It was a goofy business to begin with: a secondary market in life insurance policies in which thousands of older people tried to make a quick buck by taking out multi-million dollar life insurance policies on themselves and then selling the policies to investors.
Between 2004 and 2008, tens of billions of dollars in these insurance policies actually changed hands. Under the deals, the investors would pay the premiums until the insured person dies, at which point they could then collect the death benefit.
Bottom falls out
Then when the bond market declined making some policies less profitable than expected, the market went bust. That's when the insurers filed hundreds of lawsuits in an attempt to cancel policies they claim were never intended as estate-planning tools, but were instead meant to enrich investors speculating on the lives of the elderly.
The industry also asked regulators to stop investors from wagering with their products. Now, some investors are filing their own suits claiming that insurers' own agents and managers had encouraged investor-driven sales to boost their compensation, and that the industry cried foul only when faced with big payouts on the policies.
The investors want the insurers to be forced to honor the contracts, or to refund all of the premiums they've paid. Some are seeking punitive damages. The claims appear in filings in state and federal courts nationwide, involving dozens of policies.
The life-policy secondary market was one of many that went up in smoke during the financial meltdown of 2008-2009. But it was also hurt by revised actuarial tables, which show older people living longer. Some of the suits have been filed by relatives of the deceased elderly, alleging that death benefits belong to the family members.
The insurers contend they are acting in the name of good public policy: state insurable interest laws require an insurance buyer to have a bigger stake in the insured person's continued well-being than in his death, something the investors clearly didn't.
Meanwhile, in a lawsuit filed in Texas, investors allege that insurers including American International Group (AIG) similarly once welcomed stranger-originated policies as a way to boost revenue. They claim AIG relaxed or disregarded their own underwriting guidelines, disregarded any issues or 'red flags' raised in the underwriting process, and did not seek information that they now contend, after the fact, to be material.
In court filings, AIG denies the allegations and has alleged misrepresentation and fraud on the part of the investors.