SF 166

1st Unofficial Engrossment - 86th Legislature (2009 - 2010) Posted on 12/26/2012 11:17pm

1.1A bill for an act

1.2relating to insurance; regulating life insurance; prohibiting stranger-originated
1.3life insurance;proposing coding for new law in Minnesota Statutes, chapter 60A;
1.4repealing Minnesota Statutes 2008, sections 61A.073; 61A.074.
1.5BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.6    Section 1. [60A.078] SHORT TITLE.
1.7Sections 60A.078 to 60A.0789 may be cited as the "Insurable Interest Act."

1.8    Sec. 2. [60A.0782] DEFINITIONS.
1.9    Subdivision 1. Terms. For the purpose of this act, unless the context clearly
1.10indicates otherwise, the terms in this section have the meanings given them.
1.11    Subd. 2. Act. "Act" means sections 60A.078 to 60A.0789.
1.12    Subd. 3. Business entity. "Business entity" includes, but is not limited to, a joint
1.13venture, partnership, corporation, limited liability company, and business trust.
1.14    Subd. 4. Commissioner. "Commissioner" means the commissioner of commerce.
1.15    Subd. 5. Legitimate settlement contracts. "Legitimate settlement contracts"
1.16mean settlement contracts that comply with Minnesota law governing viatical settlement
1.17contracts and that are not part of or in furtherance of an act, practice, or arrangement that
1.18is prohibited by this act.
1.19    Subd. 6. Life expectancy evaluation. "Life expectancy evaluation" means an
1.20evaluation conducted by any person other than the insurer or its authorized representatives
1.21for the purpose of projecting or estimating how long a particular individual is expected to
1.22live.
2.1    Subd. 7. Person. "Person" means any natural person or legal entity, including, but
2.2not limited to, a partnership, limited liability company, association, trust, or corporation.
2.3    Subd. 8. Policy. "Policy" means an individual or group policy, group certificate,
2.4contract, or arrangement of life insurance affecting the rights of a resident of this state
2.5or bearing a reasonable relation to this state, regardless of whether delivered or issued
2.6for delivery in this state.
2.7    Subd. 9. Policyowner. "Policyowner" means the owner of a policy.
2.8    Subd. 10. Settlement contract. (a) "Settlement contract" means an agreement
2.9between a policyowner and another person establishing the terms under which
2.10compensation or anything of value will be paid or which compensation or value is
2.11less than the expected death benefit of the insurance policy, in return for the owner's
2.12assignment, transfer, sale, devise, or bequest of the death benefit or ownership of any
2.13portion of the policy. Settlement contract also includes:
2.14(1) the transfer for compensation or value of ownership or beneficial interest in a
2.15trust or other entity that owns such a policy if the trust or other entity was formed or
2.16availed of for the principal purpose of acquiring one or more policies, which policy insures
2.17the life of an individual who is a resident of this state; and
2.18(2) a premium finance loan made for a policy by a lender to a policyowner on,
2.19before, or after the date of issuance of the policy where:
2.20(i) the policyowner or the insured receives a guarantee of a future settlement value
2.21of the policy; or
2.22(ii) the policyowner or the insured agrees to sell the policy or any portion of its death
2.23benefit on any date following the issuance of the policy.
2.24(b) Settlement contract does not include:
2.25(1) a policy loan or accelerated death benefit made by the insurer under the policy's
2.26terms;
2.27(2) a premium finance loan in which loan proceeds are used solely to pay premiums
2.28for the policy and loan-related costs, including, without limitation, interest, arrangement
2.29fees, utilization fees and similar fees, closing costs, legal fees and expenses, trustee
2.30fees and expenses, and third-party collateral provider fees and expenses, including fees
2.31payable to letter of credit issuers;
2.32(3) a loan made by a bank or other licensed financial institution in which the lender
2.33takes an interest in a policy solely to secure repayment of a loan or, if there is a default
2.34on the loan and the policy is transferred, the transfer of such a policy by the lender, as
2.35long as the default itself is not pursuant to an agreement or understanding with any other
2.36person for the purpose of evading regulation under this act;
3.1(4) an agreement in which all the parties are closely related to the insured by blood
3.2or law or have a lawful substantial economic interest in the continued life, health, and
3.3bodily safety of the person insured or are trusts established for the benefit of such parties;
3.4(5) any designation, consent, or agreement by an insured who is an employee or an
3.5employer in connection with the purchase by the employer, or by a trust established by the
3.6employer, of life insurance on the life of the employee;
3.7(6) a bona fide business succession planning arrangement:
3.8(i) between shareholders in a corporation or between a corporation and one or more
3.9of its shareholders or one or more trusts established by its shareholders;
3.10(ii) between partners in a partnership or between a partnership and one or more of its
3.11partners or one or more trusts established by its partner; or
3.12(iii) between members in a limited liability company or between a limited liability
3.13company and one or more of its members or one or more trusts established by its
3.14members; or
3.15(7) an agreement entered into by a service recipient, or a trust established by the
3.16service recipient, and a service provider, or a trust established by the service provider, who
3.17performs significant services for the service recipient's trade or business.
3.18    Subd. 11. Stranger-originated life insurance practices. "Stranger-originated life
3.19insurance practices" or "STOLI practices" mean an act, practice, or arrangement to initiate
3.20a life insurance policy for the benefit of a third-party investor who, at the time of policy
3.21origination, has no insurable interest in the insured. STOLI practices include, but are not
3.22limited to, cases in which life insurance is purchased with resources or guarantees from or
3.23through a person or entity, who, at the time of policy inception, could not lawfully initiate
3.24the policy themselves, and where, at the time of inception, there is an arrangement or
3.25agreement, whether verbal or written, to directly or indirectly transfer the ownership of
3.26the policy and/or the policy benefits to a third party. Trusts that are created to give the
3.27appearance of insurable interest and are used to initiate policies for investors violate the
3.28insurable interest requirements and the prohibition against STOLI practices.

