by John Darer CLU ChFC MSSC CeFT RSP CLTC
E&O claims exposure for secondary market "annuities" is a ticking time bomb for Financial Advisors, Settlement Planners and E&O Insurers
The use of the term annuity to solicit investors in factored structured settlement payment streams is a massive untruth that has been used to unload other people's structured settlement payments on soon to be retirees, retirees and injured individuals. Emboldened by the massive regulatory gap, tertiary market entities have leveraged the scam label "secondary market annuities" by attaching it to just about any type of cash flow they can get on their shelves. The tertiary market companies market the scam labeled alternative investments (bearing a much higher risk profile) to financial advisors who then sell them as "secondary market annuities" to unsuspecting clients who have trusted them, because they have been sold legitimate annuities by the financial advisors, many of which are licensed and regulated insurance agents. Therein lies the exposure.
One Thing a Licensed Insurance Agent or Financial Advisor Should Know About an Annuity
A licensed insurance agent should know what an annuity is and also recognize what is not an annuity. It's fundamental knowledge that is typically part of the first primer that one must read to prepare for a state insurance licensing exam.
There is a clear cut definition of an annuity on the website of each state insurance regulator (sample below). Many states have mandatory continuing education requirements for annuities.
Why would any licensed insurance agent or a financial advisor dabbling in a factored structured settlement market place, put their license, reputation and livelihood on the line by running a false flag up their flag pole.
How Insurance Regulators Define an Annuity
Maryland An annuity is a contract between you and an insurance company under which you make either a lump sum payment or a series of payments, and in exchange, the insurance company agrees to make payment to you in the future.
Delaware An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid.
In its answer to Plaintiffs' First Amended Complaint and Counterclaims in ongoing Arizona litigation cited below, dated June 11, 2021, Genex Capital Corporation admitted, in answering paragraph 31, that "one component of its business involves purchasing from payees future structured settlement payments due under structured settlement annuities and assigning to investors a subset of those rights..." (emphasis added) ( also multiple other references to "subsets of those rights..." Ibid at 13, 53, 56, 89, 109, 126)
Source: Genex Capital Corporation, a Delaware Corporation v Seeley Capital Management, Inc., a Massachusetts corporation; et al and Related Counterclaim Richard L. Keefer and Vicki L. Keefer, husband and wife; et al; v Genex Capital Corporation, a Delaware Corporation; et al and Genex Capital Corporation, a Delaware Corporation, a Delaware Corporation v Richard L. Keefer and Vicki L. Keefer, husband and wife, Hunmi Pak, a married man; E. Dwayne Walls, a married man; and PANABCO, a partnership Arizona Superior Court County of Maricopa Case Nos. CV 2020-013796 and CV2020-004958 (Consolidated) [the pleadings are a matter of public record]
The above admission(s) by Genex Capital Corporation in its answer to the First Amended Complaint, is very helpful to illustrate, support and underscore some important points:
- When you buy a legitimate annuity you are buying the actual annuity contract, which is an actual insurance product.
- An insurance product can only be sold by appropriately licensed and appointed insurance agents and brokers in accordance with the laws of various states.
- When the originating structured settlement factoring company buys structured settlement payments in a structured settlement factoring transaction they are not buying an annuity.
- Furthermore, unless the investor is a "direct designated assignee" in the court order approving the structured settlement transfer, the investor is buying a subset of rights to certain payments ( see Ibid at 45 in contrast to Ibid at 13, 53, 56, 89, 102, 126).
- Ownership of the actual annuity that is generating the payments is not transferred to the originating structured settlement factoring company.
- Since the originating structured settlement factoring company is not buying an annuity, but rights to payments, it follows that "a subset of those rights" (as Genex Capital Corporation eloquently refers to what investors are actually buying in exchange for their investment), is not an annuity.
Given what Genex Capital admits in its answer to the investor complaint cited above, Genex (via Assured Annuity), as well as others use the term "annuity" to market "subsets of these rights", originated from structured settlement factoring transactions.
But a foreseeable exposure here is on the shoulders of the army of licensed insurance agents, financial advisors and settlement planners, who are supposed to know what an annuity is, who are regulated by one or more state insurance departments or self regulatory organizations, who may be misrepresenting to their investors what the investors are buying, with potentially disastrous consequences!
Are Subsets of Athlete Contracts Annuities ?
Now, let's take this a step further. There are other types of factored cash flows, like athlete's contracts, where tertiary market companies and/or licensed insurance agents and financial advisors in their brokerage channels are slapping on the "secondary market annuity" label to sell "subsets of rights" in such cash flows to investors. It's reckless.