THE BENEFITS OF A SECONDARY MARKET FOR LIFE INSURANCE POLICIES

HEADNOTE

Editors' Synopsis: This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of "impaired" policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Canceling Insurance Policies When Closing a Business

Regardless of why you may be closing your business, you must take certain steps to protect your financial and legal interests as well as your reputation. After all, you may go into business again. Just as you want people to remember how you ran your company, you also want to be known for the professional manner you demonstrated when closing your business.

Presumably, you were careful to take out insurance policies that would see you through certain inevitable situations. Now you must take the same care to cancel these policies. This is especially important when it comes to protecting your personal assets.

Once you've made the final decision to close shop, you'll need to notify the people with whom you've been doing business. In addition to notifying the bankers and suppliers, for instance, you'll need to contact your service providers, which include insurers. Like the others, insurers will want to know your final day for doing business. Insurers will also want to know about any possible liabilities that could arise once you're no longer in business. Don't gloss over this too quickly; you'll want to provide an honest and comprehensive response. For example, if you're aware of any pending legal threats or problems, you'll want to disclose that information (but only under the guidance of an attorney). If you're not forthcoming, you could risk being denied coverage at a later date -- perhaps when you launch a new company. And remember, news travels fast in the business community. Once your reputation is tainted it's hard to get it back.

Generally speaking, you can cancel your insurance policy at any time, but it's important to give the companies you've been working with some notice. You may need to return the original policy or sign a "policy release" or "lost policy release." But, again, consult with your attorney before signing anything. Note, too, that you will be responsible for paying any unearned premium. Sometimes policyholders incur financial penalties for canceling their policies, so it's wise to examine your contract before stopping coverage.

You may also opt to simply not renew the policy when it expires. In this scenario, you would time the closing of your business with the expiration date of your policies. Be careful though: you don't ever want to leave yourself unprotected. One disaster could wipe you out.

When a policy is canceled, some insurance companies may issue a "short rate" penalty, which refers to the amount of a premium that the company keeps. Let's say you've taken out a one-year policy and you want to cancel six months into the year. The "short rate" penalty would enable the insurance company to keep half of the yearly premium.

You'll also want to examine your policy to determine if you are subject to "surrender charges," another type of cancellation policy. If the policy does not mention such a charge, you should not be penalized. But, again, you'll want to consult with your attorney on this matter.

As you cancel the various policies you've purchased, it might be a good time to reevaluate what you could do the next time. In the process of closing your business, you'll no doubt learn what you could have done differently. Your insurance policies, for example, may look different if you launch a new business. Also, affordable insurance is becoming increasingly difficult to find because of high costs, industry consolidations, and other market factors. Still, the next time you'll want to shop around and look as carefully at the insurance companies as they are looking at you.

"How to Draft and Interpret Insurance Policies"

By Anonymous
Publication: American Agent & Broker

This source book for policyholders, underwriters, intermediaries, claim examiners, agents and consultants explores insurance contract language, format, interpretation and customization.

Author Kenneth Wollner, JD, a former underwriter and insurance company executive with 30 years of experiencein drafting and interpreting insurance policies and current managing director of an independent consulting firm, uses more than 300 insurance contract provisions and court decisions to illustrate concepts and explain drafting techniques. He also of fers practical tips for handling common problems, and provides lists of drafting conventions and several surveys, including one on the insurability of punitive damages.

A section of the book is devoted to each of the following topics: * Methods of minimizing ambiguity in insurance policy text.

* Statutory and administrative law.

* Public policy.

* Promises, conditions, warranties and representations.

* Multiple causation.

* Insuring agreements and exclusions.

* Endorsements.

The book costs $185.

To order, contact Casualty Risk Publishing at (800) 862-9792.

Temblor expected to unleash avalanche of lawsuits; vaguely worded leases, insurance policies to...

Commercial property owners and tenants who faced a mess of damage after the Jan. 17 Northridge earthquake are still facing a mess of legal ad insurance issues that could result in a spate of lawsuits later this year.

Experts said many commercial leases and some earthquake insurance

policies contain vague language that is bound to result in unresolved disputes - as property owners, tenants and insurance companies try to sort out who is responsible for paying for damages from the quake.

According to Jeffrey Master, litigation partner at Cox, Castle & Nicholson law firm in Century City, disputes regarding earthquake coverage usually fall into one of two classes: disagreements between tenants and landlords about who is responsible for paying for certain damages, and misunderstanding between insurance companies and property owners regarding the deductible portion of earthquake policies.

Masters and Rick Mallory of the downtown L.A.-based law firm Allen, Matkins, Leck, Gamble & Mallory both said the disputes are going to mean long hours of negotiations among the various parties. Many disputes will be resolved through negotiations and many will no doubt go to private mediators to avoid lengthy lawsuits. But ultimately, Masters said, "there are bound to be dozens of lawsuits" arising from cases that can't be settled.