Underwriting under the Microscope: A View from the Courtroom

1. Underwritingunder theMicroscope:A View from the Courtroom September 11, 2014 Midwestern Underwriting Conference Presented by Charles J. Vinicombe Drinker Biddle & Reath LLP Philadelphia, PA

2. Life Insurance Clients 2

3. Lawsuit process How judges and juries view life insurance underwriting Fraud against life insurers litigated in lawsuits Underwriting issues “under the microscope” in the courtroom A View From The Courtroom 3

4. General Considerations • Vast majority of life insurance policies never become subject of lawsuits • When they do, underwriting issues often take center stage • Quality of underwriting factor in company decisions in lawsuits 4

5. Focus of Judges And Juries on Underwriting Issues • Was underwriting thorough? • Were any “red flags” overlooked? • Were right follow-up questions asked? • Did underwriting follow company guidelines? • Were representations on application reasonably believable? 5

6. Lawsuit Process • Life insurance company and policy owner engage in process called discovery • Discovery goal – learn all relevant facts about the policy dispute • Life insurance company required to turn over the complete underwriting file – underwriting materials, notes and emails • Assigned underwriter may have to to testify at deposition • After discovery process completed, case may proceed to trial 6

7. Trial Process • Can be tried before a judge (called a bench trial) • Can be tried before a jury (group of 6-12 people from community where lawsuit pending) • Assigned underwriter may have to testify at trial 7

8. Some Observations • There are certain areas where there may be fraud • Detecting fraud during underwriting can: • Prevent bad business • Avoid cost to company for future lawsuits • Avoid company paying millions of dollars on bad policies 8

9. Can You Rely On The Application? • Underwriter generally entitled to rely on representations in application • General Star Indem. Co. v. Duffy, 191 F.3d 55 (1st Cir. 1999)(“An insurer is entitled to rely on the representations of an insured”) • Fla. Stat. § 627.404(3) (“An insurer shall be entitled to rely upon all statements, declarations, and representations made by an applicant . . .”) 9

10. Does the Insurer Have a Duty to Investigate Application Representations? • Some courts have imposed a duty, depending on the circumstances, to investigate • Other courts have held an insurer has the right to rely upon the accuracy of information in the application, with no duty to make additional inquiry 10

11. Financial Underwriting – Duty to Investigate • PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d 1205 (N.D. Ga. 2011): • Insured represented that primary portion of his billion dollar net worth consisted of over $600 million in uncut emeralds from a sunken Spanish galleon that he had found in the Gulf of Mexico 11

12. Financial Underwriting – Duty to Investigate • In ruling against life insurance company, Court criticized company for accepting Jolly’s representations of wealth “despite several ‘red flags’” • Company had records indicating insured was employed as cemetery worker and in a “telephone capacity” • Court criticized company for never attempting to “verify in any manner” either the genuineness or accuracy of the emerald appraisal, the claimed inventory of the emeralds or the individual authenticity of any other document • Court criticized company for not checking Jolly’s criminal history representation – insured had been convicted of check fraud • Court criticized company because inspection report listed net worth nearly $200,000,000.00 higher than represented eight months later on application 12

13. Foster v. United of Omaha Life Ins. Co., No. 08-1170, 2010 WL 3834047 (W.D. La. Sept. 24, 2010) • Court held that insurer waived its right to rescind policy based on medical misrepresentations contained in application due to its failure to adequately investigate statements made within application

14. Medical Underwriting – Duty to Investigate • A reasonable insurance company would have inquired further; insurer’s failure to conduct “even the most cursory of a follow up investigation or genuine inquiry in the face of the MIB ‘code’” constituted a waiver of its right to rescind the policy based on possible inaccurate answers contained in the application

15. Medical Underwriting – No Duty to Investigate • The Lincoln Nat’l Life Ins. Co. v. Wilmington Trust Co. and Jay L’Archevesque, C.A. No. 08-74 (D.R.I. October 4, 2012) • Insurer sought to invalidate life insurance policy in which applicant failed to disclose medical records indicating he was suffering from Alzheimer’s • Trust argued that insurer should have known of misrepresentations due to inaccuracies in medical information provided during underwriting 15

16. Medical Underwriting – No Duty to Investigate • Judge held that insurer was entitled to invalidate the policy • “While [the policy owner] tries to hide behind the fact that these omissions and misrepresentations may have been discoverable . . . There can be no question that putative insureds should not be rewarded for successfully hiding the ball that way” • “[T]he Court can see no benefit or policy justification in allowing insureds to lie on their life insurance applications in a game of ‘catch me if you can’” 16

