SB 398 Text

Senate Bill No. 398
(By Senator Minard)
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[Introduced February 28, 2005; referred to the
Committee on Banking and Insurance.]
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A BILL to repeal §33-11-5a of the Code of West Virginia, 1931, as amended; and to amend said code by adding thereto a new article, designated §33-13B-1, §33-13B-2, §33-13B-3, §33-13B- 4, §33-13B-5, §33-13B-6, §33-13B-7, §33-13B-8, §33-13B-9, §33- 13B-10 and §33-13B-11, all relating to the replacement of individual life insurance policies and annuity contracts.

Be it enacted by the Legislature of West Virginia:
That §33-11-5a of the Code of West Virginia, 1931, as amended, be repealed; and that said code be amended by adding thereto a new article, designated §33-13B-1, §33-13B-2, §33-13B-3, §33-13B-4, §33-13B-5, §33-13B-6, §33-13B-7, §33-13B-8, §33-13B-9, §33-13B-10 and §33-13B-11, all to read as follows:
ARTICLE 13B. REPLACEMENT OF LIFE INSURANCE AND ANNUITIES.
§33-13B-1. Purpose.
The purpose of this article is:
(1) To regulate the activities of insurers and producers with respect to the replacement of existing life insurance and annuities.
(2) To protect the interests of life insurance and annuity purchasers by establishing minimum standards of conduct to be observed in replacement or financed purchase transactions by:
(A) Ensuring that purchasers receive information with which a decision can be made in the purchaser's own best interest;
(B) Reducing the opportunity for misrepresentation and incomplete disclosure; and
(C) Establishing penalties for failure to comply with requirements of this article.
§33-13B-2. Definitions.
(a) "Commissioner" means the Insurance Commissioner of West Virginia.
(b) "Contract" means an individual annuity contract.
(c) "Direct-response solicitation" means a solicitation through a sponsoring or endorsing entity or individually solely through mails, telephone, the Internet or other mass communication media.
(d) "Existing insurer" means the insurance company whose policy or contract is or will be changed or affected in a manner described within the definition of "replacement."
(e) "Existing policy or contract" means an individual life insurance policy or annuity contract in force, including a policy under a binding or conditional receipt or a policy or contract that is within an unconditional refund period.
(f) "Financed purchase" means the purchase of a new policy involving the actual or intended use of funds obtained by the withdrawal or surrender of, or by borrowing from values of an existing policy to pay all or part of any premium due on a new policy. For purposes of a regulatory review of an individual transaction only, if a withdrawal, surrender or borrowing involving the policy values of an existing policy is used to pay premiums on a new policy owned by the same policyholder and issued by the same company within four months before or thirteen months after the effective date of the new policy, it will be deemed prima facie evidence of the policyholder's intent to finance the purchase of the new policy with existing policy values. This prima facie standard is not intended to increase or decrease the monitoring obligations contained in subdivision (1), subsection (a), section five of this article.
(g) "Illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of life insurance over a period of years and that is one of the three types defined below:
(1) "Basic illustration" means a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and nonguaranteed elements.
(2) "Supplemental illustration" means an illustration furnished in addition to a basic illustration that meets the applicable requirements of this article, and that may be presented in a format differing from the basic illustration, but may only depict a scale of nonguaranteed elements that is permitted in a basic illustration.
(3) "In-force illustration" means an illustration furnished at any time after the policy that it depicts has been in force for one year or more.
(h) "Policy" means individual life insurance policy.
(i) "Policy summary," for the purposes of this article, means:
(1) For policies or contracts other than universal life policies, a written statement regarding a policy or contract which shall contain to the extent applicable, but need not be limited to, the following information:
(A) Current death benefit;
(B) Annual contract premium;
(C) Current cash surrender value;
(D) Current Dividend;
(E) Application of current dividend; and
(F) Amount of outstanding loan.
(2) For universal life policies, a written statement that shall contain at least the following information:
(A) The beginning and end date of the current report period;
(B) The policy value at the end of the previous report period and at the end of the current report period;
(C) The total amounts that have been credited or debited to the policy value during the current report period, identifying each by type;
(D) The current death benefit at the end of the current report period on each life covered by the policy;
(E) The net cash surrender value of the policy as of the end of the current report period; and
(F) The amount of outstanding loans, if any, as of the end of the current report period.
(j) "Producer" means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.
(k) "Registered contract" means a variable annuity contract or variable life insurance policy subject to the prospectus delivery requirements of the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa. (l) "Replacement" means a transaction in which a new policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer if there is no producer, that by reason of the transaction, an existing policy or contract has been or is to be:
(1) Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated;
(2) Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values;
(3) Amended so as to effect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid;
(4) Reissued with any reduction in cash value; or
(5) Used in a financed purchase.
