by John Darer® CLU ChFC MSSC RSP CLTC
Oregon Federal Magistrate Judge Janice M. Stewart found on December 5, 2014 that Ringler Associates and its agent Paul Hoffman, did not owe a continuing duty to Marie Westrope or Reggie Kelly to advise them of ELNY's deteriorating financial condition in the time period following the placement of their structured annuities. In the 25 page decision the judge however, DENIED part of the motion to dismiss regarding the statutory claims in Count II (paragraph 3 below), which allows the case to continue. [ see MARIE WESTROPE and REGGIE KELLY, individually and on behalf of all other similarly situated,Plaintiffs, v. RINGLER ASSOCIATES INCORPORATED, PAUL HOFFMAN, and DOES 1-100, Defendants. USDC Oregon Portland Divison Case 3:14-cv-00604-ST Doc 82]
In 1985, following litigation to recover damages for their personal injuries, plaintiffs, Marie Westrope (“Westrope”) and Reggie Kelly (“Kelly”), each entered into a structured settlement agreement (“SSA”) in which they released the 1985 Defendants in exchange for the right to receive lifetime annuity payments. The SSAs were funded by the 1985 Defendants/Insurers with Executive Life Insurance Company of New York (“ELNY”) annuity contracts brokered by present defendants, Ringler Associates Incorporated (“Ringler”) and its employee, Paul Hoffman (“Hoffman”).
After ELNY was declared insolvent in 2012, plaintiffs’ annuity payments from ELNY were reduced by 52% and 50% respectively. Plaintiffs filed this action individually and on behalf of a class of similarly situated individuals, alleging a claim for alleging a claim for negligence based on defendants brokering “qualified assignment” annuity contracts with ELNY and then failing to disclose facts about ELNY’s deteriorating financial condition (Count I) and a claim for violating AK Stat § 21.33.037, ORS 746.310, and similar statutes in six other states based on defendants assisting ELNY, an unlicensed insurer, to transact business in those states (Count II).
The term "qualified assignment" annuity contract, as used in the Ringler decision, is a misnomer. A qualified assignment describes a contract between a defendant or defendant's insurer and the qualified assignment company to effectuate a substitution of obligors with respect to a periodic payment obligation. Valid qualified assignments comply with the guidelines set forth in IRC 130. A qualified assignment company ultimately purchases the structured settlement annuity as a qualified funding asset [defined at IRC 130(d)]. There is no distinction between a structured settlement annuity contract that is used to fund a periodic payment obligation by a qualified assignment company or a structured settlement annuity that is purchased by a defendant or insurer on a "buy and hold" or unassigned purchase. There is no difference in cost or a separate regulatory filing. The same annuity form is used.
Ringler had conceded that the negligence claim would survive their motion to dismiss
under Alaska law, but not under Oregon law. Thus there was no dispute as to Kelly's case surviving the motion leaving the Court to decide the motion as to Westrope's negligence claim.
Role of Structured Settlement Broker| C0urt Holds Defendants' Experts Have No Fiduciary Duty to Plaintiffs
An insurance agent or broker who agrees to procure insurance for a fee "owes a duty to exercise reasonable skill and care in obtaining insurance" under Oregon law.
Ringler conceded that while they brokered the contracts and that brokers generally owe a heightened duty to their clients; however the plaintiffs were not their clients; their clients were the settlement defendants in the personal injury cases (from 1985) who retained their brokerage services, who bought the annuities (actually the qualified assignment company did-in one of the cases it appeared that a Ringler owned qualified assignment company did, according to our sources) and with whom they had privity. The Court cited seminal cases Macomber v. Travelers Prop. & Cas. Corp., 804 A2d 180, 194 (Conn 2002). and Adrian v Mesirow Financial Structured Settlements LLC Adrian v. Mesirow Fin. Structured Settlements, LLC, 736 F Supp2d 404 (D PR 2010) in its analysis and concluded that defendants owed no fiduciary duty to plaintiffs as their broker, under that theory.
Plaintiffs as Third-Party Beneficiaries Theory May Bear Fruit
The privity doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties [Wikipedia]
Indeed the Court says “The common thread in the special relationships that the [Oregon] Supreme Court has recognized as giving rise to a duty of care to protect against purely economic loss is that the professional is acting, at least in part, to further the economic interests of the person to whom the duty is owed.”
