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Premium Financing Woes
Premium Financing Woes
10.05.2022
Claim Scenario:
John and Jane Doe, an extremely wealthy couple, met
with their insurance agent who advised that $10 million in life insurance
coverage would be appropriate given their financial status and estate planning
needs. He recommended a whole life policy that earned dividends and accumulated
cash value. Given the couple's age and health concerns, annual premiums for the
policy were determined to be approximately $275,000.When the Does advised the
agent that they were unable to pay the premiums out of pocket and unwilling to
liquidate substantial portions of their investment portfolio to do so he
recommended premium financing. Under the plan he outlined for the Does,
premiums for the first few years could be borrowed, with future premiums paid
by accumulated cash values of the policy. The agent backed up his
recommendation with a professional presentation provided by the premium
financing company, and the Does agreed to finance the premiums for the first
five years of the policy.
Five years later the Does, having incurred loans of
over $1.6 million plus interest, discovered that the policy's earned dividends
were insufficient to pay the premiums on an ongoing basis, and filed claims
against the agent, the carrier, and the financing company. Although the agent
responded that he had not guaranteed any level of accumulated cash value or
that it would be sufficient to pay premiums after five years he was able to
produce no written documentation other than e-mails characterizing the
financing scheme as "solid" and "extremely reliable".
Risk Management Tips:
Claims related to premium financing generally
involve relatively large amounts as the involved policies have high limits and
premiums to match. In many cases collateral is aggressively sought by the
financing company and often ultimately lost. Given the foregoing, full
disclosure of the risks and mechanics of the transaction must be made to the
client and comprehensive documentation provided and maintained by the agent.
Agents should consider requesting involvement of the client's own legal counsel
to ensure that the financing structure is proper and understood by the clients.
Doing so will provide additional protection to the agent in the event of a
claim. Bear in mind that in many jurisdictions promoting premium financing may
be considered as creating a special or fiduciary relationship with the client
which may in turn serve to elevate the agent’s professional standard of care
and disclosure.
All information provided in this blog is for
informational purposes only. The sources used are presumed accurate. CalSurance
Associates, Brown & Brown Program Insurance Services, Inc. and Brown &
Brown, Inc. will not be liable for any errors, omissions, losses, injuries or
damages arising from its display or use and will not assume responsibility for
any misguided information. No guarantees are implied.
Written by
CalSurance
Published October 2022