3.29    Sec. 3. [60A.0783] INSURABLE INTEREST REQUIRED.
3.30    Subdivision 1. Insurance on life of another. A person may not procure or cause
3.31to be procured or effected a policy upon the life of another individual unless the benefits
3.32under the policy are payable to the insured, the personal representatives of the insured's
3.33estate, or to a person having, at the time the policy is issued, an insurable interest in the
3.34individual insured.
4.1    Subd. 2. What constitutes an insurable interest. Insurable interest, with reference
4.2to insurance on the life of another, includes only the following interests.
4.3(a) An individual has an insurable interest in the life of another person to whom the
4.4individual is closely related by blood or by law or in whom the individual has a substantial
4.5interest engendered by love and affection.
4.6(b) An individual has an insurable interest in the life of another person if such
4.7individual has a lawful and substantial economic interest in the continued life of the
4.8individual insured, as distinguished from an interest that would arise only by or would be
4.9enhanced in value by the death of the individual insured.
4.10(c) An individual party to a contract for the purchase or sale of an interest in any
4.11business entity and, if applicable, a trust or the trustee of a trust of which the individual is
4.12a settlor, has an insurable interest in the life of each other individual party to the contract,
4.13but only for the purpose of carrying out the intent and purpose of the contract.
4.14(d) A trust, or the trustee of a trust, has an insurable interest in the life of an
4.15individual insured under a life insurance policy owned by the trust, or the trustee of the
4.16trust acting in a fiduciary capacity, if the insured is the settlor of the trust; an individual
4.17closely related by blood or law to the settlor; or an individual in whom the settlor otherwise
4.18has an insurable interest if, in each of the situations described in this paragraph, the life
4.19insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable
4.20interest in the life of the insured and the trust is not used, directly or indirectly, as part of or
4.21in furtherance of an act, practice, or arrangement that is otherwise prohibited by this act.
4.22(e) A guardian, trustee, or other fiduciary, acting in a fiduciary capacity, has an
4.23insurable interest in the life of any person for whose benefit the fiduciary holds property,
4.24and in the life of any other individual in whose life the person has an insurable interest so
4.25long as the life insurance proceeds are used primarily for the benefit of persons having an
4.26insurable interest in the life of the insured and the guardianship or fiduciary relationship
4.27is not used, directly or indirectly, as part of or in furtherance of an act, practice, or
4.28arrangement that is otherwise prohibited by this act.
4.29(f) An organization in section 170(c) of the United States Internal Revenue Code
4.30of 1986, as amended through December 31, 2008, has an insurable interest in the life of
4.31any person who consents in writing to the organization's ownership or purchase of that
4.32insurance.
4.33(g) A trustee, sponsor, or custodian of assets held in any plan governed by the
4.34Employee Retirement Income Security Act of 1974, 29 United States Code, subsection
4.351001, et seq., or in any other retirement or employee benefit plan, has an insurable interest
4.36in the life of any participant in the plan provided consent is obtained in writing from the
5.1participant before the insurance is purchased. An employer, trustee, sponsor, or custodian
5.2may not retaliate or take adverse action against any participant who does not consent to
5.3the issuance of insurance on the participant's life.
5.4(h) A business entity has an insurable interest in the life of any of the owners,
5.5directors, officers, partners, and managers of the business entity or any affiliate or
5.6subsidiary of the business entity, or key employees or key persons of the business entity
5.7or affiliate or subsidiary, provided consent is obtained in writing from key employees or
5.8persons before the insurance is purchased. The business entity or affiliate or subsidiary
5.9may not retaliate or take adverse action against any key employee or person who does
5.10not consent to the issuance of insurance on the key employee or key person's life. For
5.11purposes of this subdivision, a "key employee" or "key person" means an individual
5.12whose position or compensation is described in section 101(j)(2)(A)(ii) of the Internal
5.13Revenue Code of 1986, as amended through December 31, 2008.
5.14(i) A financial institution or other person to whom a debt is owed, whether for the
5.15purposes of premium financing or otherwise, has an insurable interest in the life of the
5.16borrower limited to the amount of debt owed plus reasonable interest and service charges.
5.17    Subd. 3. Insured's own life. An individual has an insurable interest in their own life
5.18and an individual of competent legal capacity that procures or effects a policy on their
5.19own life may designate any person as the beneficiary, provided the policy is not part of or
5.20in furtherance of an act, practice, or arrangement that is otherwise prohibited by this act.
5.21    Subd. 4. Reliance on statements. An insurer is entitled to rely upon all reasonable
5.22statements, declarations, and representations made by an applicant for life insurance
5.23relative to the existence of an insurable interest; and no insurer shall incur legal
5.24liability, except as set forth in the policy, by virtue of untrue statements, declarations, or
5.25representations so relied upon in good faith by the insurer.
5.26    Subd. 5. Consent of insured. A policy upon the life of an individual, other than
5.27a policy of noncontributory group life insurance, may not be effectuated unless, on or
5.28before the time the policy is effectuated, the individual insured, having legal capacity to
5.29contract, applies for or consents in writing to the policy and its terms. Consent may be
5.30given by another in the following cases:
5.31(1) a parent or a person having legal custody of a minor may consent to the issuance
5.32of a policy on a dependent child;
5.33(2) a court-appointed guardian of a person may consent to the issuance of a policy
5.34on the person under guardianship;
5.35(3) a court-appointed conservator of a person's estate may consent to the issuance of
5.36a policy on the person whose estate is under conservatorship;
6.1(4) an attorney-in-fact may consent to the issuance of a policy on the person that
6.2appointed the attorney-in-fact for the limited purpose of replacing one or more policies
6.3with one or more new policies, provided the aggregate amount of life insurance on the
6.4person as the result of the replacement remains the same or decreases;
6.5(5) a trustee of a revocable trust may consent to the issuance of a policy on the
6.6life of a settlor of the trust; and
6.7(6) a court of general jurisdiction may give consent to the issuance of a policy upon
6.8a showing of facts the court considers sufficient to justify the issuance of the policy.

