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In 1998, Jack Matalon of Bay Harbor Island, Fla., purchased two life insurance policies from John Hancock Life Insurance Co. Rather than name his family members as beneficiaries, the then 70-year-old Matalon immediately turned around and sold the policies — valued at $1 million and $2 million — to Future First Financial Group. The Ponte Verde Beach, Fla.-based Future First is in the viatical business. It buys insurance policies at a discount from people who are terminally ill and also from seemingly healthy senior citizens — putting cash into their pockets for immediate needs. The purchaser then picks up the premium payments. These deals — in which insureds sell life insurance policies to investors before the ink dries on the contract, figuratively speaking — are called wet ink viaticals. They have become increasingly popular in the last several years, quickly becoming an estimated $1 billion-a-year business. They are a way for people to profit from their own life insurance policies, rather than having their beneficiaries and heirs enjoy the money. But attorneys for John Hancock say that if the Boston-based insurer had known that Matalon planned to immediately sell his policies to investors, the company never would have issued them to him. Attorneys for the 139-year-old, publicly traded insurer are scheduled to go to trial this month to ask U.S. District Judge Paul Huck in Miami to order Future First to return the policies to John Hancock. The insurer, in turn, would return the premiums paid by Future First. John Hancock contends that the policies should be rescinded because Matalon misrepresented his intent in buying them. Insurers and regulators fear that the growth of wet ink viaticals, left unchallenged, could hurt the life insurance industry and encourage fraud. “A life insurance policy is issued to protect a beneficiary from the adverse financial consequences of the death of the insured person,” says Lester Dunlap, chairman of the National Association of Insurance Commissioners’ viatical working groups, who also is Louisiana’s assistant commissioner of insurance. “It’s not intended to be used as a quick and ready source of cash.” Future First argues that there was nothing wrong with this wet ink transaction because John Hancock’s life insurance application contained no prohibition against reselling policies to investors. The viatical company has filed a countersuit against John Hancock, alleging bad faith. Richard Lee Martens, a partner at Boose Casey Ciklin Lubitz Martens McBane & O’Connell in West Palm Beach who’s representing Future First, referred a Daily Business Review inquiry to his co-counsel, Daniel McGinnis, a partner at Rogers & Harden in Atlanta. McGinnis did not return phone calls for comment. Future First, through its public relations representative, also declined to comment. The lawsuit, filed two years ago, may serve as a test case of the enforceability of wet ink viatical transactions, says Peter Kramer, a partner at Steel Hector & Davis in Miami who filed the suit on behalf of John Hancock. If his client wins, Kramer says, the ruling could discourage people from buying policies with the sole intent of selling them, says Kramer, who believes this suit is the first of its kind. KEY IS INTENT In standard viatical arrangements, investors buy life insurance policies at a discount from terminally ill people, who presumably bought the policies before becoming ill and thinking that the benefits would go to their heirs. It’s become an accepted way for the dying to obtain cash to cover medical bills and other expenses. But wet ink transactions typically involve ostensibly healthy people in their 60s or 70s who purchase the insurance for the sole purpose of turning around and selling it. In many cases, industry officials and regulators say, seniors buy the policies at the encouragement of brokers, who promise to purchase the policies from them — usually for 10 percent to 15 percent of the face value. Brokers then sell the policies to viatical companies, which sell them to investors, who essentially are betting that the insured will die sooner rather than later so they can earn a larger and quicker return on their investment. Industry officials and regulators say the key to the difference between acceptable and unacceptable viatical arrangements is the insured’s intent at the moment of buying the policy. Dunlap says people are within their rights if they bought a policy 20 years ago and now want to assign it to someone else. But it’s a very different story, he says, if the person buys the policy with the intention of selling it. “If it’s a cash cow and I sell it for 10 cents on the dollar, that’s not what life insurance is all about,” he says. According to the lawsuit, Matalon was first approached by Unisyn Inc., a insurance brokerage in Plantation that arranges viatical sales for Future First. Kramer declined to say how much Matalon was paid for his two policies, noting that the price wasn’t in the court record. But, he added, it isn’t unusual for policyholders to sell their policies for $25,000 to $50,000, depending on the face value of the policy. Efforts to reach Matalon were unsuccessful. FRAUD AND HIGHER COSTS John Hancock and other insurers offer several reasons for their opposition to wet ink viaticals. With or without these deals, the life insurer pays out the same benefit when the insured dies. But insurers count on a certain percentage of policyholders to stop paying premiums, causing the policy to lapse with no payout. When investors purchase a life insurance policy, however, they are much less likely to let the policy lapse, Kramer explains. This increases costs for insurers. Another big concern, insurers say, is that applicants who intend to quickly sell their policies to investors have a greater incentive to lie about their health. That’s because they, rather than their heirs, stand to benefit financially from the policy. Because wet ink viaticals are relatively new, the insurance industry and state insurance regulators only now are moving to bring them under control. Last year, a Florida statewide grand jury investigating the viatical industry found massive fraud, and recommended strong new laws to regulate the industry. Earlier this year, the NAIC approved a model law to curb senior settlement deals. It provides that life insurance policyholders cannot sell policies within the first two years of issue. Dunlap says the model law offers an exception for policyholders who become terminally ill within two years of buying a policy. The NAIC hopes that its model law will be adopted by states to regulate the currently unregulated wet ink viatical industry. While Florida has regulated viaticals since 1996, it has no statutes that specifically address the wet ink variety, says Steven Grenier, an investigator with the Florida Department of Insurance’s fraud division in West Palm Beach. Grenier says that while some insurance companies, like John Hancock, have challenged wet ink transactions, other carriers have not. The only way insurers currently can stop them are through lawsuits based on contract law. It’s a “big gray area,” Grenier says. FOUL PLAY Kramer argues that an 1881 U.S. Supreme Court decision makes wet ink viaticals illegal. The high court, in Warnock v. Davis, ruled that the person who buys a life insurance policy cannot assign it to someone who has no insurable interest in the insured. The court reasoned that this would constitute a “wager” on the policyholder’s life, giving the investor a “direct interest” in the insured’s “early termination.” Beyond fears of investors hastening nature’s course, insurers and regulators have strong and well-founded fears about fraud. Last year, Future First’s vice president, William F. Sweeney, was indicted by a statewide grand jury with four other people on multiple counts of fraud and grand theft related to their alleged participation in schemes involving the purchase and resale of life insurance policies. The defendants were accused of dealing in policies that involved “clean sheeting” — failure by applicants to disclose material information to obtain a policy which they otherwise could not have obtained. The case against Sweeney and the other four is pending. John Hancock’s suit against Future First does not allege that Matalon lied in any way on his application. In its court filings, Future First notes that it’s “undisputed that Matalon provided accurate, truthful information about his health, income and other matters.” But the Matalon case shows how stopping viatical deals through the courts could present some touchy public relations challenges for insurers. While some insurers don’t want policyholders selling their policies through wet ink deals, the carriers would prefer to go after the brokers and viatical companies. “There is a fine line you don’t want to cross,” says Kramer. “If an insured did it unwittingly, if they are prodded into doing it by someone unscrupulous, you don’t want to hurt the individual. The culprit in this case was the viatical company.”

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