The Future of Death Futures: Why Viatical Settlements Must Be Classified as Securities

8/8/2019 The Future of Death Futures: Why Viatical Settlements Must Be Classified as Securities

1/89Electronic copy available at: http://ssrn.com/abstract=1669558

THE FUTURE OF DEATH FUTURES: WHY

VIATICAL SETTLEMENTS MUST BE

CLASSIFIED AS SECURITIES

Miriam Albert

Pace Law Review, Vol. 19, No. 3, Spring 1999

This paper can be downloaded without charge from the

Social Science Research Network Electronic Paper Collection at:

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2/89Electronic copy available at: http://ssrn.com/abstract=1669558

PACE LAW REVIEW

. The Future ofDeath Futures:Why Viatical Settlements Must.Be Classified as Securities

Miriam R. Albert

VOLUME 19 SPRING 1999 NUMBER 3


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346 PACE LAW REVIEW [Vol. 19:345The expansion of the AIDS crisis affects more than justthose afflicted with the disease. Researchers, practitioners, and

other healthcare service providers are affected by increases inboth the number of AIDS patients and the treatment altemativesavailable. The sheer number of persons infected, and thedollar amounts involved in treating them,4 have resulted in thecreation of AIDS as a business,. encompassing both medical andfinancial serviCes and innovations.5

Despite recent treatment breakthroughs and the continuedhope researchers have for finding'a way to eradicate this deadly3. From 1995 to 1996, for th e first time in th e AIDS pandemic, deaths amongpersons reported with AIDS decreased by 25%. This decline was in large measure. due to th e increasing Use of combination antiretroviral therapy, including proteaseinhibitors. See CDC REPoRT, 1997 EDITION, supra n o t ~ 1, at 5; see also infra note 6.4. AIDS is a financially devastatingdiagnosis. Typically, with no income fromemployment, AIDS patients must find money to fund any of the 'nnmerous available therapies to treat their. illness, ranging from th e traditional {in a relativesense, in.tliatAIDS is such a new disease that "traditional" therapies:may not even

be a few years old) to th e experimental. AIDS patients also may need funds to payfor costly home care; in addition to their other bills and living expenses. Insurancecoverage, to th e eXtent e v e n a v a i l a t i l e ~ is hy no means comprehensive. See Kathe- .rine DePeri, Brokered Viatical Settlement ContractsAre Not Securities - Securities& Exc1w.nge Commission v. Life Partners, Inc., 70 TEMP. L. REv. 857, 873 (1997).

A 1992 study: by th e National Association of People With AIDS' ("NAPWA")found that over 50% of AIDS patients surveyed lived on less than $12,000 annually. Over halfofthe survey respondents reported significant difficulties in providing for basic personal needs such as rent, food and medicines. See "HIV inAmerica: A Profile of the Challenges Facing Americans Living With HIV,"NAPWA, Sept. 1992; see also Prepared text of William J. Freeman, Executive Director of the National Association of People W ~ t h AIDS, Attachment One-C to th eMinutes ofInsurable Interest Working Group ofthe Life Insurance (A) Commi tteeof the National Association of Insurance Commissioners, Dec. 8, 1992, 1993-1NAIC Proc. 779, 7 8 6 ~ 8 7 .

Predictions of the costs of treating AIDS have grossly underestimated th e actual dollar amounts. involved. See Karen A. Clifford & Russel P. Iuculano, AIDSand Insurance: The Rationale for AIDS-Related Testing, 100 HARv. L. REv. 1806,1807 (1987).

. AIDS treatment is very expensive. A 1992 study by the American MedicalAssociation found that HIV patients incur an average of $119,000 in medical expenses from th e time of infection with HIV until death from AIDS-related illnesses. See Clifford Carlse n,AIDS Life Policy Purc1w.ser Seeks New Life from lPO,S.F. Bus. TIMEs, Nov. 10, 1995, at 3. This figure pre-dates the costly new proteaseinhibitors. See infra note 42.

5. Because AIDS is so expensive to treat, th e huge number of AIDS patientshas affected th e insurance industry as well. See Clifford & Iuculano, supra note 4,at 1806.

1999]disease, tcontinuescially. Atdevastatiseek medadvancespatients.A devatical sett

6. In thAIDS invoinhibitors.[The resdefeats tnow usevirus. Tan d overmutanttem, andbody is bments itritonavircombinathan jus

David W. Soand Insuredments havecrease in thepidemic cu7. Assetsets. The asprincipal paField for IssAsset-bpurchasing tof income-prtric bills, anunder life inpot! Legal SBOND WEEKTradeable www.nytimeized by the 8. The tcharist or coto the Romarefer to th e ljourney." Se

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[Vol. 19:345than just

andinalterna

and thein theh medical andthe continued

this deadlydeaths amongin large measure

note 6.no income from

numerous avail(in a relativeevenneed funds to pay

InsuranceSee Kathe- Securities851, 813 (1991).("NAPWA")$12,OOOannu

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new proteaseof AIDS patientssupra note 4,

1999] THE FUTURE OF DEATH FUTURES 347disease, there is no cure for AIDS.s Thus, the AIDS pandemiccontinues to devastate its victims, both physically and financially. Attempts to alleviate, or at least ameliorate, the physicaldevastation of AIDS are made by the countless researchers whoseek medical advances and by the practitioners who put thoseadvances into effect through new treatment strategies for theirpatients.A developing form of asset-backed security,7 known as a viatical settlement,8 represents one approach at ameliorating the

6. In the mid 1990s, researchers announced breakthrough tre.atments forAIDS involving a combination antiretroviral therapy, including proteaseinhibitors. .[The researchers] broke new ground in the theory of how the AIDS virusdefeats the immune system in the body. Based on their theory, doctors cannow use three different types of drugs at the same time to defeat the AIDSvirus. The theory assumes the body is constantly fighting th e AIDS virusan d over time the virus develops strains that the body cannot defeat. Thesemutant AIDS strains then multiply an d overcome th e bOdy's defense system, and.a person develops AIDS. By using a combination of new drugs, th ebody is better able to defeat th e AIDS virus. In some small scale experiments it has been demonstrated that the combined use of saquinavir,ritonavir, an d indinavir ca n be effective in containing th e AIDS virus. Thecombination of these drugs with A'Zlf is hundreds of times more effectivethan just th e use of AZT, the most commonly used drug.

David W. Sonimer et al., Viatical Settlements: Perspectives ofInuestors, Regulatorsand Insureds, J. SOC'Y C.L.U. & CHFC 54, 56-51 (Mar. 1991). These new treatments have "altered the natural history of HIV infection, contributed to an increase in the number of persons living with AIDS, an d changed th e shape of theepidemic curves." CDC REPORT, 1997 EDITION, supra note 1, at 5.1: Asset-backed securities ar e claims on cash flows from pools of similar assets. The assets ar e packaged an d sold to investors who receive the interest andprincipal payments from these cash flows. See Asset-Backed Securities Is BoomingField for Issuers, CARD NEWS, Apr. 1, 1996.Asset-backed securities ar e increasingly popular today, with investorspurchasing the right to receive income streams from any number of different kindsof income-producing assets, ranging from lottery winnings, legal settlements, electric bills, an d future royalties on rock an d roll songs to death benefits payableunder life insurance policies held by th e terminally ill. See Douglas Brown, Jackpot! Legal Settlements, Lottery Winnings May Be Next in Line for Securitization,BOND WEEK, May 20, 1996, at 1; see also Leslie Eaton, You Too Can Become aTradeable Security, Rated AAA (last modified June 1, 1998) . David Bowie raised $55 million by selling bonds collateralized by the right to receive future royalties on his songs. See id.8. The term "viatical" comes from the Latin word "viaticum" which is the Eucharist or communion given to Christians who are dying or are in danger of death;to th e Romans, it meant money or provisions for a journey, but the term came torefer to the last rites-something to sustain the deceased person on his or he r "lastjourney." See THE AMERICAN HERITAGE DICTIONARY OF THE AMERICAN LANGUAGE
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348 PACE LAW REVIEW [Vol. 19:345financially devastating aspects of AIDS.9 This specialized formof receivable financing gives life insurance policyholders accessto death benefits under their policies that would be otherwiseunavailable to them during their lives.

