Opinion ID: 720633
Heading Depth: 2
Heading Rank: 1

Heading: Exemption of Viatical Settlements as Insurance Contracts

Text: 21 If viatical settlements are insurance contracts, then they are altogether exempt from coverage under the federal securities laws. See Securities Act of 1933, 15 U.S.C. § 77c(a)(8) (insurance ... policy ... issued by a corporation subject to the supervision of the insurance [authority] of any State exempt from coverage). In favor of that exemption, LPI argues first that a viatical settlement redistributes risk in the same manner as does an insurance contract. The purchaser incurs a risk that the insured will live longer than anticipated, thus diminishing the present value of the death benefit; the insured is relieved of some of the financial implications of that risk (e.g., the need for funds to cover extended medical care) by taking a reduced but immediate payment. Second, invoking the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), which provides that no federal law may impair or supersede any law enacted by any State for the purpose of regulating the business of insurance, LPI maintains that its activities of selling and advertising death benefits are part of the business of insurance, see SEC v. National Secs., Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568-69, 21 L.Ed.2d 668 (1969) (statute governing sale and advertising of policies regulates business of insurance), and further refers us to the district court's finding that a number of states expressly regulate viatical settlements in the insurance sections of the state codes. 22 We are advised by LPI that nine states now regulate viatical settlements and that others are considering the Model Viatical Settlements Act drafted by the National Association of Insurance Commissioners. The SEC observes, however, that these regulations protect sellers (insureds), not buyers (investors). LPI rejoins that the dearth of regulations to protect buyers indicates only that the states believe that such regulation is unnecessary. Indeed, the McCarran-Ferguson Act exemption from the federal securities laws is triggered not only when a state prohibits but also when it permits an insurance activity. See American Mut. Rein. Co. v. Calvert Fire Ins. Co., 52 Ill.App.3d 922, 9 Ill.Dec. 670, 675, 367 N.E.2d 104, 109 (1977). 23 We agree with LPI insofar as it implies that the important question is not whether the states regulate viatical settlements. The scope for federal regulation of viatical settlements does not turn upon whether the states regulate them; federal regulation is foreclosed or not depending upon whether viatical settlements are insurance contracts within the exemption that the Congress of 1933 expressly provided for such instruments, or the marketing of fractional interests is part of the business of insurance within the meaning of the McCarran-Ferguson Act. Accordingly, we focus upon that question. 24 The district court concluded that LPI does not issue insurance policies or underwrite risk or undertake the normal activities of an insurance company. The SEC adds that LPI does not engage in the quintessential insurance function of risk-pooling, i.e., transforming what is a highly uncertain outcome for the individual insured into a highly predictable outcome by insuring a large number of persons. That an insurance policy underlies the viatical settlement is, the Commission says, irrelevant; any substantial asset might have served just as well. Moreover, the Commission states that the business of insurance referred to in the McCarran-Ferguson Act encompasses the relationship between an insurance company and an insured; the relationship that the SEC wants to regulate is that between a promoter and its investors, and regulation of that relationship is not insurance regulation, but securities regulation. See National Secs., 393 U.S. at 460, 89 S.Ct. at 569. 25 The SEC's argument on this score is much more persuasive than LPI's. The seller of a [318 U.S.App.D.C. 308] viatical settlement is not foregoing current consumption in order to protect against future risk, as does the buyer of an insurance policy. Quite the contrary: he is giving up the protection of a policy already in effect, in favor of current consumption. Nor is there any evidence that the typical investor who buys an LPI viatical contract pools the financial risk that the seller will live longer than expected. To do so, the investor would have to acquire enough contracts to reduce the actuarial risk associated with the life span of each individual seller. The record gives no indication, however, that LPI's investors systematically engage in the risk-pooling that is the essential characteristic of insurance. Moreover, there is no reason to expect that state insurance commissioners would regard even the pooling of viatical contracts as a form of insurance. To the extent that regulation of insurance companies is prompted by concern over their ability to pay benefits when due, that concern is simply not applicable to investors in a viatical settlement because the insured receives payment from the investors at the outset; thereafter the investor has no further liability to the insured. 26 To be sure, the investor's pre-payment of the death benefit diminishes the insured's risk that he will become insolvent before he dies; but as the SEC suggests, that initial risk of insolvency could have been reduced by the insured's liquidation of any asset that he owned. For example, the buyer could just as effectively have purchased the seller's home subject to his reservation of a life estate in the property, or the buyer might have factored the seller's accounts receivable--which, like death benefits, will be paid at an uncertain future date and bear some risk of default. These arrangements--and numerous others--entail roughly the same investment risk-sharing features as the acquisition of a fractional interest in death benefits, but they do not involve an insurance contract. That the underlying asset in this case happens to be an insurance contract is, as the SEC maintains, simply irrelevant. 27 In short, a viatical settlement is not an insurance policy, and the business of selling fractional interests in insurance policies is no part of the business of insurance. LPI's offering does not, therefore, qualify for the insurance exemption from the federal securities laws, and is not shielded from federal regulation by the McCarran-Ferguson Act.