When Does the Opinion of a Life Insurance Agent/Broker Become FRAUD on the Buyer?

The below is an excerpt from an in-depth interpretation by Steve Leimberg of the alleged facts and findings of an actual pending lawsuit involving Wal-Mart Stores, Inc. v. AIG Life Ins, Hartford Life Ins, the brokers involved and their representatives.  Actually alleged facts and findings have been substituted with possible parallel facts and findings shown in [bracketed italics] to illustrate both how allegations of fraud in this Wal-mart case could be applied in other future cases and how to how to adopt proven prudent financial management principals and best-practices that are the best defense against such complaints. 

Theoretical EQUITABLE FRAUD Case based on Actual EQUITABLE FRAUD Case:

[Policyowner] claimed that the insurers, brokers, and their representatives knew or should have known, but failed to disclose, material information about [policy costs, the reasonableness of performance expectations, and thus] the risk that the [policy holding(s)] would not achieve their intended... benefits because of the structural flaws in those plans.

Among other things, [Policyowner] alleged that:

§      Certain [federal regulators (i.e., the Financial Industry Regulatory Authority or FINRA)] had disapproved [the use of policy comparison/audit/evaluation systems], such as those [use to sell life insurance policies] to [Policyowner]...  based on concerns relating to [policy comparison/audit/evaluation systems being misleading], and deviations from acceptable [prudent financial management principals as set forth it the Prudent Investor Act],

§      The [policy comparison/audit/evaluation systems] were designed … in a fashion that deviated from [prudent financial management principals as set forth it the Prudent Investor Act], with respect to [A) the failure to investigate and justify policy costs against peer-group products and/or industry benchmarks, and B) the failure to investigate the reasonableness of illustrated performance expectations of invested assets underlying policy cash values] and that these deviations from [prudent financial management principals] increased the risk that the [policy holding(s)] would fail, as they did, under the [circumstances] in effect at the time [Policyowner] bought the policies.

§      [Policyowner] sought assurances from the insurers, brokers, and their representatives about the [suitability of the recommended product];

§      [Policyowner] reasonably relied on the insurers, brokers, and their representatives to fully disclose all material information ;

§      Had [Policyowner] known that the [policy holding(s)] were flawed in the manner alleged, it would not have purchased the policies.

§      [Policyowner] incurred substantial damages as a result of the [policy holding(s)] failure to produce [the illustrated] benefits.

To state a claim for common law fraud, a party must allege:

§      a false representation, usually one of fact [e.g., The false representation that policy comparison/audit/evaluation systems at least imply is that the results identify the most suitable policy holding(s) for a given client situation without limitation (since no such limitations are typically disclosed).];

§      the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth [e.g., Use of policy comparison/audit/evaluation systems that FINRA has concluded are misleading and which compare only some limited number of products without disclosing such limitations and without investigating A) underlying policy costs against industry benchmarks representative of all peer-group products, and B) the reasonableness of illustrated performance expectations for invested assets underlying policy cash values is at least a disregard for the truth if not also a reckless indifference to the truth.];

§      an intent to induce the plaintiff to act or to refrain from acting [e.g., Given that most policy comparison/audit/evaluation reports are produced by life insurance product distributors, that the principal business of these distributors is not the analysis of life insurance products but instead the sale of certain life insurance products, that these policy comparison/audit/evaluation reports are thus incidental to the sale of certain life insurance products instead of a stand-alone service, and that these policy comparison/audit/evaluation reports only include those products which that distributor is licensed to sell (without regard to whether or not other products may be more suitable in the given client situation), the intent of the financial advisor using such policy comparison/audit/evaluation systems is clearly to induce the client to purchase one of those life insurance products that the financial advisor is licensed to sell.];

§      the plaintiff's action or inaction taken in justifiable reliance upon the representation [e.g., The client who purchases a life insurance product identified by a policy comparison/audit/evaluation report as "most suitable" in that client's particular situation (at least from among those included in the report) is clearly acting in justifiable reliance on the representations of the financial advisor using the policy comparison/audit/evaluation report.]; and

§      damage to the plaintiff as a result of such reliance [e.g., Consider a policy is purchased pursuant to the findings of a policy comparison/audit/evaluation report in which the "most suitable" product (from among those included in the report) is expected to produce a $5,000,000 death benefit for a $40,000 per year premium that is invested into a conservative cash value asset allocation, and that a subsequent investigation of A) actual policy expenses as they relate to industry benchmark averages and B) actual performance of invested assets underlying policy cash values relative to asset-class indices indicates the same $40,000 annual premium could have purchased between $7,000,000 and $13,000,000 of death benefit depending on the asset allocation appropriate to the client, the damages to the client/plaintiff could be as much as either $1,000,000 or $7,000,000 again depending on the investor risk profile appropriate to the client, particularly if the client is either deceased or uninsurable and the product "recommended" by the policy comparison/audit/evaluation system cannot therefore be exchanged to a product that actually offers best-available rates and terms (BART).]

