In a case of first impression, the Fourth Circuit U.S. Court of Appeals recently ruled that the Virginia Viatical Settlements Act (Act) does not violate the dormant Commerce Clause of the U.S. Constitution. In Life Partners, Inc. v. Morrison, Nos. 06-1370 and 06-1371, 2007 WL 1240301 (4th Cir. Apr. 30, 2007), the viator was a terminally ill Virginia resident. The viator filed a complaint with the Virginia Bureau of Insurance against the Texas-based viatical settlement provider, Life Partners, Inc. (Life Partners), five months after accepting a settlement amount from Life Partners that was below the minimum permitted under the Act.
Viatical Settlement Regulation
Viatical settlement regulation developed in the 1990s due to regulatory concern over potential abuses in viatical settlements, transactions in which life insurance policies held by terminally ill insureds are purchased for less than the expected death benefit. The National Association of Insurance Commissioners (NAIC) initially developed the Viatical Settlements Model Act (Model) over 11 years, from 1993 to 2004. Although Life Partners, Inc. involved a terminally ill viator, viatical settlement regulation has been under review recently by a number of states and the NAIC due, in part, to the growth of the life settlement industry, which involves settlements in which the policyholder is not terminally ill. Under the Model, both types of settlements are governed as “viatical settlements.”
The state statutes and regulations based on the Model regulate viatical settlements and the individuals or entities involved in these transactions in a variety of ways, including: provider and broker licensing requirements; form filing and approval requirements; annual reporting requirements; privacy restrictions with respect to disclosing the identity and the financial or medical information of an insured; examination and investigative authority; disclosure requirements; prohibited practices; advertising regulations; fraud prevention and control; and provisions for criminal penalties, civil remedies, and regulatory enforcement actions.1 The Model has been subject to extensive amendment during the course of its development, and the NAIC is currently in the process of amending it further.
Dormant Commerce Clause Challenge
In Life Partners, Inc., Life Partners claimed that enforcement of the Act violated the dormant Commerce Clause because the Act gives Virginia regulators authority over all viatical settlements involving Virginia viators, resulting in regulatory control that affects commerce occurring outside Virginia. On motion for summary judgment, the State Corporation Commission (Commission) made two arguments. The Commission argued, first, that the law did not violate the dormant Commerce Clause and, second, that Congress authorized state regulation of viatical settlements through the McCarran-Ferguson Act. The district court ruled that the Virginia law did not violate the dormant Commerce Clause, relying on the balancing test in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). The district court found that (1) the Act did not discriminate against interstate commerce, (2) the Act served a legitimate and important local purpose, and (3) any burden on commerce was only incidental. The district court did not reach the Commission’s second argument.
On appeal, the Fourth Circuit considered the McCarran-Ferguson argument, stating that “if the McCarran-Ferguson Act authorizes the States to regulate viatical settlements, the issue of whether the Virginia Viatical Settlements Act burdens interstate commerce becomes irrelevant.” Life Partners, 2007 WL 1240301, at *6. The court summarized the relationship between the McCarran-Ferguson Act and the dormant Commerce Clause in this context, stating that the McCarran-Ferguson Act protects from a dormant Commerce Clause challenge any state law (1) related to the regulation of the business of insurance or (2) enacted for the purpose of regulating the business of insurance, reserving from its operation only the federal antitrust laws.
In determining whether the Act falls under the scope of the McCarran-Ferguson Act, the court considered the purpose of the Act, which is to protect terminally ill Virginia residents who find it necessary to sell their life insurance policies. The court noted the need for regulation in this area because “[t]he power imbalance between the viator and the provider creates a substantial potential for abuse.” Id. at *2. The court also noted that the Act regulates agreements that essentially modify the two-party arrangement between insurer and insured to include a third party. When viatical settlements are entered into, both the insurer and insured face changed obligations and economic risks. The court also noted the state’s interests in viatical settlements, notably: (1) that residents be protected from the potentially unscrupulous conduct of viatical settlement providers, and (2) that residents not defraud insurers in an attempt to realize a quick financial return. Id. at *10. The court stated that, most importantly, the Act “regulates directly the conduct and relationships of those traditionally engaged in the insurance business — insurers and insureds.” Id. at *13.
After considering the factors described above, the court
ha[d] little difficulty in concluding that the Virginia Viatical Settlements Act relates to the regulation of the business of insurance; was enacted for the purpose of regulating the business of insurance; and indeed regulates directly and substantially the actual business of insurance. Thus the McCarran-Ferguson Act saves the [Viatical Settlements] Act from any dormant Commerce Clause challenge.
Id. at *14.
The opinion presents obstacles for similar dormant Commerce Clause challenges to state viatical settlement regulation in the Fourth Circuit and perhaps in other circuits as well. Both insurers and viatical settlement providers are encouraged to follow developments in this rapidly evolving area of the law.
This article is a part of the FOCUS on the Insurance Industry Summer 2007 Newsletter.