In the typical viatical settlement, a terminally-ill policyholder, known as aviator, sells the right to receive the proceedsof his or he r life insurance policy to an investor. During his orhe r lifetime, the policyholder is paid an estimation of the presen t value of the death benefits under the policy, calculatedbased on such factors as projected life expectancy, the face valueof the policy, and the cost of at least two years of future premi1988 (3d ed. 1996); see also David Ja y Korn, Viaticals: When Sooner Is Better ThanLater, ACCT. TODAY, Jan. 19, 1998 (for a description of the viatication process).9. Another vehicle to provide terminally-ill policyholders with access to lifeinsurance benefits while they ar e alive are "accelerated death benef it" ("ADB") provisions in traditional insurance policies. The insurer guarantees th e payment ofth e policy face value upon the death of the insured, as long as the policy is then ineffect.. The insurer is under no obligation to advance an y portion of the death benefit to the insured in th e absence of an ADB provision.ADB provis ions can be included in th e initial policy, or can be added as ridersor attachments to new or exis ting policies. Unlike. viatical settlements, ADB provisions typically provide that a portion of th e face value benefit be retained as adeath benefit for the traditional beneficiary. An ADB provision typically pays asmaller percentage of the face value of th e policy than a viatical settlement an d issubject to more stringent requirements on availability, in terms of triggering conditions. ADBs ar e typically only available to insured persons with life expectancies of less than one year, whereas viatical settlements can be made with viatorswith much longer life expectancies.

In an ADB provision, th e issuing insurance company pays benefits directly toth e insured, unlike a viatical settlement where some third party advances funds toth e insured. Other differences between ADB provisions an d viatical settlementsinclude: ADB payouts can be slow, while viatical settlements ar e typically paidwithin a few weeks; ADB provisions are typically limited to universal and wholelife policies, while viatical settlements can be made on a much wider range of policy types; an d insureds must deal exclusively with th e issuing insurance companywith ADBs, while insureds can shop their policies to various viatical settlementfirms. See Sharon Crockett & Lynn Homa, Viatical Settlement Firms Look toSecuritize, STANDARD AND POOR's CREDITWEEK, Apr. 3, 1995, at 1; see also AbbieCrites-Leoni & Angellee S. Chen, Money for Life- Regulating the Viatical Settle-ment Industry, 18 J. LEG. MED. 63, 80-81 (1997); see also Sheila D. Foster, ViaticalSettlement: A New Employee Benefit, MANAGEMENT ACCT., May 1998, at 55. See,e.g., Alexander D. Eremia, Viatical Settlement and Accelerated Death Benefit Law:Helping Terminal, but Not Chronically III Patients, 1 DEPAUL J. HEALTH CARE L.773, 784 (1997), for a comparison of ABD provisions and viatical settlements.

Additional vehicles that provide access to otherwise unavailable assets includereverse mortgages and sale-leaseback arrangements coupled with a life estate onresidential properties. See id. at 774.

1999Jurns, wcomes twaiver o

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Thewherein icy fromthe new

10. A dpolicy an dOsborne, RREV. 471, 411. Cocations in tment of a settlement.


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[Vol. 19:345 1999] THE FUTURE OF DEATH FUTURES 349specialized form

the proceedsDuring his or

of the presthe face value

of future premiSooner Is Better Thantion process).

with access to lifebenefit" ("ADB") prothe payment of

as the policy is then inof the death bene-

ca n be added as ridersADB proviretained as a

pays asettlement and isof triggering con

with life expectanbe made with viators

benefits directly toadvances funds tod viatical settlementsare typically paido universal an d wholepol

insurance companyviaticalsettlement

toat 1; see also Abbiethe Viatical Settle-D. Foster, ViaticalMay 1998, at 55. See,Death Benefit Law:J. HEALTH CARE L.

includewith a life estate on

urns, which, under most viatical settlement agreements, becomes the responsibility of the investor, absent a disabilitywaiver of premiurns.lO

The investor's return is the difference between the deathbenefits ultimately paid, presumably the policy's face value, an dth e discounted amount paid to the policyholder. Thus, th e return depends primarily on the date of the viator's death, and, toa lesser extent, on th e speed with which the insurance companyis notified an d ultimately pays out on the policy.

Viatical settlements are legal an d serve a benevolent purpose. However, beyond the altruism of providing funds to theterminally ill, and th e legalities of simply selling the right toreceive life insurance proceeds to someone other than the insured, viatical settlements pose other legal an d ethical issues.l1Because viatical settlements have not ye t been classified as investment contracts, an d thus securities for purposes of the federal securities laws, investors in viatical settlements mustgather information themselves on which to base their investment decisions. Furthermore, investors are denied the protec-:'tions an d remedies provided by th e federal securities laws,.andhave only a comrilon law fraud remedy to redress misleadingstatements or omissions by viatical settlement firms. The specter of conflicts of interest, confidentiality problems, an d th e serious threat of fraud loomsover th e viatical settlement industry;and in th e absence of appropriate regulation, threatens the verystability of this compassionate and increasingly popular financial innovation.

The typical viatical settlement has a purchase side,wherein some person or entity purchases the life-insurance policy from the terminally-ill policyholder, and a sale'side, whereinthe new owner sells either an entire policy,or fractional inter

10. A disability waiver eliminates th e need to pay premiums on the insurancepolicy and is typically renewable as long as the disability exists. See Malcolm E.Osborne, Rapidly Developing Law on Viatical Settlements, 31 WAKE FOREST L.REV. 471,489-90 (1996).11. Commentators have raised concerns about insurable interests an d complications in the assignmentof policies, an d about the effect of an absolute assignment of a policy on a waiver of premium clause in connection with a viaticalsettlement. See id. at 485-90.
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350 PACE LAW REVIEW [Vol. 19:345ests ina policy or a pool of policies, to investors.12 The initialpurchase of life insurance policies by viatical settlement firmsfrom terminally-ill viators is subject to some regulation at thestate level, typically by a state's insurance department.Twenty-four states regulate the purchase side of viatical settlements; another eight states are considering such legislation.13

12. There are three basic scenarios for viatical settlement transactions. First,the viator may sell his or he r policy directly to an investor who holds the policyuntil the viator dies and then collects the death benefits. Second, a viator may usea broker who matches up viators and m.vestors for a fee, and never assumes anownership interest in the policy. Third, the viator may sell hi s policy to a finn whothen sells fractional interests in such policy, or pools the policy with other policiesand sells fractional interests in the pooL See Elizabeth L. Deeley, Viatical Settlements Are Not Securities: Is It Law or Sympathy?, 66 GEO. WASH. L. REV. 382, 386(1998).

This Article focuses on the third scenario, as that is the only scenario thatarguably results in the sale of a security for purposes of the federal securities laws,triggering the. need for the protections thereunder. In SEC u. Life Partners, Inc.,87 F.3d 536 (D.C. Cir. 1996), the D.C. Circuit Court of Appeals considered the status of fractional interests in viatical settlements as securities. The court obliquelyeliminated. theflrsttwo scenarios as constituting securities:[PJresumably a finn might also buy i nsurance policies for it s own account oract as an agent, matching a single investor with a terminally i ll insured,without runnfug afoul of the securities laws.

SEC v. Life Partners, Inc., 87 F.3d 536, 539 (D.C. Cir. 1996).13. Arkansas, .1997 Ark. Acts 490, approved by the G1>vernor Mar. 13, 1997;California, CAL.ms. CODE 10113.1 to .2 (Deering 1996); Connecticut, 1997CONN. ACTs202 (Reg. Sess.), approved June 24, 1997; Florida, FLA. STAT. 626.991to .993 (1996);lllinois, 215 Iu.. COMPo STAT. 158/1-95 (West 1996), approved June21,1996); Indiana, INn. CODE 27-8-19.8-27-8-19.8-26 (1994); Kansas, KAN. STAT.

ANN. 40-2,140 -152 (1992); Kentucky, 1998 Regular Session, H.B. 414, approved Apr. 7, 1998; Maine, ME. REV. STAT. ANN. tit. 24-A, 6801 to 16, (West1997) enacted June 10, 1997; Michigan, MICH. STAT. ANN. 24.569(1)-(8) (Law.Co-op. 1996); Minnesota, MINN. STAT. 60A.961 to .974 (1996); Montana, 1997Mont. Laws 298, approved Apr. 18, 1997; New Mexico, N.M. STAT. ANN 59A-2034-36 (Michie 1989); New York, N.Y. INS. LAw 7801 - 10 (Consol. 1993); NorthCarolina, N.C. GEN. STAT. 58-58-42 (1995); North Dakota, N.D. CENT. CODE 26.1-33.1-01-26.1-33.1-10 (1995); Oklahoma,S. 791, 46th Leg., 2d Sess. (Okla.1997); Oregon, 1995 Or. Laws 342; Texas, TEx. ms . CODE ANN. 3.50-6A (West1993); Utah, UTAH CODE ANN. 3IA-21-104 (1994); Vermont, VT. STAT. ANN. tit. 8, 3826-3832 (1994); Virginia , 1997 Va. Acts ch. 814, approved Apr. 2,1997; Washingt.on, WASH. REV. CODE 18.102.005 to .001 (1995); Wisconsin, WIS. S'I'A'l'. 632.68 (1996).In addition, as of October 1, 1998, eight states were considering some form ofregulation for the viatical settlement industry: Delaware, S.B. 39, 139th Gen. A(DeL 1997); Hawaii, H.B. 580, 20th State Leg. (Haw. 1991); Iowa, S.B. 354, 78thGen. A 1st Sess. (Iowa 1997); Massachusetts, H.B. 27, 181st Gen. Ct. (Mass.1997); Missouri, H.B. 1019, 90th Gen. A (Mo. 1998); New Hampshire, H.B. 263,1997 Reg. Sess. (N.H. 1997); New Jersey, AB . 2712, 208th Leg. (N.J. 1997); Ohio,