Equitable fraud differs from common law fraud in one respect; the defendant need not know that the representation is false. Although an expression of opinion cannot form the basis of a fraud claim,

"the mere fact that a material statement is in the form of an opinion, or of an estimate, is not necessarily conclusive as to whether it must be treated as such"

Even though the language of a representation concerns only legal consequences and is in the form of an expression of opinion, it may, as in the case of any other statement of opinion, carry with it by implication the assertion that the facts known to the maker are not incompatible with his opinion or that he does know facts that justify him in forming it."

When the recipient does not know the facts, he may justifiably rely upon these implied assertions and recover on the basis of a misrepresentation of implied fact.

Similarly, a statement that is "facially true" may constitute an actionable misrepresentation if it causes a false impression as to the true state of affairs, and the actor fails to provide qualifying information to cure the mistaken belief.

[Policyowner]'s Amended Complaint alleges that the insurers, brokers, and their representatives misrepresented the [suitability] of the [policy holding(s)] by failing to inform [Policyowner] that [policy comparison/audit/evaluation systems used to sell the policy holdings] deviated from [prudent financial management principals as set forth it the Prudent Investor Act], and that those deviations had prompted regulators to question or disapprove [policy comparison/audit/evaluation systems]. These are misrepresentations of implied fact - implied in light of representations that the [policy holding(s)]  were "designed" or "intended" to [be suitable as defined in the Prudent Investor Act].

In addition, a Broker allegedly advised [Policyowner] that its maximum exposure under a "worst case" scenario would be [some number as shown by another illustration of hypothetical policy performance based on some other more conservative set of assumptions but still without A) investigation as to the appropriateness of policy costs as measured against peer-group products and/or industry benchmarks, and B) investigation as to the reasonableness of illustrated performance expectations of invested assets underlying policy cash values]. That statement may be classified as an "estimate" or "opinion," since no one can provide absolute assurance as to future events. Nonetheless, it is the type of opinion that suggests the reasonable belief that it was based on facts known to the maker. Thus, such a statement can form the basis for an equitable fraud claim as well.

But the [defendants] argued that this claim must be dismissed, if for no other reason, because [Policyowner] did not rely on their representations. They point to a Letter of Understanding (LOU) executed by [Policyowner], which states:

[Policyowner] has reviewed with its own legal and tax advisors all present and future implications of its ownership of the [policy holding(s)], and that it has not relied upon any representations of [defendants] in that regard.

The trial court also questioned [Policyowner]'s ability to seek relief in light of this provision. But this court did not view the LOU as dispositive [because] this provision states only that [Policyowner] relied on its own [it's] advisors in analyzing the risks of using [life insurance policies] policies [to fund __________], and did not rely on [defendants] "in that regard." It does not, by its terms, state that [Policyowner] was absolving [defendants] of liability for material misrepresentations as to the structural flaws in its product.

So here, the court held that [Policyowner] adequately alleged the elements of fraud, that [Policyowner] could pursue a fraud claim beyond the pleading stage of the litigation, and as a result, that [defendants] must now face litigation involving allegations of fraud and defend their "opinions" almost certainly based in part on prevailing industry sales practices involving the use of illustrations of hypothetical future performance instead of investigation and disclosure of A) expected/possible costs and B) the reasonableness of expected/illustrated future performance (as prescribed by the Prudent Investor Act, but which is not intended to suggest an alleged omission on the part of any of the defendants that is being litigated in this case).

Conclusion:

Life insurance agents/brokers are being held to increasingly higher standards, and the Wal-mart case is just one more example.  Use THEInsuranceAdvisor.COM research to demonstrate you have investigated both A) the appropriateness of policy costs as measured against peer-group products and/or industry benchmarks, and B) the reasonableness of illustrated performance expectations of invested assets underlying policy cash values.  THEInsuranceAdvisor.COM Research Reports are the only such tool approved by FINRA for determining and documenting life insurance product suitability.  Besides, independent research can be both a terrific marketing tool to demonstrate a commitment to genuinely doing what is demonstrably best for the client and a competitive advantage when policy comparison/audit/evaluation systems present misleading results to sell some limited number of products. 

Our thanks again to Steve Leimberg for his permission to use his terrific work as the basis for this newsletter.  Please also note that this newsletter is not intended to be a complete examination of this case and that neither the Delaware trial court nor the Supreme Court have made any factual findings or determinations of liability against any of the defendants in the case.  For a complete interpretation of this case, read “Clarification to Wal-Mart Stores, Inc. v. AIG Life Ins. Co. (LISI Estate Planning Newsletter # 1274 (April 15, 2008)) at http://www.leimbergservices.com/  Copyright 2008 Leimberg Information Services, Inc. (LISI).  If you are not already a subscriber to LISI newsletters, click here to learn more about Steve Leimberg's newsletters.