A third party alleging a violation of a professional duty may bring a negligence claim, as long as it is an intended beneficiary of the contract. A third-party beneficiary exists “if it appears from the terms of the contract, interpreted in light of the accompanying circumstances, that the purpose of the person securing the insurance was to benefit, at least in part, someone in addition to, or other than, himself.” The Court cited the Ninth Circuit which has recognized, “[a] structured settlement takes place when a tort defendant or its liability carrier purchases an annuity, with the tort plaintiff as the beneficiary, to settle a civil lawsuit.” Legal Econ. Evaluations, Inc. v. Metro. Life Ins. Co., 39 F3d 951, 952 (9th Cir 1994).
"Concluding that the negligence claim survives under Oregon law based on the plaintiffs’ status as third-party beneficiaries and construing the allegations in the Complaint in favor of plaintiffs, plaintiffs were intended third-party beneficiaries of the SSAs which were purchased to provide for their lifetime care. This status demanded a heightened duty of care from defendants to exercise reasonable care in procuring SSAs for them."
Continuing Duty Theory
Plaintiffs also alleged that defendants owed a continuing duty until ELNY’s liquidation to
inform them of the downfall of the junk bond market and of ELNY’s failing health. The Oregon Court cited this general rule, since Oregon law does not specifically address it:
“[t]he general rule is that an insurance agent or broker is not a guarantor of the financial condition or solvency of the company from which he obtains the insurance” . . . [and] “where the company was solvent when the policy was procured, its subsequent insolvency generally does not impose liability on the agent or broker.” citing AYH Holdings, Inc. v. Avreco, Inc., 826 NE2d 1111, 1132 (Ill App Ct 2005) (first alteration in original), quoting Higginbotham & Assocs., Inc. v. Greer, 738 SW2d 45, 46-47 (Tex App 1987).
This seems to suggest regardless of who engages the broker. [ Note that insolvencies are typically excluded from insurance broker error's and omissions policies]
The exception to the rule is if the subsequent insolvency of an insurer imposes liability on an agent or broker if the agent or broker knew or should have known of the insurer’s precarious condition at some point when the insured could have been protected., citing Higginbotham & Assocs., Inc., 728 SW2d at 47; see Hobbs v. Midwest Ins., Inc., 570 NW2d 525, 530 (Neb 1997). The court concluded that, "even if defendants had a continuing duty to notify plaintiffs of ELNY’s declining financial condition under Oregon law, the Complaint fails to allege sufficient facts to support a negligence claim for breach of that duty.
Breach of Duty of Care
The Court concluded that the general allegation as to why ELNY was an unreliable choice “at the time”
defendants brokered and finalized plaintiffs’ SSAs is sufficient to allege a breach of defendants’
duty of care.
The Court stated " defendants’ argument ignores paragraph 50 (of the Complaint) which alleges: “At the time Defendants brokered Plaintiffs’ and class members’ SSAs, a reasonable broker would have disclosed” three specific risks. That time period was 1985 for plaintiffs. Id, ¶¶ 17-18 (emphasis
added). One of the undisclosed risks is “that ELNY managed a significantly riskier asset pool
than other competing annuity sellers which increases ELNY’s risk of defaulting on its SSA
payment obligations.” Id, ¶ 50. That “risker asset pool” allegedly resulted from heavy investment in junk bonds by ELNY’s parent companies, FEC and Executive Life Insurance Company of California, which clearly predated the collapse in value of junk bonds in 1986. " [ the complaint also cites the 1982 Baldwin United collapse which was at one time cited as one of the largest 20 business failures of the 20th century-see inset for more on Baldwin United]
Why was Baldwin United Significant?
Baldwin United's $9 billion bankruptcy was at the time, in 1983, the largest bankruptcy ever! [see Wikipedia]. Hard to ignore then! Hard to ignore now!
NY Times Business Day 1/4/1983 cites that two insurance units of Baldwin United Insurance Units were" "financially impaired" for six months in 1982
NY Times Business Day 9/27/1983 cites "The Baldwin-United Corporation, the Cincinnati piano company that borrowed heavily to move into the insurance business, filed for protection under the bankruptcy laws yesterday in one of the largest financial collapses in American history"
David Ingram a risk management historian cites the 1983 "Baldwin United Shell Game" in an ongoing list of risk management failures that includes Executive LIfe
Statutory Claims Regarding Transacting Business with Unlicensed Insurer
In denying the defendants' motion in part, the Court stated that words “directly or indirectly with respect to domestic risks are sufficiently broad to encompass activities by a person acting outside Oregon to assist an unauthorized insurer in selling an annuity to an Oregon resident that names an out-of-state straw corporation as the owner of the annuity for tax purposes. Absent any contrary authority, at this juncture, the allegations in the Complaint are sufficient to state a claim by Westrope against defendants for violating ORS 746.310".