Affirming viatical settlement laws: the NAIC developed the viatical settlements model act to protect insureds and to create a transparent and fair viaticat settlements market.

The viatical settlements industry try was born in the 1980s in response to the AIDS crisis, when dying patients desperately needed cash to pay for expensive treatment. As AIDS became a more treatable disease, the industry expanded to include other terminal illnesses. People suffering from cancer, heart disease, Alzheimer's disease and other progressive illnesses, as well as elderly people in need of funds for assisted living, found viatical settlements to be a useful source of immediate cash.

Here's how the settlements work: a terminally ill patient sells his life insurance policy to a company (on behalf of investors) for a percentage of the face value, based on life expectancy--the shorter the life expectancy, the higher the payout. The company takes over payment of premiums and collects the full benefit when the insured dies.

Today, the industry is growing exponentially as investors seek out not only the terminally ill, but the swelling ranks of generally healthy, elderly Americans interested in profiting from their life insurance policies before they die. It is estimated that $13 billion worth of life insurance policies were sold by policyholders to investors in 2005--up from $5 million in 1989 and $200 million in 1998and it is projected that by 2030, the number could reach $160 billion.

Because of the need to protect insureds and to create a transparent and fair viatical settlements market, the National Association of Insurance Commissioners developed the Viatical Settlements Model Act in 1993 as well as accompanying rules to guide states in their regulation of the viatical settlements industry.

To date, approximately 38 states have adopted a version of the model act or similar legislation. Virginia enacted its Viatical Settlements Act in 1997 to address the state's concern with the "potential for exploitation of vulnerable and seriously ill individuals." The core provisions of the act ensure that companies purchasing life policies are reliable; it requires full disclosures to insureds; protects the privacy of insureds; establishes minimum prices for policies; and prohibits fraud.

That law was tested recently in Life Partners Inc. v. Morrison, when the U.S. Court of Appeals for the Fourth Circuit ruled that the McCarran-Ferguson Act, a federal law giving states authority to regulate insurance matters, also covers viatical settlements.

In Life Partners, a terminally ill resident of Virginia with only months to live sold her $155,000 policy to Texas-based Life Partners Inc. for $29,900, or 26% of face value. The Virginia Viatical Settlements Act, however, requires such companies to pay 60% to 80%.

The insured later demanded more money, claiming she was entitled to at least $69,000 based on Virginia law. When the company refused, the insured complained to the state bureau of insurance, which demanded that Life Partners adhere to the state's regulatory scheme. Life Partners sued, alleging that Virginia's scheme was so broad it affected commerce occurring outside the state, which it claimed violated the U.S. Constitution.

The court disagreed, holding that Virginia's Viatical Settlements Act was properly enacted for the purpose of regulating the business of insurance.

As the court explained, the act managed and controlled the relationship between insurer and insured, and did not address the relationship between viatical settlement providers and their investors.

Frank N. Darras, a Best's Review columnist, is a partner with Shernoff Bidart Darras LLP, Claremont, Calif. He is a plaintiff's lawyer representing disabled insureds. He can be reached at [e-mail].