(m) "Replacing insurer" means the insurance company that issues or proposes to issue a new policy or contract that replaces an existing policy or contract or is a financed purchase.
(n) "Sales material" means a sales illustration and any other written, printed or electronically presented information created, completed or provided by the company or producer that is used in the presentation to the policy or contract owner related to the policy or contract that is purchased.
§33-13B-3. Exemptions.
(a) Unless otherwise specifically included, this article does not apply to transactions involving:
(1) Credit life insurance;
(2) Group life insurance or group annuities where there is no direct solicitation of individuals by an insurance producer. "Direct solicitation" does not include any group meeting held by an insurance producer solely for the purpose of educating or enrolling individuals or, when initiated by an individual member of the group, assisting with the selection of investment options offered by a single insurer in connection with enrolling that individual. Group life insurance or group annuity certificates marketed through direct-response solicitation is subject to the provisions of section eight of this article;
(3) Group life insurance and group annuities used to fund prearranged funeral contracts;
(4) An application to the existing insurer that issued the existing policy or contract when a contractual change or a conversion privilege is being exercised; or, when the existing policy or contract is being replaced by the same insurer pursuant to a program filed with and approved by the Commissioner;
(5) Proposed life insurance that is to replace life insurance under a binding or conditional receipt issued by the same company;
(6)(A) Policies or contracts used to fund:
(i) An employee pension or welfare benefit plan that is covered by the federal Employee Retirement and Income Security Act (ERISA);
(ii) A plan described by Sections 401(a), 401(k) or 403(b) of the Internal Revenue Code, where the plan, for purposes of ERISA, is established or maintained by an employer;
(iii) A governmental or church plan defined in Section 414 of the Internal Revenue Code, a governmental or church welfare benefit plan, or a deferred compensation plan of a state or local government, or tax exempt organization under Section 457 of the Internal Revenue Code; or
(iv) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor.
(B) Notwithstanding paragraph (A) of this subdivision, this section shall apply to policies or contracts used to fund any plan or arrangement that is funded solely by contributions an employee elects to make, whether on a pretax or after-tax basis, and where the insurer has been notified that plan participants may choose from among two or more insurers and there is a direct solicitation of an individual employee by an insurance producer for the purchase of a contract or policy. As used in this section, "direct solicitation" does not include any group meeting held by an insurance producer solely for the purpose of educating individuals about the plan or arrangement or enrolling individuals in the plan or arrangement or, when initiated by an individual employee, assisting with the selection of investment options offered by a single insurer in connection with enrolling that individual employee;
(7) New coverage provided under a life insurance policy or contract and the cost is borne wholly by the insured's employer or by an association of which the insured is a member;
(8) Existing life insurance that is a nonconvertible term life insurance policy that will expire in five years or less and cannot be renewed;
(9) Immediate annuities that are purchased with proceeds from an existing contract. Immediate annuities purchased with proceeds from an existing policy are not exempted from the requirements of this article; or
(10) Structured Settlements.
(b) Registered contracts are exempt from the requirements of subdivision (2), subsection (a), section six of this article and subdivision (2), section seven of this article with respect to the provision of illustrations or policy summaries: Provided, That premium or contract contribution amounts and identification of the appropriate prospectus or offering circular is required in the notification or correspondence.
§33-13B-4. Duties of producers.
(a) A producer who initiates an application for a policy or a contract shall submit to the insurer, with or as part of the application, a statement signed by both the applicant and the producer as to whether the applicant has existing policies or contracts.
(b) If the applicant does not have an existing policy or contract, the producer's duties with respect to replacement are complete.
(c) If the applicant does have an existing policy or contract, the producer shall present and read to the applicant, not later than at the time of taking the application, a notice regarding replacements.
(1) The notice shall be in a form prescribed by the Commissioner or other substantially similar form approved by the Commissioner. No approval shall be required when amendments to the notice are limited to the omission of references not applicable to the product being sold or replaced.
(2) The notice shall be signed by both the applicant and the producer attesting that the notice has been read aloud by the producer or that the applicant did not wish the notice to be read aloud and that a copy of the notice was left with the applicant.
(3) The notice shall list all life insurance policies or annuities proposed to be replaced, properly identified by name of insurer, the insured or annuitant, and policy or contract number if available, and shall include a statement as to whether each policy or contract will be replaced or whether a policy will be used as a source of financing for the new policy or contract. If a policy or contract number has not been issued by the existing insurer, alternative identification, such as an application or receipt number, shall be listed.