1999]These rments fing of vth e purquent ssubjectities law

Thecurrentstate orcuritiesformatidecisionis high,cause frvestmeprotectAct")18("ExchabeneficprotectH.B. 12, . 1997); an14. Ttors andateness o15. S16. Cinterestswhich spARIz. REwhich sp1999 S.Dtration fregulatinchange Cin viaticatual Bensettleme

17.ground a18. 19. "Securiticurities
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351Vol. 19:345 1999] THE FUTURE OF DEATH FUTURESThe initial

settlement firmsregulation at th e

department.of viatical settlelegislation.13

transactions. First,the policyviator may nsean d never assnmes an

s policy .to a firm whowith other policieseeley, Viatit;al Settle L. REV. 382, 386the only scenario thatu. Life Partners, Inc.,th e sta

The court obliquelyit s own account ori l l insured,

); Connecticut,.1997 FLA. STAT. 626.991 1996), approved June KIm. STA'I:. RB. 414, ap

6801 to 16; (West 24.569(1)-(8) (Law.STAT. ANN 59A-20North

CENT. CODELeg., 2d Sess. (Okla.ANN. 3.50-6A (West, VT. STAT. ANN. tit. 8,WIS. STAT.

of39, 189thGen..A78th

H:.B. 263,1997); Ohio,

These regulations cover, among other topics, minimum payments for policies, pre-signing disclosures to viators, and licensing of viatical settlement firms.14 These regulations focus onthe purchase of th e policy from th e viator, an d no t on subsequent sales to investors, which this Article argues should besubject to additional regulation through state and federal securities laws.15

The sale of fractional interests in viatical settlements iscurrently not subject to meaningful regulation at either th estate or federalieveU6 The legislative intent ofthe federal securities laws was to prevent fraud through the disclosure of information necessary to make meaningful investmentdecisions.1,7 The potential for fraud in this develo'pingindustryis high, and there is no mandatory disclosure to investors.. Because fractional interests in life insurance policies constitute investment contracts, investors therein should be granted theprotection of theSecurities Act of 1933, as amended {"SecuritiesAct")18 and the Securities Exchange Act of 1934, as amended{"Exchange Act").19 The viators themselves would be indirectbeneficiaries of this change. In the absence of the necessaryprotections provided by th e Securities Laws, investors may ulti-H.B. 12, 122nd Gen . A (Ohio 1997); Pennsylvania, H.B. 1127, .183rd Gen. A (Pa.1997); and South Carolina, H.B. 3542, 112th Sess. of th e Gen: A. (S.C. 1997).

14. The coverage ofthe existing an d proposed viaticallegislat ion protects viators and is beyond the scope of this Article. Fo r a full discnssion of the appropriateness of these legislative initiatives , see Osborn, supra note 1015. See Deeley, supra note 12, at 382.16. Certain states are starting to consider legislation to regulate fractionalinterests in viatical settlements as securities. Arizona recently enacted a statute,which specifically includes viatical settlements in the definition. of security. SeeARIz. REV. STAT. 44-1801(23) (1998). South Dakota recently enacteda statutewhich specifically includes viatical settlements in the definition of security. See1999 S.D. SB 48 (1999). However, the statnte provides an exemption from registration for viatical settlements offered by companies in compliance with Title 58,regulating- insurance in South Dakota. See id. Further, the Securities and Exchange Commission is actively involved in the effort to regulate fractional.interestsin viatical settlements as securities. See infra Part IV for a discnssion of the Mutual Benefits case an d states' efforts to regulate fractional interests in viaticalsettlements.17. See infra notes 136-60 and accompanying text for a discnssion of background an d goals of the federal securities laws.18. 15 U.S.C. 77a-h (1994)19. 15 U.S.C. 78a-h (1994). For purposes ofthis Article, the nomenclature"Securities Laws" means both the Securities Act of 1933, as amended, and th e Securities Exchange Act of 1934, as amended.
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352 PACE LAW REVIEW [Vol. 19:345mately decide no t to invest in viatical settlements, taking withthem the life blood of this industry.20 The Securities .and Exchange Commission ("SEC") was unsuccessful in its first bid toclassify fractional interests in viatical settlements as investment contracts under the Securities Act, in the recent case ofSEC u. Life Partners, Inc. 21 Despite it s setback inLife.Partners,the SEC has no t given up it s efforts to regulate fractional inter-ests in viatical settlements.22 Some states are also consideringthe classification of certain forms of viatical settlements assecurities.23

Part I of this Article presents an overview of the evolutionof the viaticalsettlement industry, as it responds to changinglife expectancies of AIDS patients resulting from new drugtreatments and to viatical settlement firms' attempts to diversify byviaticating policies of patients suffering from illnessesother than AIDS.

Part II of this Article raises the ethical issues imbedded inviatjcal settlement transactions, including conflicts of interest,cooodentiaJity concerns, and fraud, al l of which should be disclosed as risk factors to investors i I i viatical settlements.Part TIl of this Article considers the classification of viatical

settlements as securities for purposes of the Securities. Laws.Part III examines the legislative history and case law interpret-ing the Securities Laws, critiquing the holding in Life Partners. that fractional interests in pools of viatical settlements do. no tconstitute securities as defined in the Securities Act and its in-terpretive case law. Part III concludes that fractional interests

20. The dollar amount of policies viaticated ha s increased continually sincethe first viatica! settlements in th e late 1980s. See infra Part I for a discussion ofth e viatica! settlement industry. Although there are investors who are presentlywilling to do without the protections of the Securities Laws, i f the fraud in thisindustry worsens, such investors may elect to put their investment funds elsewhere. Offering investors th e protection ofthe Securities Laws may serve to keepsuch investors in the viatica! settlement market, and ma y attract new investors,making the viatica! settlemeut market broader an d more liquid.21. SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. C ir. 1996), reh'g denied, 102F.3d 587 (D.C. Cir. 1996); see infra PartIII for a discussion of this litigation.22. The SEC does not take the position that all viatica! settlements are securities; it focuses on the sale of fractional interests in policies to multiple investors.See supra note 12 for a description of the three scenarios for viatica! settlements;see also infra note 130; infra Part IV for a discussion of the Mutual Benefits case.23. See infra Part IV for a discussion of states' efforts to regUlate fractionalinterests in viatica! settlem ents.

1999]in viaticaof the Sein order

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[Vol. 19:345 1999] THE FUTURE OF DEATH FUTURES 353.. taking with

and Exin its first bid toas invest

the recent case ofk in Life Partners,fractional intere also considering

settlements asof the evolutionto changingfrom new drugto diverfrom illnesses

inof interest,

ofviaticallaw interpretin Life Partners

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who are presentlyi f th e fraud in this

funds elsemay serve to keep

new investors

this litigation.are securi

multiple investors.viatical settlementsBenefits case:

regulate fractional

in viatical settlements fall within both the spirit and the letterof the Securities Laws, and thus should be considered securitiesin order to further the legislative goals of the Securities Laws.

Part IV of this Article explores the viatical settlement industry after Life Partners, focusing on the efforts of some statesto classify certain forms of viatical settlements as securities,and the SEC's continued efforts to achieve the investor protection denied by the court in Life Partners.

