Insurance fraud on the elderly.

Insurance scams often target older people, who may fall prey to misleading sales pitches and false promises of a secure future. Trial lawyers can help.

When 75-year-old widow Betel Baird met with life insurance agent Al Adams, little did she know she'd invited a swindler into her home.(1) She would soon learn, however, just how much it cost her to open her door. Like many people, she worried about having enough money for her last expenses and her funeral. So when Adams offered her a life insurance policy that would provide her estate with enough "ready cash," he said, to pay all her final expenses and debts, she was receptive.

He explained that the policy cost just $8.95 a month per "unit" of coverage. He advised her that she would need at least five units at a cost of $44.75 a month. She did not realize that five units, at an annual cost of $537, provided only $5,000 of coverage, barely enough to cover her funeral and associated costs.

Yet Baird had a 12-year life expectancy, meaning that she could expect to pay premiums for 12 years at $537 a year, for a total anticipated cost of $6,444. Only if she died within 10 years would she receive more in death benefits than she would have paid in premiums. Not only was this a bad bargain, but the insurance company sent her an annual "alert" urging her to buy more units to keep pace with the rising cost of dying.

Fortunately, victims of life insurance fraud can find recourse in the courts. Lawsuits against insurance companies and their agents can result in the award of significant damages. In 1998, the Alabama Supreme Court approved an award of punitive damages to a couple who were defrauded by an insurance agent into cashing in a paid-up policy and buying other coverage that required them to pay premiums for three years before the new policies would be worth their face value. The couple--vulnerable because of their old age, financial status, and lack of formal education--were unaware of the agent's malicious intent.(2)

Anyone can be victimized by unscrupulous insurance agents, but the elderly are often targeted. Why? They are often home, for one, and they have time to listen. Many welcome a visitor, even an insurance agent. Some may be more trusting or deferential to an "expert." Unfortunately, many of the elderly suffer from cogitative deficits, depression, or social isolation that makes them vulnerable to financial exploitation.(3)

Some of the common problems associated with aging--such as losses in vision, hearing, and short-term memory--make an affected older person easier to deceive. And more serious mental deficiencies, such as those caused by early dementia or stroke, make people susceptible to insurance fraud and other scams. Even if they later suspect that they have been defrauded, many victims never seek help. Often, they don't want to admit that they have been victimized, or they can't remember what was promised to them. Sometimes, they die before they can seek compensation.

The sale of low-value, final-expense life insurance is not the only gimmick used to fleece the elderly. Many older policyholders have years-old whole-life policies that have accumulated a sizable cash surrender value. An insurance agent encourages them to trade in these policies and buy new ones that pay higher death benefits. This practice, known as churning, earns the agent a large sales commission while substantially increasing the policyholder's premium cost. It is alleged that Prudential Life Insurance, which settled a class-action churning case in 1997, earned more than $8.5 billion in commissions.(4)

Insurance agents' selling annuities of dubious value under the guise of estate planning is common. Typically, the agent suggests that the client can gain both substantial tax savings and additional income by buying an annuity.

For example, older clients may be induced to attend an "estate planning seminar" where they are convinced that by buying an annuity they can "save estate taxes," even though the estate is too small to be subject to the federal estate tax. Meanwhile, the annuity provides a relatively poor return to the client but a fine commission to the agent.

Using similar tactics, the Alliance for Mature Americans, an insurance company, sold more than 9,700 annuities to the elderly. The company relied on aggressive sales pitches that lasted as long as eight hours. After selling an older client a living trust, the company sent out a high-pressure annuity sales agent who would deliver trust documents, but whose real goal was to sell an annuity. The agent played on the older people's fear of outliving their savings to convince them to buy annuities from specific insurance firms that paid the company the highest commissions. When sued, the company agreed to pay a multimillion-dollar settlement rather than proceed to trial and face claims that it had deceived and defrauded the annuity buyers.(5)

Viatical settlements

Another tool for defrauding older policyholders is the viatical settlement--the purchase of a life insurance policy by a third party from its owner, the viator, who is usually terminally ill and sells the policy to raise cash for medical or other expenses. The buyer collects the death benefit upon the death of the viator.

Although viatical settlements were devised to help terminally ill viators and can be legitimate, the viatical industry has been characterized as "infected with scam artists, `ponzi' schemes, and other fraudulent activities."(6) Today individual investors and companies see significant profit opportunities in buying policies from people who are not terminally ill but who require cash and don't see any reason to continue paying their life insurance premiums. The sale of the policy can seem like a windfall to someone in need of money, but it is often an even greater windfall for the purchasers--who, even after buying the policy and paying the remaining premiums, often realize returns of 15 percent to 45 percent.