6.9    Sec. 4. [60A.0784] PROHIBITED PRACTICES.
6.10It is unlawful for any person to:
6.11(1) procure or cause to be procured or effected a policy in violation of section
6.1260A.0783;
6.13(2) engage in STOLI practices or otherwise wager on life;
6.14(3) solicit, market, or otherwise promote the purchase of a policy for the purpose of
6.15or with an emphasis on the subsequent sale of the policy in the secondary market;
6.16(4) enter into a premium finance agreement with any person or agency, or any
6.17person affiliated with such person or agency, pursuant to which the lender or any person
6.18affiliated with the lender shall receive any proceeds, fees, or other consideration, directly
6.19or indirectly, from the policy or policyowner or any other person with respect to the
6.20premium finance agreement or any settlement contract or other transaction related to
6.21such policy that are in addition to the amounts required to pay the principal, interest, and
6.22service charges related to policy premiums pursuant to the premium finance agreement or
6.23subsequent sale of such agreement; provided, further, that any payments, charges, fees,
6.24or other amounts in addition to the amounts required to pay the principal, interest, and
6.25service charges related to policy premiums paid under the premium finance agreement
6.26shall be remitted to the insured or to the insured's estate if the insured is not living at the
6.27time of the determination of the overpayment; or
6.28(5) enter into or to offer to enter into a settlement contract prior to the issuance of a
6.29policy that is the subject of the settlement contract or proposed settlement contract.

