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Ohio "Investment Advisor" Is One Bad "Apple"

One of Patrick Hindert's neighbors to the North is going "up the river". William R. Appleton, II, the "bad apple" former insurance agent from Maineville, Ohio pulled a "mini Madoff" on unsuspecting victims, posing as an investment advisor and  convincing his insurance clients to invest, then placed the investments in his own personal accounts, paid his own expenses and paid off earlier investors. The bilking took place from 2003-2007.  Appleton plead guilty in March 2009. According to the Ohio Department of Insurance, the slime ball was sentenced earlier this month to serve 97 months for one count of mail fraud concurrent with 5 years for one count of income tax evasion.

It is very easy to check the credentials who hold themselves out as "investment advisors" online. Do not invest with anyone without verifying credentials.

Life insurance policy "contestable period"

Someone has made a comment on another industry blog concerning life insurance that I though would best be addressed in this forum. The writer appears confused over the significance of the contestable period on a life insurance policy. Here's what she writes:

"I have noticed lately that there are a lot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect".

The contestable period defines a measure of time during which a life or health insurance company can protect itself from material misstatements made in an insurance application. Consider that a nominal down payment could turn into a $1 million claim in a matter of days or hours and perhaps you will understand the need for the life insurance company to have all of the information at its disposal to properly evaluate the risk.

Let us assume. for example, that you applied for a life insurance policy and lied on the application that you never smoked. If during the contestable period the insurance company discovers that you in fact smoke like a chimney, they can rescind the policy, and refund your money. If, however, they discovered this after the contestable period had expired, they could not take the policy away from you. Contestable periods are defined in the policy and are typically 1-2 years. Some policies have extended periods for fraud.

With respect to "banking on the policy", there is plenty of evidence that insurance companies pay claims during the contestable period. If you prepay your life insurance application or disability insurance application you will receive a conditional receipt. The receipt spells out the conditions for which a claim will be paid during the underwriting period. Assume someone dies in a motor vehicle accident one month after a life insurance application and insurance physical have been submitted to the insurer. Should there be a claim during this time, the insurance company will typically continue underwriting the application as if the decedent were alive, collect all the underwriting requirements to determine if the decedent would have been insurable. If so. it pays the claim.

A contestable period is an important consideration in the event you are replacing one insurance contract with another. If you have had a policy with company A for 5 years, the contestable period is over. If you go to policy B to save a few bucks but in aspiring to be the next "Leland Van Lew" you neglect to disclose your "crocodile wrestling" and "volcano luging" avocations on the app, you may have some problems.

The classic scene from Universal Pictures' Along Came Polly features a passionate promotion of risk taking "Leland Van Lew" (portrayed by Bryan Brown) for insurance by "Sanford Lyle" (portrayed by Philip Seymour Hoffman) to a panel of "insurance underwriters". What is notable is that "the insurance" was approved after FULL DISCLOSURE.

The Bird May Be The Word, But The Vulture Isn't The Only Bird In the Insurance Jungle

The synopsis for "Vulture Culture: Dirty Deals, Unpaid claims and the coming collapse of the Insurance Industry" by Eric D. Gerst (Amacom publishing 4/1/2008) reads like an alterrnative book jacket description for the John Grisham novel "The Rainmaker", or a review for the 1995 film of the same name:

"We all dutifully write out checks for insurance coverage each month, assuming that if the worst should occur, we'll be protected financially. But what we don't know about the insurance business could - and most probably will - hurt us. "Vulture Culture" is a hard-hitting expose of the sorry state of the industry, from tales of rampant, widespread corruption to inconsistent state regulations and the inability - and often unwillingness - of the federal government to protect the rights of denied claimants.The book takes readers into a world of bid-rigging, fraudulent commissions, and secret payoffs, revealing shocking abuses and ominous new trends. Readers will hear about a rogue's gallery of shady executives, including a CEO whose massive claim denial schemes eventually got him fired ...at great cost to consumers. From the Hurricane Katrina fiasco of unpaid claims, to a revolving door in which former insurance executives regulate their own industry before returning to it themselves, this is a shocking account of an industry on the brink of collapse, and what must be done to fix it before it's too late".

Perhaps these two stanzas of an "Invisible Bankers" era song sum up one side of the story:

"Nowhere to turn around and catch your breath
It's all relatively trouble free
No need to bother with the bottom line
Or a money back guarantee

You sign a deal that's been etched in stone
It's absolutely cut and dry
That's when they got you in the danger zone
And the only way out is to die"

from "Vulture Culture"-The Alan Parsons Project (1985)

From reading the work of this latter day incarnation of Andrew Tobias, it's conceivable that one could develop the perception that EVERY insurance company is entirely corrupt and we should all be suspect. While not downplaying the serious subject matter of Gerst's book, consumers must be properly educated and be able to differentiate between what is a corrupt business practice and legitimate business practices that include the legitimate investigation of claims.

According to estimates of the tri-partisan watchdog Coalition Against Insurance Fraud, a national alliance of consumer groups, public interest organizations, government agencies and insurers, fraudulent insurance claims represent an $80 billion a year business! Fraud generally occurs when there is intentional deception about an insurance matter to receive money or other benefits not rightfully due the perpetrator of the deception. The Coalition states that the following are usually not frauds (1)good-faith disagreement between an insurance company and consumer about a claim (2) decision by the insurance company to decline your insurance application, or not renew your coverage.

Further reading that may be helpful on the topic of insurance fraud

• Coalition Against Insurance Fraud website
• Coalition Against Insurance Fraud blog
• C Edward Sentell  The Misprepresentation Defense  in Life and Disabilty Cases: The Issue of Causation
• Earlier this year it was reported that Whirlpool Corporation suspended 39 workers for lying on insurance paperwork about their smoking habits (ostensibly to save $500 on their employee health insurance.)

Gerst's solution  "Call in the Feds!"

Further reading on the Debate Concerning Federal Regulation of Insurance

• The Case For Federal Regulation of Insurance   Tom Baker, University of Connectcut School of Law  May 2007
• Federal Regulation of Insurance Would be Harmful  Jim Hodges Politico.Com August 12, 2008
• NAMIC Position on Federal Regulation
• The Forgotton Financial Sector Ed Royce (R-CA) member of House Financial Services Commitee an co-author of the National Insurance Act   from Wall Street Journal, April 16, 2008
• Sen.John E. Sununu press release on Reintroduction of "National Insurance Act of 2007" May 24, 2007