The viator often sells the policy for an amount that is not actuarially sound. He or she is usually in a weakened physical condition and often in financial straits, a situation that creates an unequal bargaining relationship that greatly favors the buyer. The viator may not even appreciate that to avoid federal income taxation, the sale must meet strict requirements of the Internal Revenue Code.(7)

Unlike closely regulated life insurance policies, viatical settlements are regulated in only about 30 states.(8) A model act proposed by the National Association of Insurance Commissioners in 1993 and last updated in 1998, if adopted, would protect investors, permitting state insurance commissioners to set standards for viatical settlement contracts.(9)

While most viatical settlement companies are legitimate, others mislead, deceive, or even defraud viatical investors. The North American Securities Administrators Association named viaticals one of the top 10 frauds.(10) To sell their product, some promoters make "[m]arketing promises like `guaranteed returns of 40 percent.'"(11)

One way to defraud the investor is to sell a viatical knowing that the insured lied about his or her health condition when applying for the policy, as did one Florida viatical settlement company.(12) Sometimes, insureds acquire a policy by hiding evidence that they have a life-threatening condition. An agent may know that the insured lied to the life insurance company but assure the investor that there are no grounds for the company to contest the payment of the death benefit and sell the investor the policy before its contestability period expires.

When the insured dies, however, the viatical investor cannot collect the face value of the policy because of the fraud committed by the insured in not revealing the preexisting life-threatening condition.(13)

Conversely, other agents sell policies by claiming that the insured is very ill and is likely to die. The unsuspecting investor expects to collect on the policy soon. Instead, the investor discovers that he or she must continue to pay the premiums for years to come, or allow the policy to lapse and forfeit the investment. While patiently waiting for an insured to die may be an acceptable investment for a large, sophisticated investment company, it is not a prudent investment for an individual.(14)

In extreme cases, some viatical companies don't even bother to buy policies with the money from their investors but use it merely to line the pockets of the firm's organizers. For example, American Benefits Services, a viatical settlement company, promoted viatical investments by promising a return 42 percent greater than the amount invested, to be received on the death of the viator. If the insured person did not die within three years, the investor could cash out with a 15 percent return.

The offer was so good that more than 3,300 people invested $117 million in the scheme. The money was forwarded to Financial Federated Title and Trust, another viatical investment company. However, Financial Federated spent only $6 million in purchasing life insurance policies. In August 2000, the company's owner, Frederick Brandau, was convicted of 28 counts of money laundering and 14 counts of mail fraud.(15)

Ballooning premiums

The elderly can also be victimized by the sale of long-term-care insurance that purports to have a fixed premium but in reality has one that rapidly rises over time. The policy states that the premium cannot be raised unless the company institutes a general rate increase for all similar policies. In other words, the company cannot increase premiums on an individual policy, for example, merely because the insured becomes older or sicker. But the company can raise the rate for all policies of the same class, dramatically increasing their cost over time.

By lowballing the initial premium, the company offers an attractive product. Later, the premium rises to a more realistic level as the company learns how much it can expect to pay in benefits to policyholders. As premiums rise, so do policy cancellations: Policyholders facing increasing medical bills and fixed or diminishing incomes cannot afford the sharply rising premiums. And every cancellation benefits the insurance company, which has collected premiums but will never have to pay claims under the policy.

In 1998, a class action against several long-term-care insurance providers--Acceleration Life Insurance Co., Benefit Plans II, and Commonwealth Life Insurance Co.--and an insurance agency, Interstate Service Insurance Agency, Inc., was filed in federal court in North Dakota.(16) In that case, more than 13,000 policyholders who had purchased long-term-care insurance experienced average rate increases of 700 percent.(17)

The policies were "guaranteed renewable" and were supposedly level-premium policies. But the policies permitted the insurers to raise the premium if the change applied to all similar policies. And it did, with a vengeance. One 83-year-old insured had purchased a long-term-care policy with an annual premium of $1,498 in 1987, but by 1996, the premium was $6,158.13, an increase of over 400 percent. Though he complained to the North Dakota Department of Insurance, he was told that it could not prohibit the rate increases. Unable to afford the high premium, at age 92 he dropped the policy. Another client at age 82 bought a long-term-care policy with an annual premium of $829.86. Ten years later the premium was $6,638, an increase of 800 percent.