6.30    Sec. 5. [60A.0785] PROHIBITION; ENTRY INTO LIFE SETTLEMENT
6.31CONTRACT; LEGITIMATE INSURANCE TRANSACTIONS.
6.32    Subdivision 1. Prohibition; entry into life settlement contract. No person at any
6.33time prior to, or at the time of, the application for, or issuance of, a policy, or during a
6.34two-year period commencing with the date of issuance of the policy, shall enter into a
7.1life settlement contract regardless of the date the compensation is to be provided and
7.2regardless of the date the assignment, transfer, sale, devise, bequest, or surrender of the
7.3policy is to occur, except as otherwise provided by law.
7.4    Subd. 2. Presumption. When a rebuttable presumption is created under this section,
7.5the burden of rebutting the presumption is on the policyowner and not the insured.
7.6    Subd. 3. Legitimate insurance transactions. Nothing in this act prevents:
7.7(1) any policyowner, whether or not the policyowner is also the subject of the
7.8insurance, from entering into a legitimate settlement contract;
7.9(2) any person from soliciting a person to enter into a legitimate settlement contract;
7.10(3) a person from enforcing the payment of proceeds from the interest obtained
7.11under a legitimate settlement contract; or
7.12(4) the assignment, sale, transfer, devise, or bequest with respect to the death benefit
7.13or ownership of any portion of a policy, provided the assignment, sale, transfer, devise, or
7.14bequest is not part of or in furtherance of STOLI practices.

7.15    Sec. 6. [60A.0787] PROCESSING CHANGE OF OWNERSHIP OR
7.16BENEFICIARY REQUESTS.
7.17    Subdivision 1. Obligation to process change of ownership or beneficiary
7.18requests. Upon receipt of a properly completed request for change of ownership or
7.19beneficiary of a policy and, if applicable, the completed questionnaire described in
7.20this section, the insurer shall respond in writing within 30 calendar days with written
7.21acknowledgment confirming that the change has been effected or specifying the reasons
7.22why the requested change cannot be processed. The insurer shall not unreasonably delay
7.23effecting change of ownership or beneficiary and shall not otherwise interfere with any
7.24permitted settlement contract entered into in this state.
7.25    Subd. 2. Written questionnaire. If the insurer receives a request for change of
7.26ownership or beneficiary, the insurer may require, as a condition of effecting the requested
7.27change, that the policyowner complete and return a written questionnaire designed to
7.28determine whether the change request relates to or is made in accordance with a settlement
7.29contract. The questionnaire shall be in a form approved by the commissioner and shall
7.30include, but not be limited to, the following:
7.31(1) the definition of settlement contract;
7.32(2) an inquiry regarding whether the request for change of ownership or beneficiary
7.33relates to or is made in accordance with a settlement contract;
8.1(3) if the answer to clause (2) is "yes," then an inquiry regarding whether the insured
8.2underwent a life-expectancy evaluation during the 18 months immediately preceding
8.3the issuance of the policy;
8.4(4) if the answer to clause (3) is "yes," then an inquiry regarding whether, during
8.5the same period, the results of the life-expectancy evaluation were shared with or used
8.6by any person for the purposes of determining the actual or potential value of the policy
8.7in the secondary market;
8.8(5) if the answer to clause (4) is "yes," then an inquiry regarding whether either
8.9of the following conditions exist:
8.10(i) there was an agreement or understanding before issuance of the policy, between
8.11the insured and another person, to guarantee any liability or to purchase or stand ready to
8.12purchase the policy, including through an assumption or forgiveness of the loan; or
8.13(ii) the policyowner funded a portion of the policy premiums by other than the
8.14following means:
8.15(A) using personal assets provided by the insured or by a person who is closely
8.16related to the insured by blood or who has a lawful substantial economic interest in the
8.17continued life, health, and bodily safety of the insured; or
8.18(B) full recourse liability financing incurred by the insured;
8.19(6) a disclosure that presenting false material information, or concealing material
8.20information, in connection with the questionnaire is defined under the laws of this state
8.21as a fraudulent act; and
8.22(7) a signed certification by the policyowner that the answers and information
8.23provided in and pursuant to the questionnaire are true and complete to the best of their
8.24knowledge and belief.
8.25    Subd. 3. Other inquiries. Nothing in this section should be interpreted to limit an
8.26insurer's ability to make other inquiries to detect STOLI practices.
8.27    Subd. 4. Fraternal benefit societies. Nothing in this act shall prohibit a fraternal
8.28benefit society regulated under chapter 64B from enforcing the terms of its bylaws or rules
8.29regarding permitted beneficiaries and owners.