I: The Changing Face of the Viatical MarketViatical settlements have become increasingly popularsince their inception in the late 1980s,24 developing primarily asa response to the AIDS crisis. The annual volume of the indus

try is estimated at over $500 million, with estimates of up to $1billion by the year 2000.25The viatical settlement industry has continued to grow andchange dramatically over the first decade of it s existence.26 To a

large extent, the viatical market was, and continues to be, de24. There ar e two competing theories concerning who actually Completed thefirst viatical settlement in the late 1980s. Rob Worley, of Living Benefits Inc., an

Albuquerque, New Mexico viatical settlement firm, ha s been credited as the firstperson to explore viatical settlements. Worley was listening to a radio call-in talkshow featuring a 36-year-old caller with no family who ha d learned that he hadonly months to live. The caller's only asset was a large life insurance policy, whichhe tried unsuccessfully to sell to insurance companies an d banks.Mr. Worley researched the relevant laws an d surveyed insurance industryparticipants about available alternatives for the terminally-ill policyholders, andthen bought his first policy, through Living Benefits, in April 1989. See Nancy L.Bruer, Financial Help for the Terminally Ill, PERSONNEL J. , Jan. 1993, at 78.Others claim that viatical settlements were developed by an HIV-positive fi-nancial planner, David Petersen, who started the first viatical settlement companyto help some of his dying friends. See Arthur Allen, As They Lay Dying, WASH.POST, Nov. 17, 1996, at W13.25. Because annual reporting requirements by viatical settlement firms areneither mandatory nor uniform, a verifiable estimate of th e dollar volume ornumber of policies viaticated is not yet possible. There is a wide disparity in theavailable estimates. See Albert B. Crenshaw, Tackling an Issue ofAgony; RulingMay Ultimately Ai d the Business of Buying Death Benefits, WASH. POST, Sept. 1,1995, at Cl; see also Viatical Association Drafts Its Own Model Laws, BESTWlRE,Nov. 5, 1996.26. One catalyst for growth was the enactment of th e Health Insurance Portability an d Accountability Act of 1996. Pub. L. No. 104-191, 110 Stat. 1936 (codifiedas amended in scattered sections of 42 U.S.C). The statute makes proceeds fromviatical settlements exempt from federal income taxes in most cases. The statute .conferred tax-free status on viatical settlements paid after DecembeI' 31, 1996 to
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354 PACE LAW REVIEW [VoL 19:345pendent on AIDS and HIV-infected policyholders to supply theraw materials for viatication - life insurance policies, in good.standing, held for more than two years (so any applicable contestibility period has expired).27 Thus, the viatical industry is. very sensitive to factors affecting life expectancies of viators,such as new treatments for various illnesses, primarily thoseassociated With HIV and AIDS, that may affect th e purchaseprice paid for policies and the ultimate return to investors.28

When researchers at the August 1996 World AIDS Conference in Vancouver announced that protease inhibitors couldprolong th e lives of some AIDS patients,29 the viatical settleviators with a life expectancy of less than two years by a viatical settlement firmlicensed in the state where the viator lives.

There may be additional taxes on viatical settlement proceeds at the state andlocal levels. To achieve consistency with this new federal legislation. other statesare eXpected to adopt legislation making viatical settlements tax free. New Yorkan d California confer tax-free treatment on the proceeds of viatical settlements.However, mos t states still follow the old federal rule, holding proceeds of viaticalsettlements as taxable to th e extent the proceeds exceed the viator's ta x basis inthe policy. See Sommer et al., supra note 6, at 59.

For a discussion of the general tax issues arising in connection with viaticalsettlements, see Osborn, supra note 10; see also Denise M. Schultz, Comment,Angels of Mercy or Greedy Capitalists? Buying Life Insurance Policies from the Ter-minally Ill, 24 PF;pP. L. REV. 99, 103-106 (1996). For a discussion of the taxtreatments ofviatical settlements as compared to ABDs, see Eremia, supra note 9,at 787-91.27. See infra Part II for a discussion of incontestability clauses.28. See supra note 6.29. Protease inhibitors have affected more than just the viatical settlementmarket. Because AIDS is no longer considered a death sentence, some insurancecompanies are now eXperimenting with selling life insurance policies to HIV-infooted applicants.In April, 1997, Guarantee Trust Life Insurance Co., of Glenville, IL, a firmspecializing in insuring impaired individuals, began offering whole life coverage tosome HIV-positive applicants. The president of Guarantee Trust said the company undertook this change because "'we believe many otherwise healthy HIV-positive individuals are more appropriately viewed as having a treatable chronicillness rather than a terminal disease." See Greg Lugliani, Body Positive July1997 (visited Mar. 22, 1999) .These policies are much more expensive than typical life insurance, to compensatethe insurer for the additional risk of the insured's HIV-positive status. See id.; seealso Sommer et al, supra note 6, at 55.

The coverage was made available to certain people age 20 to 49 with HIV, bu tnot full-blown AIDS. See Insurer Flooded With Queries About HN Life Policy,BESTWlRE, Apr. 23, 1997. The insurance is not available to patients who contracted HIV through the injection of drugs. The company fears that drug use "creates incalculable risks for the company, including the chance that drug users won'ttake their health-sustaining medications." Lugliani, supra.

I I!,

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1999]ment indeagerly abut had

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[Vol. 19:345supply thepolicies, in good

y applicable conindustry isof viators,primarily those

th e purchaseto investors.28AIDS Confercoulde viatica! settle-

settlement firmat the state and

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1999] THE FUTURE OF DEATH FUTURES 355ment industry was thrown into a state offlux.30 This news waseagerly anticipated by AIDS and HIV patients and advocates,31but ha d other implications for some viatica! settlement firmS.32

Guarantee Trust decided to insure the lives ofcertain HIV-positive applicantsafter months of research and developmental work, including studying data fromCDC, insurance industry mortality tables, information from it s reinsurer, inter-views with local doctors treating HIV-infected patients and with national HIV experts, an d consultations with people in the HIV community an d consultants whowork with them. See Linda Koco, Guarantee Trust Looks at Applicants with HlV,NATL UNDERWRITER, Apr. 21, 1997, at 13.

This program has significance for th e insurance industry, and, depending onthe number of policies issues to HIV-positive applicants, ma y also affect th e viatical settlement industry; after th e incontestability period expires, these GuaranteeTrust policyholders may seek to viaticate their policies. See infra Part I I for adiscussion of incontestability clauses.30. See Beth Ashley, Changes Prove Fatal for Some Viatical Companies; Sur-vivors Alive, Well, GANNET NEWS SERVICE, Feb. 18, 1998, at ARC. The news wasnot all necessarily bad for the viaticalsettlementindustry. The new treatmentsare expensive, and thus wo.uld fuel demand for viatical settlements fromviators.Th e irony is that these costly medical advances arguably make viatical settlementsa less attractive investment, or at least subject to a deeper discount, based on theincreased life expectancies of viators availing themselves of th e treatments. SeeSommer et al, supra note 6.31. While no one was claiming a cure for AIDS, th e idea of a cure seemed lessunthlDkable than ever before. See Lawrence K Altman, With AIDS Advances,More Disappointment, N.Y. TIMEs, Jan. 19, 1997, at 14; see alSQ Joel Lang, Rede-signing Destiny: New Drugs Have Added Ups and Downs to the AIDS RollerCoaster, HARTFORD COURANT, Mar. 30, 1997, at 10. AIDS activists worried that apublic perception that AIDS was almost curable would dry up funding an d publicinterest in actually achieving a cure. See Bob Condor, New Drugs Kindle HopeAmong HlV Patients, Cm. TRIB., Apr. 13, 1997, at 1.32. One casualty of th e new protease inhibitors was Sa n Francisco-based Dignity Partners, a viatical settlement company that was once a media darling; SeeDignity Partners Announces Second Quarter Earnings, Bus. WIRE, Aug. 14, 1996.Dignity Partners was the first firm to sell notes securitizing the proceeds of viaticated policies, and the first viatical settlement firm to sell shares in a registeredoffering. See Ironwood Capital and Dignity Partners Completes the FirstEver As-set Securitization ofViatical Settlements in the.Amount of$35 Million, Bus. WIRE,Mar. 2, 1995. Standard. & Poor's gave th e 1995 public offering of $35.million ofnotes an "A"rating,.and as a reflection of the market'soptiniism about the futureof the viatical settlement industry, published new rating criteria for viatical settle-ment deals in November, 1995. See id.In complying with its disclosure o b l i g a t i o ~ s under the Securities Laws, Dignity listed as a risk factor in its prospectus for the initial public offering that:

th e development of a cure or vaccine against. diseases an d other terminalillnesses (including AIDS) or the development ofa treatment which extendsthe life expectancy of individuals with such illnesses could delay substan-tially the collection of the face value of policies purchased by the company. . .Any such delay could materially reduce the company's actual yield on it sportfolio.
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356 PACE LAW REVIEW [VoL 19:345

Carlsen, supra note 4, at 3.Dignity had been attempting to diversify it s portfolio, hoping to viatica te policies from AIDS patients with life expectancies in excess of 24 months, and policiesfrom patients with other terminal illnesses. See Anne Colden, Dignity Partners'Future May Be Murky as AIDS Mkt. Shifts, Dow JONES NEWS SERVICE, July 29,1996. However, in light of th e reports from th e Vancouver World AIDS Conference in 1996, Dignity instead announced that because over 95% of it s viaticationbusiness had been with AIDS- and HIV-infected viators, it would temporarilycease processing any new applications from that population. See Despite Win OverSEC, Viaticals' Profits Face Threat, BESTWlRE, July 19, 1996 [hereinafter ProfitsFace Threatl.According to Dignity, th e medical developments announced at the conferencewere welcome news for many, but, if the treatments prove to be effective in thelong term, Dignity's results would be adversely affected. Following this announcement, Dignity's stock dropped by 77% in one day. See Colden, supra .Dignity be

gan selling off it s policies and repurchasing its shares to correct what it perceivedas an overreaction by the market to it s announcement. &e Dignity Partners An-nounces Share RepurchaseProgram, Bus. WIRE, Oct. 18, 1996.Life Partners called Dignity Partners "an insignificant player in the viaticalmarket" and said that Dignity wa s using the new treatments for AIDS as a "poorexcuse to get out of the market." Profits Face Threat, supra. .Dignity later decided to cease it s viatical settlement business and to sell off it snon-AIDS policielil.