The plaintiffs claimed that the insurance companies intentionally sold lowball-priced policies knowing that they would later impose unconscionable premium increases. They claimed that the companies had intentionally deceived them by leading them to believe that the policies were renewable for life at essentially level premiums when the companies knew that the premiums would increase dramatically. The companies also misled the plaintiffs by claiming in form letters of renewal that the policies were competitive and were "one of the best policies available in your state."(18)

In the end, the case settled: More than $12 million was awarded to more than 13,000 buyers of long-term-care insurance, premiums were rolled back immediately, and future increases were banned.(19)

Fighting fraud

Insurance companies and their agents defraud the elderly all too often. Consumer advocates can help fight these practices by warning the public about insurance fraud and the danger of placing too much trust in an insurance agent. Trial lawyers can bring aggressive lawsuits to discourage fraudulent activities.

More effective state laws and regulations, and vigilant enforcement of current laws, are needed to protect the public against insurance scams and fraudulent investment schemes.

Notes

(1.) Adapted from Selling Life Insurance to the Elderly, 58 CONSUMER REPS. 700 (1993). The case described here is real; the names of the parties have been changed.

(2.) Life Ins. Co. v. Parker, 726 So. 2d 619, 620-21 (Ala. 1998).

(3.) See Namkee G. Choi et al., Financial Exploitation of Elders: Analysis of Risk Factors Based on County Adult Protective Services Data, 10 J. ELDER ABUSE & NEGLECT 39, 51 (1998); Hannie C. Comijs et al., Risk Indicators of Elder Mistreatment in the Community, 9 J. ELDER ABUSE & NEGLECT 67, 74 (1997).

(4.) In re Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 450 (D.N.J. 1997), aff'd sub nom. Krell v. Prudential Ins. Co. of Am., 148 F.3d 283 (3d. Cir. 1998), cert. denied, 525 U.S. 1.114 (1999); Leah Nathans Spiro, What Does Prudential Really Owe? BUS. WK., Feb. 2, 1998, at 117.

(5.) Alliance for Mature Ams. Ins. Servs. v. Los Angeles County Superior Court, No. B106364, 1996 Cal. LEXIS 7100 (Cal. Dec. 18, 1996) (denying review); Death Planning Made Difficult: The Danger of Living Trust Scams, Hearing Before the U.S. Senate Special Comm. on Aging, 106th Cong. (July 11, 2000) (statement of George B. Hoffman, Former Salesperson, Alliance for Mature Americans), available at http://www.senate.gov/~aging/hr53.htm (last visited Apr. 30, 2001); Reynolds Holding, Seniors Fall Prey to Estate-Planning Scams, S.E CHRON., Dec. 10, 2000, at 2.

(6.) Liza M. Ray, Comment, The Viatical Settlement Industry: Betting on People's Lives Is Certainly No "Exacta," 17 J. CONTEMP. HEALTH L. & POL'Y 321,322 (2000).

(7.) I.R.C. [sections] 101(g) (2001).

(8.) Ray, supra note 6, at 339.

(9.) The Viatical Settlements Model Act [subsections] 5, 10 (1994), available at http://www.insure.corn/life/viatical/vsma.html (last visited Apr. 30, 2001).

(10.) Lisa Karam Middleton, Death Watch: Viaticals Under Fire, available at http://www. insure.com/life/viatical/problems.html (last visited Apr. 30, 2001).

(11.) Id.

(12.) See State v. Viatical Servs., Inc., 741 So. 2d 560, 561 (Fla. Dist. Ct. App. 1999), review denied, 753 So. 2d 567 (Fla. 2000).

(13.) In re Accelerated Benefits Corp., No. 34703-00-CO (Fla. State Treasurer, Dep't. of Ins. Feb. 5, 2001), available at http://www.doi.state.fl.us/ consumers/alerts/press/2001/ABCfo.pdf (last visited Apr. 30, 2001).

(14.) Middleton, supra note 10.

(15.) In re Fin. Federated Title & Trust, Inc., 252 B.R. 834 (Bankr. S.D. Fla. 2000) (citing grand jury indictment in related criminal case of United States v. Brandau); Kimberly Lankford, Many Ways to Lose, KIPLINGER'S PERS. FIN., Nov. 2000, at 98.

(16.) Hanson v. Acceleration Life Ins. Co., No. 3:97-152 (D.N.D. settled Oct. 1999, dismissed June 21, 2000).

(17.) Long-Term Care Insurance, Hearing Before the Senate Special Comm. on Aging, 106th Cong. (Sept. 13, 2000) (statement of lead plaintiff counsel Allan Kanner, Allan Kanner & Associates, New Orleans), available at http://www.senate.gov/~aging/hr58.htm (last visited Apr. 30, 2001).

(18.) Id.

(19.) Id.

Lawrence A. Frolik is a professor at the University of Pittsburgh School of Law