17. Medical Underwriting – No Duty to Investigate • Reliastar Life Ins. Co. v. Laschkewistch, No. 5:13-CV-210, 2014 WL 2211033 (E.D. N.C. May 28, 2014) – court held insurer was entitled to rely on insured’s representations • Court admitted that, had insurer requested and reviewed insured’s doctors’ records, it would have discovered fraud • Nevertheless, insurer was under “no obligation to dig deeper” after it conducted minimal investigation 17

18. No Duty to Investigate • Hartford Life and Acc. Ins. Co. v. Nittolo, 955 F. Supp. 331 (D.N.J. 1997) • Insured’s lawyer invited judge to what he called “Realityville” – a place where people might make misrepresentations to an insurance company, but misrepresentations are normal • In ruling in favor of insurance company and finding misrepresentations in application, judge rejected lawyer’s invitation to “Realityville” 18

19. No Duty to Investigate • “In Realityville, the argument goes, people usually certify and sign important documents without reading them, and professionals like insurance agents and nurses who have a duty to get things right manage to get everything wrong”  • “In Realityville, people don't know their own incomes and when they give an estimate, it may be inflated by two or three times and still be correct” 19

20. No Duty to Investigate • “It seems that in Realityville, people are unable to take responsibility for their mistakes and they blame their problems upon whomever crosses their path” • “The court declines the invitation to this bizarre place. Unfortunately for [the insured’s] position, the law of Realityville does not apply.  The law of New Jersey governs this case and compels judgment in favor of . . . Hartford” 20

21. Financial Underwriting – Questioning the Underwriting Process • Jury found that insurance company was victim of fraud • Jury ruled: insurance company had to pay multi-million dollar death benefit • Some jury comments: • Juror needed to show more financial information to get a car loan than insurance company required for multi-million dollar policy • Another juror unfavorably compared underwriting process to much more vigorous requirements to obtain a home mortgage 21

22. Medical Underwriting 22

23. Medical Underwriting • Possible underwriting issues: • Incomplete answers • Incomplete medical records • Medical conditions/medical treatments/medications identified in medical records not disclosed in application • Lack of follow-up on medical providers identified in provided records • Conditions/treatments/medications disclosed in prior trial applications 23

24. Types Of Financial Fraud • Inflated values of hard to verify assets • Inflated real estate values • Phony third party verification of net worth • Forged signatures • Misrepresentations about other existing insurance • Misrepresentations concerning the purpose of the insurance 24

25. SecondaryMarketfor Life Insurance • In-Force Life Settlements: $35 Billion • Increased investment in the secondary market starting around 2004 led to “manufactured” policies as policy demand outstripped supply • According to the American Council of Life Insurers, “the detection and suppression of STOLI policies lacking insurable interest has been especially important in adjusting secondary market activities to realistic levels” • Although the secondary market significantly shrank with the economic decline, the Life Insurance Settlement Association is predicting new growth due to increasing demand by public and private pension funds re-entering the secondary market

26. Example of Financial Fraud • $20 million life insurance policies on 79 year old insured • Application representations: • insured had net worth of $46.4 million • no discussions about possibly selling policy on secondary market 26

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28. Example of Financial Fraud 28

29. Example of Financial Fraud • Consequences for producer who committed “egregious fraud:” • Sentenced to 3 years felony probation for “False Impersonation” • Ordered to pay restitution of $128,405.07 to life insurance company – return of commissions • Ordered to reimburse investigative costs to state Dept. of Insurance 29

30. Inflated Real Estate Values • Example: • Insured represented having total assets and net worth of $10,300,000.00 • Discovery revealed insured did not own any real estate, but had used a wealthy relative’s address as her own • Insured resided with her son in a low income housing project 30

31. Phony Third Party Verification Of Net Worth • Accountant listed as verifying insured’s assets on inspection report • Accountant did not exist • What we found: • Address for “accountant” was an empty lot • Calls to listed “accountant’s” phone number would ring forever 31

32. Phony Third Party Verification of Net Worth • Accountant verifying insured’s assets listed on inspection report existed, but was not an accountant • What we found: • Checked accountancy board website in state and no such accountant listed • Called phone number for accountant listed in report • Person answered and identified himself by same name • Person denied he was an accountant • Person denied ever conducting a review of insured’s finances 32

33. Misrepresentations About Other Existing Insurance • Application – Please list amounts of all in force life insurance on your life, including any policies that have been sold • Possible situations: • Insured fails to disclose existing insurance • Insured understates amount of existing insurance • Insured states multiple applications submitted and will accept “best offer” then accepts multiple offers 33