During the third quarter of 1996, th e company concluded that the efficacY ofthe treatments reported at the AIDS Conference and substantially reportedtreatments increased the risks of purchasing and holdfug policies insuringthe lives of individuals diagnosedwith HIV or AIDS, especially those withlonger life expectancies. The company also reported that it does not believeit is viable to continue to operate a viatical settlement business solely fornon-AIDS policies while a market for non-AIDS policies develops, if it develops at all As a result, th e company reported that the board of directors hadrecently decided to cease the company's viatical settlement business and approved the sale of the company's non-AIDS policies.

Dignity Partners Announces Earnings, Sale ofPolicies, Sale of Equity Investmentand Cessation of Via ical Settlement Business, Bus. WIRE, Mar. 31,1997, at 1.

Other firms were slowly and less publicly undertaking the same course of action as Dignity - weaning their portfolios from an almost exclusive reliance onAIDS- and HIV-infected policyholders, and seeking ou t policYholders sufferingfrom other terminal illnesses. See David W. Dunlap, AIDS Drugs Alter an Industry's Math: Recalculating Death-Benefit Deals, N.Y. TIMEs, July 30, 1996, at D1.Fearful of a mass exodus from this blossoming industry , the National ViaticalAslilociation ("NVA"), an induliltry trade group, iIiIsued it s own prelillil release entitled"Protease Inhibitors Are Not Inhibiting All Viatical Settlement Firms." The release reiterated remarks of some lilpeakers at the World AIDS Conference that thenew treatments were not a cure, finil;hing up with a pledge to continue to provideAIDS patients with viatication opportunities "as part of a liIeries of viable financialoptions, which can offer fiscal dignity during the most trying times." See PressRelease o f National Viatical Association, July 25, 1996.

1999]Asfrom whical marshifted. feludes p

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tim'e8." See Press MATURING MA.rumTPLACE, Mar. 11, 1997, at 1.36. See Eremia, supra note 9, at 786.

[Vol. 19:345 1999] THE FUTURE OF DEATH FUTURES 357

to viaticate poliof 24 months, and policies

'1Colden, Dignity Partners'8 NEWS SERVICE, July 29,

95% of its viaticationit would temporarilySee Despite Win Over1996 Ihereinafter Profitsat the conference

be effective in the.Following this announcesupra. Dignity becorrect what it perceivedSee Dignity Partners An-the viaticalfor AIDS as a "poor

and to sell off it sthat the efficacy ofTeportedpolicies insuringespecially those withit does not believesolely forifitdevel-

of directors hadbusiness and ap-ofEquity InvestmentMar. 31, 1997, at 1.

,the same course of ac

DrugsAlteran Indus-July 30, 1996, at Dl .the National Viaticalpress release entitledRirms." The rethat theto continue to provideof viable financial

As the perception of AIDS began to shift from a diseasefrom which one dies to a disease with which one lives,33 the viatical market responded.34 The pool of selling policyholders hasshif ted from solely AIDS and HIV-infected persons, and now includes policyholders suffering from a wide range of illnesses,such as Alzheimer's disease, heart disease, stroke, cancer, and,in some cases, just old age.35 This shift is, at least in part, aresult of the changes in the treatments for AIDS that may alterthe life expectancy of some AIDS and HIV-infected persons, andthe corresponding recognition of the need to diversify by viatieating policies of patients with other terminal illnesses.36 Industry participants also credit the changing composition of the

33. See Altman, supra note 31, at 14.34. The infectious optimism of the 1996 World AIDS Conference was mutedby the sobering and tempered reports from the 1998 World AIDS Conference inGeneva. The participants cautioned that simply lowering a pat ient's viral load toan undetectable level did not mean that the disease was gone. Instead, it wassimplyhiding, with the potential to come back at some future point in time. SeeKim Roller, Twelfth WorldAIDS Conference; Experts Examine Latest HIVOptions,DRUG STORE NEWS, Aug. 24, 1998, at CP54.Thus, while protease inhibitors an d their encouraging, results for AIDS patients had a chilling effect on at least part of the burgeoning viatical settlementmarket, the new therapies are not universally effective, an d no one has been curedyet. The virus remains dormant in cells, with the ever present potential to comeback. One clinical study found that 86% of patients had no detectal>le trace of thevirus after 48 weeks on protease inhibitors, while the remaining 14% saw the virusreturn. See New AIDS Drugs Restoring Vitality, SAN ANToNIO ExPRESS-NEWS,Sept. 3, 1996, at 10.35. See Eremia, supra note 9, at 785-87; see also Charles E. Schmidt, Jr., Viat-icalFirmsFighting Outlaw Image, BEST'S REV. - LIFE-HEALTH INS. ED., Mar. 1996,at 69.A program called "Senior Settlements" permits healthy seniors, typically over70, to viaticate their life insurance policies. One viatical settlement firm, Viaticus,Inc., expects to purchase up to $300 million in policies in 1998, 80% of these fromrelatively hea lthy people. See Joseph B. Treaster, Death Benefits, Now for the Liu-ing, N.Y. TIMEs, Sept. 27, 1998, 3, at 1; see also ViaticalIndustry Expands toInclude New Financial Opportunities For Seniors - Senior Settlemimts Help TheElderly Market Cash in on Their Life Insurance, Bus. WIRE, Apr. 14, 1998; ViaticusAdds Seniors, BEST'S REV; LIFE-HEALTH INS. ED., Dec. 1997, at 89; Korn, supranote 8.According to one viat ical settlement firm, senior citizens are considered to be abig market for viatical settlements because seniors often are the demographic withchronic illnesses. However, some viatical settlement firms are offering viaticationto seniors age 75 an d over, even without a life-threatening or chronic condition.See Viatical Settlements: BigNew Senior Product in Financial Planning Business,
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358 PACE LAW REVIEW [VoL 19:345pool of viators to the increasing acceptance of viatication as alegitimate financial vehicle.37

The growing pains evident in the viatical settlement industry highlight certain risks inherent in these transactions, toboth viators38 and to investors.39 Merely identifying these risks

37. Viaticus, Inc. began a two-pronged campaign to legitimize viatica! settlements. The company engaged first in federal and state lobbying campaigns, pressing for the regulation of the viatica! settlement industry in an effort to prevent.fraud and to standardize viatica! payouts. The second prong of the attack was acampaign to achieve t a x ~ f : i : e e treatment for the proceeds of viatica! settlements.See Marketing a New, Complex Financial Option For Terminally Ill; HEALTHCAREPR AND MARKETING NEWS, Oct. 16, 1997.Both prongs of Via icus ' effortBwere realized; 25 states now regulate viaticalsettlements, and Congress passed HIPPA, making viatica! settlements tax free forviators with life expectancies ofless than two years. See supra note 13 for a list ofstate regulations on viatica! settlements; see also supra note 26 for a discussion ofthe tax legislation.The increasing respectability and popularity of viatica! settlements may prove. troublesome to th e insurance industry. Insurers se t premiums on policies based ona statistical expectationthat some percentage of the polices will be abandoned, andthus no death benefits will be due thereon. I f viatica! settlement firms continue tointervene, and purchase some or al l ofthe policies that would otherwise be abandontJd, insurance comparueswill end up paying out more than planned. This couldlead to increases in premiums on policies, and even a corresponding decrease insales. See Korn, supra note 8.

38. Viators are e x p o s ~ t o three primary risks in th e viatication process.First, viators run the risk of losing income-derived benefits, such as welfare orMedicare, as a result of the sale of their policy. Second, viators run the risk thattheir private medical history furnished to the viatica! settlement firm will somehow become more publicly disseminated. Third, viators run the risk that th e advent of new drug therapies will make their life expectancies so uncertain as todrive investors from the viaticaI settlement market, or valued so low as to makesuch investments not financially worthwhile, in either case eliminating viators'. access to death benefits dUring their lives. For a full discussion of the risks toviators, see generally Miriam R. Albert, Selling Death Short: The Regulatory andPolicy Implications ofViatical Settlements, 61 ALB. L. REv. 1013 (1998).

