are well over 15 years old. In some cases, the premiums paid may exceed the death benefit,” says Jule Rousseau, Partner at law firm, ArentFox Schiff.
This ‘win’ for Blackstone – and the life settlement industry at large – will provide welcome relief for asset managers that still have premium-financed policies in their portfolios. Life settlement asset managers regularly assess litigation risk before purchasing policies and therefore make a judgement call with regards to whether they would want exposure to this risk at all, and if so, what price that risk price is worth.
Most of this risk exists, however, in the industry’s tertiary market, where larger portfolios are traded between investors; it is not unusual for the same policy to be traded multiple times over time. However, the secondary market rarely sees premium financed policies anymore, and they don’t represent a significant percentage of the industry.
“The specific issue in here is that of policies purchased with non-recourse premium finance loans. While there may be some legacy policies of this type in the tertiary market, as they mature, they’ll exit the market, and they’re not being replaced. The litigation activity makes it seem like this is a bigger issue than it really is to the industry at large,” said Rousseau. “Overall, the risk to the market as a whole remains low.’
Representatives for neither Blackstone nor Cozen O’Connor, counsel for the Estate of Edward Albart, had responded to a request for comment by press time.
