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Crackdown on Fraud Under Way in Viatical-Settlement Industry?

December 1999

There is a new wrinkle in the viatical-settlement industry.

Viatical-settlement companies are the businesses that purchase the life insurance policies of people with a catastrophic or terminal illness. In the 10 to 15 years of their existence they have provided much-needed cash to people with AIDS for medical care, living expenses, and other necessities.

As in any other industry that deals in a lot of cash, however, the scent of quick profits has been picked up by the unscrupulous and dishonest. Life insurance fraud is starting to affect this industry and some people with HIV/AIDS are getting caught in the middle.

Fraud On the Rise

Life insurance fraud has increased in California in recent years.

One reason is a California Supreme Court ruling that says once a life insurance policy has been in force for two years, nothing, including fraud, will cause the policy to be canceled or rescinded by the carrier, with the exception of nonpayment of premium. The life policy becomes "incontestable."

The California Legislature fine-tuned that ruling and allowed one other exception, when someone has an impostor stand in for them at the insurance physical exam. Other than that, after two years the policy is valid, even if lies were told to obtain the coverage.

This has led many people to believe that getting a policy by misrepresentation or deceit is OK as long as the policy stays effective for two years. After two years, the purchaser can sell the policy to a viatical settlement company for cash.

Rogue Traders

A few dishonest insurance agents actually started soliciting people whom they knew to be uninsurable, such as people dealing with symptomatic HIV and AIDS. By helping a person lie his or her way into insurance, the agents got their commission for the sale and really didn't worry about what happened to the insurance company or even the insured.

This practice became so blatant that some insurance agents were selling clients seven or eight different policies from as many insurance companies all at the same time. Some tried to establish relations with AIDS-service organizations, offering contributions in return for referring clients to them. At least one person here in California was actually referred to one of these agents by a viatical settlement company.

Criminal Fraud

Enter the authorities, usually the local police working with the various Departments of Insurance, but also, in at least one case, the FBI. Despite the fact that incontestable life insurance policies are completely valid in California as well as many other states, there is still the issue of criminal fraud.

Criminal fraud has many definitions, one of which is "the intentional concealment of a material fact for the purpose of unlawful gain." Not mentioning any medical problems on a life insurance application when you are taking medications and/or have some HIV-related symptoms could easily be considered intentional concealment, especially if you are filling out six or eight applications simultaneously. And that includes applications that the agent fills out for you because you must sign the application, verifying the information's validity.

So even though the policy may be two years old and is incontestable as an insurance contract, that does not eliminate the possibility of criminal fraud charges being filed.

Clampdown Under Way?

Would law enforcement authorities really file criminal charges against a person with a terminal illness like AIDS and send them to jail?

AIDS Project Los Angeles' Benefits Program is not aware of any such charges actually being filed. But should the insurance industry perceive this to be a growing problem, they would certainly demand more severe measures, including prosecution and possibly even incarceration.

The Benefits Program is aware of investigations of at least three insurance agents in California as well as one in Florida and one in Texas, all for fraud. Several of their HIV clients who bought policies from them have also been contacted. Some have been threatened with fraud charges, but were offered immunity in return for their testimony against the insurance agent. So, at the moment, they appear to be focused only on prosecuting the insurance agents.

This does not mean that someone who purchased a policy in that manner should cancel it out and lose the money you have paid. Unfortunately, it also doesn't provide any guarantee of what might happen in the future. Insurance counselors in the Benefits Program encourage anyone interested in discussing this further to contact them.

This article has been reprinted at The Body with the permission of AIDS Project Los Angeles (APLA).

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This article was provided by AIDS Project Los Angeles. It is a part of the publication Positive Living.
See Also
More on Selling Your Life Insurance (Viatical Arrangements)