39. Investors in viatica! settlements are also exposed to certain risks. Thereis a substantial financial risk, where the ultimate return on this investment is tiedto the actual lifetime of th e viator. Investors know how much they will get, bu t th edate of the payment is uncertain. Thus, the risk is that the effective return declines as the payment dates gets further away from th e estimated date of death.See Amy S. Friedman, Banks Now Sel ling Viatical Settlements, NA'r'L UNDER-WRITER, Nov. 3,1997, at 41. The viator may outlive his or her projected life expectancy, diminishing th e return to the investor. Because AIDS is such a newdisease, no reliable mortality tables have been established yet. There are no longterm studies on the effectiveness of the new drug treatments, and, although th enew treatments do not cure AIDS, they seem to extend the lives of certain AIDSpatients. For investors in viatica! settlements, th e possibility of extending the lifeof the viator increases the risk of the investment, and may thus decrease the

1999]

amount inv57. Howevlate the pugan increaexpectancypricing of tgreater theoutlived, thment, the rThis ri21 policiestwo years. would havSee MarciaN.Y. TIMEmate retursense, incrbility for osupra notevarying le386.Viatichas done mental capunder durealso the pocelable, orirrevocablity statuterescind ththe viaticaFinallance comptransactiothat the isupra notBecaunot yet coof capacitcompaniecies are vsuch an opany failiof fraud.settlemenSee TCORP. COduress, mcompanythe positi
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[Vol. 19:345 1999] THE FUTURE OF DEATH FUTURES 359of viatication as asettlement indus-

these transactions, tothese risks

to legitimize viatical settlee lobbying campaigns, pressin an effort to preventd prong of the attack Was aof viatical settlements.Terminally ill, IIEALTHCARE

w regulate via ticalsettlements tax free forsupra note 13 for a lis t of a note 26 for a discussion ofsettlements may provemlUms on policies based onwill be abandoned, andfirms continue to

t would otherwise be abanthan planned. This couldcorresponding decrease in

viatication process.as welfare orrun the risk thatsettlement firm will someru n the risk that the ad-so uncertain as tovalued so lowas to makediscussion of the risks toan d1013 (1998).

to certain risks. Thereon this investment is tiedthey will get; but thet the effective -return deestimated date of death.

NAT'L UNDER-her projected life expecsuch a newyet 'I'hereare no long

and, although thethe lives of certain AIDSof extending the life

may thus decrease the

amount investors are willing to pay for policies. See Sommer et al, supra note 6, at57. However, some estimate of the viator's life expectancy must be used to calculate the purchase price of a policy. Therefore, even before protease inhibitors bega n increasing the life expectancies of some AIDS patients, estimating the lifeexpectancy of a particular viator was challenging. This estinl ation is critical to thepricing of the transaction; the shorter the life expectancy of th e policyholder, thegreater the percentage of th e policy value paid. I f the viator died earlier than, oroutlived, th e projected life expectancy used to calculate the viatical settlement payment, the return to th e investor is affeCted.

This risk is very real. In one case, an Arizona ma n invested over $100,000 in21 policies on the lives of viators who were predicted to die within th e followingtwo years. Three years later, only seven ha d died, and the investor was told hewould. have :to pay the premiums or lose his entire investment in those policies.See. Marcia Vickers, Investing It: J:i'or Death J/utures, the Playing p'ieLd 1s Slippery,N.Y. TIMES, Apr.. 27, 1997, 3, at 5. So th e viator's longevity decreases th e ultimate return when th e death payments are finally paid, and in a more immediatesenae, increases the o u t . : o f ~ p o c k e t costs to the investor, who must assume responsibility for ongoing policy premiums after the first two years. See Sommer et al.,supra note 6, at 55, for a tabular illustration of the range of expected returns forvarying lengths of time and initial investment; see also Deeley, supra note 12, at386.Viatical settlements also pose legal risks to the investors. Although no courthas done so yet, a judicial determination that th e viator l a c k ~ d . t h e necessarymental capacity to enter into the viati.cal settlement, or that th e dedSion was madeunder duress, could force.an equitable recision ofthe viaticationcontract. Ther.e isalso th e possibility that a court would hold the policy to be n o n - a s ~ i g n a b l e 9I' cancelable, or .that not all, the prior b e n ~ f i c i a r i e s would' have waived their rights,ifirrevocable, wider the policy. LikeWise, a court could find a state's incontestability statute inapplicable, thereby allowing th e issuing life insurance company torescind th e policy. For a discussion of incontestability clauses an d their effect onthe viatical. settlement industry, see infra Part II.

Finally,because of th e nature 1Jfthe viatical settieII).ent transaction, the insurance company that issued th e original policy.provides .the ultimate credit for thetransaction, e,xposing both th e viator and th e viatical settlelllent firm to th e riskthat the.insurance company will default on its payment obligations. See Eremia,supra note 9; at 783.Because viatical settlements are such a new type.of transaction,courts havenot yet considered issues common in traditional insurance litigatioq, such as lackof capacity or duress. Further, there are, as of yet, no cases. of issuing. insurancecompanies defaulting onviatical settlement transactions. However,.as more policies are viaticated, and in the absence of apprqpriate regulation, th e likelihood ofsuch an occurrence increases. There have been cases of the issuing insurance company failing to pay, however. In such cases, t h ~ r e typically has been an allegationof fraud. See infra Part II for a discussion of the fraud problems in the viaticalsettlement industry. .

See Thomas Hammack, Regulating Viatical Transactions, 45. FED'N INs. &CORP. COUNS. Q. 85, at 103 (1994), for a discussion ofunequal bargaining power,duress, mistake, .and incapacity in contracts made between a viatical settlementcompany an d th e terminally ill, concluding that, because th e insured is. often not inth e position to bring a claim after the contract has been entered because of his or
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360 PACE LAW REVIEW [Vol. 19:345is insufficient. The risks present in the viatical settlement industry mandate that some form of disclosure be required to protect investors so as to maintain or even expand the number ofinvestors in their critical role as supplier of funds in th e viatication process. Those opposed to regulating the sale side of theviatical settlement industry might argue that these risks areself-evident, and that a savvy investor ought to be able to protect himself or herself contractually from any resulting exposure.40 However, viatical settlements are a relatively new typeoftransaction, and participants are not limited to financially sophisticated or accredited investors.41 Viatical settlements havea humanitarian component that may attract first-time, unsophisticated investors who need information about the risks ofviatication. In addition, th e increasing costs of treating AIDSmeans that viatorsneed investors to buy their policies morethan ever.42 This combination increases the need for the disclosure and antifraud protections of the Securities Laws.

1999]As

with ccreaseabsenctentialviaticanies orthemseadequaboth toregulatorder teral re

Whhe r health, "paternalistic regulation is necessary to prevent the abuse from occurring, an d to ensure economic efficiency an d distributive justice, personal integrity,an d sound judgment."40. As the viatical settlement market matures an d responds to a changinglandscape, new risks are identified, and, because of th e lack of protection understate or federal securities laws, new innovations must be created to manage therisks. Fo r example, as a hedge against the risk that th e viator will outlive his orhe r projected life expectancy, thereby reducing the investors' return, some viaticalsettlement companies are using supplemental insurance policies to provide interim payments to investors. Several U.S. viatical settlement companies an d oneU.K viatical settlement company teamed up to offer a product called "ProfitShield"under which investors can purchase the insurance through their viatical settle-ment company on invested capital. The' program ha s a one-year deferment following maturity an d will provide a maximum coverage of two years to death. Theinvestor receives th e benefit of the insurance plus the actual death benefit underth e policy when th e insured dies. See Barbara Mannino, Moving Beyorul theLearning Curve: Emergence ofVia tical Insurance Settlements , BESTS REV. - LIFE-HEALTH INS. ED., Aug., 1997, at 72.41. See Michael R. Davis, Unregulated Investment in Certain Death: SEC v.Life Partners, 42 VILL. L. REV. 925, 926-27 (1997).42. Before the advent of costly protease inhibitors, th e proceeds of th e firstviatical settlements tended to be used by patients to pay medical an d other bills,an d grant last wishes. See Kara Swisher, Allstate to Offer Discounts to Buy Poli-cies of the Terminally Ill, WASH. POST, Aug. 1, 1991, at B8. This use of funds ma yhave been simply a function of the lack of any meaningful life-prolonging treat-ments available at that time. Now the new protease inhibitors are available and,for many patients, are proving helpful in reducing their viral load down below detectable levels, with the potential for corresponding reductions in HIV opportunistic infections. See Sommer et al., supra note 5, at 56-57.