8.30    Sec. 7. [60A.0788] FRAUDULENT ACTS.
8.31    Subdivision 1. Fraudulent acts. A person who commits a fraudulent act as defined
8.32in this section commits insurance fraud and may be sentenced under section 609.611,
8.33subdivision 3.
8.34    Subd. 2. List of fraudulent acts. All of the following acts are fraudulent when
8.35committed by a person who, with intent to defraud and for the purpose of depriving
9.1another of property or for pecuniary gain, commits, or permits any of its employees or its
9.2agents to commit them:
9.3(1) failing to disclose to the insurer where the insurer has requested such disclosure
9.4that the prospective insured has undergone a life expectancy evaluation;
9.5(2) misrepresenting a person's state of residence or facilitating the change of the state
9.6in which a person resides for the express purpose of evading or avoiding the provisions
9.7of this act; and
9.8(3) presenting, causing to be presented, or preparing with knowledge or belief that it
9.9will be presented to an insurer any false material information, or concealing any material
9.10information, as part of, in support of, or concerning a fact material to one or more of
9.11the following:
9.12(i) a questionnaire as provided for under section 60A.0787; or
9.13(ii) any other documents or communications, whether written or verbal, which are
9.14intended to detect STOLI practices or demonstrate compliance with this act.

9.15    Sec. 8. [60A.0789] REMEDIES.
9.16    Subdivision 1. Actions to recover death benefits. (a) If the beneficiary, assignee, or
9.17other payee receives the death benefits under a life insurance policy initiated by STOLI
9.18practices or a policy procured or effected in violation of section 60A.0783, the personal
9.19representative of the insured's estate or other lawfully acting agent may maintain an action
9.20to recover such benefits from the person receiving them.
9.21(b) Where a person receives the death benefit as a result of a nonwillful violation of
9.22this act, the court may limit the recovery to unjust enrichment, calculated as the benefits
9.23received plus interest from the date of receipt, less premiums paid under the policy by
9.24the recipient and any consideration paid by the recipient to the insured in connection
9.25with the policy.
9.26(c) Where a person receives the death benefits as the result of a willful violation of
9.27this act, the court may, in addition to actual damages, order the defendant or defendants to
9.28pay exemplary damages in an amount up to two times the death benefits. A pattern of
9.29violations of this act and conduct involving one or more fraudulent acts are evidence of
9.30willfulness. The exemplary damages shall be paid to one or more governmental agencies
9.31charged with combating consumer fraud, including the Department of Commerce.
9.32(d) The court may award reasonable attorney fees, together with costs and
9.33disbursements, to any party that recovers damages in any action brought under this
9.34subdivision.
10.1    Subd. 2. Enforceability of contracts. Any contract, agreement, arrangement, or
10.2transaction prohibited under this act is voidable.
10.3    Subd. 3. Effect on other law. This act shall not:
10.4(1) preempt or limit other civil remedies, including, but not limited to, declaratory
10.5judgments, injunctive relief, and interpleaders;
10.6(2) preempt the authority or relieve the duty of other law enforcement or regulatory
10.7agencies to investigate, examine, and prosecute suspected violations of law;
10.8(3) limit the powers granted elsewhere by the laws of this state to the commissioner
10.9or an insurance fraud unit or the attorney general to investigate and examine possible
10.10violations of law and to take appropriate actions against wrongdoers; or
10.11(4) limit the power of this state to punish a person for conduct that constitutes a
10.12crime under other laws of this state.

10.13    Sec. 9. REPEALER.
10.14Minnesota Statutes 2008, sections 61A.073; and 61A.074, are repealed.

10.15    Sec. 10. EFFECTIVE DATE.
10.16This act is effective for policies issued on or after August 1, 2009.