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361[Vol. 19:345settlement inprothe number of

f funds in th e viaticathe sale side of thethat these risks areto be able to proany resulting expo

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1999] THE FUTURE OF DEATH FUTURESAs the viatical settlement industry grows to include viators

with conditions other than AIDS, there is a corresponding in-.crease in the need for disclosure to investors. In th e continuedabsence of federal regulation, th e threat of fraud remains, potentially leading to the absence of investors. As a result, th eviatical settlement market would consist only of th e few companies or individuals who would agree to buy a policy and hold itthemselves until it matures. Investors must be provided withadequate disclosure to eliminate, or at. least minimize, fraud,both to investors and viators. . However, since the only existingregulation of viatical settlements occurs at the state level, inorder to protect viators, the protection of investors through federal regulation becomes paramount. .

II: Ethical Considerations in th e ViaticalSettlement Industry

While viatical. settlements ar e legal, the moral aspects ofviatication are less clear.43 The current regulation of viaticalsettlements ignores. investors' needs. Instead, th e regulationsprotect viators from unscrupulous viatical settlement firms thatmay seek to take advantage of viators.44 Courts have not yetapplied traditional contract defenses like duress, undue inHuence, and lack of capacity, but as the viatical settlement indus-try continues to grow, this is likely to change.45

called"ProfitShieWtheir viatica! sett leone-year deferment followof two years to death. Theactual death benefit underMoving Beyond theBEST's REV. - LIFE-in Certain Death: SEC v.the proceeds of the firsty medica! an d other bills,

to Buy Poli-t BS. This useoffunds maylife-prolonging treat-are available and,viral load down below dein HIV opportunis

AIDS has always been a very expensive disease, and with the .advent of theprotease inhibitors, the.cost of fighting it has gone up dramatically. "[S]ince protease inhibitors do not help everyone and can cost as much as $20,000 per year toadminister, HIV/AIDS patients may still be in need of medica! funds since mosthealth insurance plans limit medication reimbursement as well as medications tothose included on a specific approved list." See Eremia, supra note 9, at 787; seealso Sommer et al., supra note 6, at 57; see also Lang, supra, note 31, at 10.

43. See Osborne, supra note 10, at 485-90.44. See supra note 13 for a list of the current state statutes and proposed legislation of viatica! settlements.45. Traditional contract law principles dealing with lack of capacity provideone sort of remedy forviators. A patty lacking contractual capacity enters into acontract that is voidable at the incompetent party's option. However, because of

the peculiar circumstances of terminally-ill viators, contract law remedies may beinsufficient. Terminally ill parties may not realize or be able to face their ownincapacity, and further, might not seek to spend any of their precious remainingtime on litigation. See Crites-Leoni & Chen, supra note 9, at 80-81; see also Ham-mack,. supra note 39, at 103.
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362 PACE LAW REVIEW [Vol. 19:345Viatical settlements are not the only enterprise to profitfrom the dying. Death is its own industry, encompassing hospi

tals, hospices, physicians, home care attendants, pharmaceutical companies and funeral homes. These participants are notgenerally considered ghoulish; yet there is a stigma attached toviatical settlements, perhaps because of the more direct connection between profit and death.Viatical settlements are not for the squeamish. The returnon the investment does not depend on the performance of anonymous workers in a competitive market; it depends on how long

a terminally-ill human being lives.46 The investor, and the viatical settlement firm, while sympathetic to the viator's medicalcondition, hope, at least from a financial point of view, that theviator does not live out his or her life expectancy.

The unsettling ethical aspects of viatical settlements can beoffset by the corresponding moral good in helping the dying.The tension involved with viatical settlements stems from theinexorable linking of the benevolent and the financial incentives. If investors do not earn a decent, if not superior, rate ofreturn, they will move their investment funds into othervehicles.

Perhaps with these concerns in mind, many ofthe state regulations on viaticalsettlements require that the viatical settlement firm obtain a medical certificationas to th e viator's mental capacity. See ARK.. ConE ANN. 28-81-509(A)(I) ("A viati .cal settlement provider entering into a viatical settlement contract with any per-son with a terminal illness or condition shall first obtain [) a written statementfrom a licensed attending physician that the person.isof sound mind and under noconstraint or undue influence."); see also ConE ME.R. 24-A at 6809 (1997). Ar-guably, ethical viatical settlement firms would require this of their own accord.

46. "The financia l risk in viaticals creates a morally perverse feature no t pres-en t in other investments: the investor must hope for the early demise of th e personwhose life insurance he buys. Th e longer th e person hangs on, th e lower the an-nual rate of return." Michael J. Sandel, You Bet Your Life, NEW REpUBLJC, Sept. 7,1998, at 11.

Promotional materials from one viatical settlement firm listed T-cell counts oftwelve viators, along with their names, medical summaries, life expectancies an dthe rates of return on their policies. The viatical settlement firm wa s prominentlyfeaturing one particular viator, with a T-cell count of 150 per cubic milliliter ofblood, compared with a normal level of about 1,000. In the words ofthe company,this viator was suffering from "Thrush, Kaposi's Sarcoma, Hairy Leukoplakia! Peripheral Hyperesthesia!" Th e company promised the viator wouldn't live morethan 15 months . See Allen, supra note 24, at W13.

1999]Beyon

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1999] THE FUTURE OF DEATH FUTURES 363Beyond th e legalities of viatical settlements are complexethical issues.47 These issues fall into three categories: conflicts

of interest, confidentiality concerns, an d fraud. 48 These categories constitute the primary areas where disclosure to investorsis needed to permit infonned investment decisions. Eventhough conflicts of interest, confidentiality concerns, and somefonns of fraud can be adequately addressed by state regulationon the purchase side of viaticaI settlements, the more threatening aspects of fraud in th e viatical settlement industry are bestaddressed by bringing viatical settlements under the protectionof the Securities Laws. Investors need disclosure on these issues, whether such issues are handled by state or federal regulation, or no regulation at all. 'ilie following discussion exploresthese issues in their context as subjects for disclosure pursuantto the Securities Laws.A. Conflicts of Interest

The viatical settlement industry is subject to conflict of interestproblems that pi t the agendas ofothers against what maytruly be in a viator's best interest. Because of the expense of thenew protease inhibitors, funds for life-sustaining care are coming from investors with a very real stake in seeing the viator's. life end sooner rather than later. Viatical settlement finns arein the business of making money, so they aim to find viatorswho will predecease their life expectancy. While predicting lifeexpectancies is not an exact science, the evaluation of a viaticalapplication includes an examination of th e quality of the viator's medical care; the lower the quality of care, the morequickly the viator is likely to die.49 Viatical finns have strongfinancial incentives to discourage or prevent viators from par

47. See Crites-Leoni & Chen, supra note 9, at 78.48. U.S. News & World Report conducted a study of the viatical settlementindustry in the mi d 1990's an d "uncovered a darker side of the business, markedby conflicts ofinterest, lack of disclosure an d nonexistent or ineffectual regulation.Health care providers, lawyers an d financial planners who work with the terminally il l may benefit without the knowledge of their patients or clients. Brokerswho claim to find the best terms for sellers actually work for the companies thatbuy the policies." Pamela Sherrid, Enriching the Final Days, U.S. NEWS & WORLDREP., Aug. 21, 1995, at 56.49. According to one infectious disease specia list paid by a viatical settlementfirm to evaluate medical records, "it's morally distressing work, like watching froma window as a pedestrian heads for an open manhole. But I can't call up a doctor I
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[Vol. 19:345therapies. 50 Like-is paid more by

even when thean d not necessarilyin th e viatical set

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the

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1999] THE FUTURE OF DEATH FUTURES 365worker and one viatical settlement firm.55 Some viatical settlement firms have begun offering their services directly to hospitals,56 and some physicians have requested direct commissionsfor referring viators to viatical settlement firms. 57

The specter of conflict ofinterests in the viatical settlementindustry has lessened somewhat over time, in part becausestates,58 and viatical settlement industry trade groups,59 havebegun to legislate codes of conduct aimed at reducing th e potential for conflicts, and in part because, as the industry grows andbecomes more mainstream, viators and their advocates becomemore educated about viatication in general, and become moreaware of these potential conflicts. Nonetheless, the potential forthese conflicts of interest must be disclosed to viatical settle-advised potential viators to shop their policies around to multiple viatica! settlement firms, Life Entitlement's logo was prominently displayed in the brochure,an d in fact, Life Entitlements was the only viatica! settlement firm mentioned byname, along with its toll-free telephone number. See Sherrid, supra note 48, at 56.

55. At AIDS Foundation Houston, a nonprofit AIDS support organization, asupervising social worker moonlighted as a representative of a viatical settlementfirm. The facility's executive director knew of the arrangement, but justified itbecause th e social worker was not allowed to promote her viatica! settlement firmat the facility, an d because the majority of the facility's clients were too poor tohave life insurance to viaticate. To ease this conflict, the viatical settlement firmagreed not to display brochures at th e facility's group offices and had it s namedeleted from the list of recommended viatical settlement firms distributed by thefacility. See Sherrid, supra note 48, at 56.

56. Viaticus, Inc. sent representatives to hospitals to sell the benefits ofviatica! settlements to health care providers, such as case workers. See Allen, supranote 24, at W13. Viat icus was, in effect, asking hospital personnel to serve as it sunpaid salesmen. However, case workers ar e supposed to "steer patients throughthe maze ofcare options while helping their hospital survive in the cutthroat worldofcontemporary medicine" an d no t steer them toward the particular option ofviatication, or to a particular viatica! settlement firm. The conflict arises in that, byconvincing patients to viaticate, the patients get an influx of cash to pay debts,presumably including debts owed to the case workers' employer, the treating hospital. See id.57. See Sherrid, supra note 48, at 56.

58. See CAL. INS. CODE 10113.2(f) (West 1997).59. Via ical settlement industry trade groups have adopted codes of conductfor their member firms. Members of th e NVA must adhere to stated "Standard

Business Practices" an d "Code of Ethics." See NA'r'L VlATICAL AsS'N INFO. BOOKLET,15-16.According to the Viatical Association of America ("VAA"), another industry

trade group, it is "dedicated to the maintenance of high ethical standards, including absolute respect of viator privacy an d confidentiality. We promote the highestlevel of professionalism by our members an d full compliance with state laws." [d.


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366 PACE LAW REVIEW [VoL 19:345ment investors in order for them to make informed investmentdecisions.B. Confidentiality

Another problem burdening the viatical settlement industr y flows from the tension between protecting viators' privacyregarding the details of their illness, and providing viatical se ttlement firms with that same information which is critical toappropriately pricing the policies. In most viatical settlements,the viator releases his or her medical records to the viatical settlement company. This release may contain a confidentialityprovision, but at least some of the viator's specific medical history will need to be disseminated to potential investors as partof the necessary, albeit, macabre, marketing ofthepolicy.60

This tension has been eased through th e efforts of the N ational Association of Insurance Commissioners ("NAIC").61 TheNAIC Viatical Settlements Working Group drafted a ViaticalSettlements Model Act and Regulation, which serve as the basisfor most of the state regulation of viatical settlements.62

Some regulators fear that th e current state laws do not provide sufficient protection to viators.63 Of the states that regulate viatical settlements, only Maine prohibits the release of theviator's personal information.64 However, even without being

60. Allen. supra note 24, at W13; see alsa Treaster, supra note .35, 3, at 1.61. The NAIC is a voluntary association made up of the cbiefinsurance regulatory commissioners and staff from all 50 states, the District of Columbia andAmerican Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands.62. In December 1993, the NAIC adopted the "Viatical Settlement Model Act"and in September 1994, the NAIC adopted the "Viatical Settlement Model Regulation" (collectively, the "NAIC Models"), designed to protect viators when dealingwith viatical settlement companies. The three primary areas of regulation in theNAIC Models are enforcement provisions, mandatory disclosure to viators, andmandated mininlum payouts. See 1994-1 NAIC Proc. 352, 362.63. Tom Foley, Commissioner of the North Dakota Insurance Department,wants to protect viators from any possible physical risk stemming from the releaseof their personal information, including names and addresses. Mr. Foley led aneffort at the NAIC's 1998 spring meeting to adopt a model regulation that prohibited viatical brokers from revealing the names of viators to investors. See NAlCMulls Privacy Option on Viaticals, AM. BANKER-BOND BUYER, Apr. 6, 1998, at 1{hereinafter NAlC Mulls Option].

64. See CODE ME. R. 24-A at 6806 (1997); see also NAlC Mulls Option, supranote 63, at 1.

1999]legally pto release

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1999] THE FUTURE OF DEATH FUTURES 367legally prohibited, some viatical settlement companies declineto release this information as a policy matter.65

In 1998, the NAIC Viatical Settlement Working Groupagain took up the issue of confidentiality, discussing the possibility of including some privacy language in the Model Regulation.66 If the NAIC includes language to combat this problem,the states may be inspired to adopt the language into their ownstatutes. This approach would ease the confidentiality problem,by granting viators needed additional protection, while still allowing viatical settlement firms to disclose the information necessary to sell the policies. However, increasing viatorprotection, and even providing remedies for violations of suchprotection, increases the need for disclosure to viatical investorswho might be pulled into such remedy.67C. Fraud

The third and most pervasive ethical concern in the viaticalsettlementindustry is the threat of fraud. The rapid growth andincreasing legitimacy of viatical settlenientsas investmentshave created a corresponding possibility of fraud on or by viatical settlement participants that, if unchecked, couldultimatelycripple this industry. The expense of fighting a terminal illnessmay tempt some viators to commit fraud. Viatical settlementspermit viators access to funds to pay for life-prolonging treat-ments, but only i f there is a valid underlying insurance policy.Thus, ~ a t o r s have every incentive to secure lifeinsurance,68even when they know they are HIV-positive.69 Likewise, un

65. See NAlC Mulls Option, supra note 63, at 1.66. See NAlC Mulls Option, supra note 63, at. 1. .67. Life Partners raised concerns about the efrect of th e Securities Laws' disclosure rules on th e privacy of viators. The district court characterized this as afalse concern, because the disclosure obligatious fall only on those "selling.or offering securities, not on those selling assets which are then repa-ckagedby others assecurities." SEC v. Life Partners, Inc., 898 F. Supp. 14, 19 (D:n,C. 1995). .68. "The development of these drugs and drug regimeus [(ptoteaseinhibltors)]may increase antiselection risks because unscrupnlousindividuals might view lifeinsurance as an opportunity to pay for the drugs and other medical care. Any suchfunding would be borne indirectly by healthy individuals in th e form of higherpremiums." George B. Kozol, Home HlV Tests Create New Problems: Some MayFraudulently Purchase Life Insurance to Fund Medical Care, 'BESTS REV. - LIFE-HEALTH lNs. ED., Dec. 1996, at 68.69. Disclosure ofHIV-positive status is no longer a total bar to obtaining lifeinsurance. An insurance company recently began marketing insurance for HIV
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368 PACE LAW REVIEW [Vol. 19:345 1999)scrupulous viatical settlement firms may try to sell non-existentpolicies to investors who are unprotected by the disclosure requirements of the Securities Laws.

Fraudulentpractices have been documented in the viator'spurchase of the underlying policy from the issuing insurancecompany; and on both the purchase and sale side of the viaticalsettlement industry. These fraudulent practices fall into fourbasic scenarios: (1 ) unscrupulous insurance agents assisting viators in defrauding insUrance companies by keeping the viators'HIV status secret; (2 ) viators defrauding insurance companieson their own, relying on traditional insurance law incontestability clauses;7o (3) viators defrauding viatical settlement companies; and (4) viatical settlement companies defrauding viatorsand investors.

The potential for fraud perpetrated by viators and insur-ance agents pales in comparison to the potential for fraud perpetrated on investors by unscrupulous viatical settlementfirms.Moreover, unlike the fraud by viators and insurance agents,which are somewhat controlled by state regulation, there is essentially no regulation in place to curb the potential fraud byviatical settlement firms, other than a common law action forfraud.positive applicants. See supra, note 29. However, the vast majority of insurersdecline to provide new policies for applicants whom it knows to be HIV-positive,creating an incentive for unethical viators to hide their HIV status:

For the first time the life insurance indnstry faces a situation in which anindividual can reap significant financial rewards from a fraudulent life insurance application. For instance, someone who knows he is serionsly il l atthe tiine of his application can intentionally misrepresent his health andmedical history to obtain a life insurance policy. The person who survivesthe two-year contestability period can then obtain a substantial percentageof th e policy face amount from a viatical settlement company.

Kozol, supra note 68, at 68.70. An incontestability period represents the agreement that an insurer willnot dispute th e validity of the policy after the expiration of some fixed time, typically two years, from the date of the policy. See Burke A Christensen, Incontesta-ble Clause Gives Insurance Fraud New Meaning, TRUSTS & ESTATES, Apr., 1997, at68. The purpose is to protect beneficiaries from unnecessary litigation after the

insured dies. See Eric K Fosaaen, AIDS and the Incontestability Clause, 272 N.D.L. REV. 267, 271 (1990). Any application for an increase in the dollar amount ofinsurance coverage starts the incontestability period over again with respect tosuch increase. See also Dignity Viatical Settlement Partners v. Cedalion Systems,Inc., 4 F. Supp. 2d 466 (W.D.N.C. 1998).

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Documents

The Future of Death Futures: Why Viatical Settlements Must Be Classified as Securities