(d) In connection with a replacement transaction, the producer shall leave with the applicant at the time an application for a new policy or contract is completed, the original or a copy of all sales material. A copy of any electronically presented sales material shall be provided to the policy or contract owner in printed form no later than at the time of policy or contract delivery.
(e) Except as provided in subsection (c), section six of this article, the producer, in connection with a replacement transaction, shall submit to the insurer to which an application for a policy or contract is presented a copy of each document required by this section, a statement identifying any preprinted or electronically presented insurer-approved sales materials used, and copies of any individualized sales materials, including any illustrations related to the specific policy or contract purchased.
§33-13B-5. Duties of insurers that use producers.
(a) Each insurer that uses producers shall maintain a system of supervision and control to ensure compliance with the requirements of this article. This system of supervision and control shall include at least the following:
(1) Informing its producers of the requirements of this article and incorporating the requirements of this article into all relevant producer training manuals prepared by the insurer;
(2) Providing to each producer a written statement of the insurer's position with respect to the acceptability of replacements including providing guidance to its producer as to the appropriateness of these transactions;
(3) Reviewing the appropriateness of each replacement transaction that the producer does not indicate is in accord with subdivision two of this subsection;
(4) Confirming that the requirements of this article have been met; and
(5) Detecting transactions that are replacements of existing policies or contracts by the existing insurer, but that have not been reported as such by the applicant or producer. Compliance with this subdivision may include, but may not be limited to, systematic customer surveys, interviews, confirmation letters or programs of internal monitoring.
(b) Each insurer that uses producers shall have the capacity to monitor each producer's life insurance policy and annuity contract replacements for that insurer, and shall, upon request, make these records available to the Commissioner. The capacity to monitor shall include the ability to produce records for each producer's:
(1) Life replacements, including financed purchases, as a percentage of the producer's total annual sales for life insurance;
(2) Number of lapses of policies by the producer as a percentage of the producer's total annual sales for life insurance; (3) Annuity contract replacements as a percentage of the producer's total annual annuity contract sales;
(4) Number of transactions that are unreported replacements of existing policies or contracts by the existing insurer detected by the insurer's monitoring system as required by subdivision (5), subsection (a) of this section; and
(5) Replacements, indexed by replacing producer and existing insurer.
(c) Each insurer that uses producers shall require with or as a part of each application for life insurance or an annuity a statement signed by both the applicant and the producer as to whether the applicant has existing policies or contracts.
(d) Each insurer that uses producers shall require with each application for life insurance or an annuity that indicates an existing policy or contract a completed notice regarding replacements required by subsection (c), section four of this article.
(e) When the applicant has existing policies or contracts, each insurer that uses producers shall be able to produce copies of any sales material required by subsection (e), section four of this article, the basic illustration and any supplemental illustrations related to the specific policy or contract that is purchased, and the producer's and applicant's signed statements with respect to financing and replacement for at least five years after the termination or expiration of the proposed policy or contract.
(f) Each insurer that uses producers shall ascertain that the sales material and illustrations required by subsection (e), section four of this article meet the requirements of this article and are complete and accurate for the proposed policy or contract.
(g) If an application does not meet the requirements of this article, each insurer that uses producers shall notify the producer and applicant and fulfill the outstanding requirements.
(h) Records required to be retained by this article may be maintained in paper, photographic, microprocessed, magnetic, mechanical or electronic media or by any process that accurately reproduces the actual document.
§33-13B-6. Duties of replacing insurers that use producers.
(a) Where a replacement is involved in the transaction, the replacing insurer that uses producers shall:
(1) Verify that the required forms are received and are in compliance with this article;
(2) Notify any other existing insurer that may be affected by the proposed replacement within five business days of receipt of a completed application indicating replacement or when the replacement is identified if not indicated on the application, and mail a copy of the available illustration or policy summary for the proposed policy or available disclosure document for the proposed contract within five business days of a request from an existing insurer;
(3) Be able to produce copies of the notification regarding replacement required in subsection (c), section four of this article, indexed by producer, for at least five years or until the next regular examination by the insurance department of an insurer's state of domicile, whichever is later; and
(4) Provide to the policy or contract owner notice of the right to return the policy or contract within thirty days of the delivery of the contract and receive an unconditional full refund of all premiums or considerations paid on it, including any policy fees or charges or, in the case of a variable or market value adjustment policy or contract, a payment of the cash surrender value provided under the policy or contract plus the fees and other charges deducted from the gross premiums or considerations or imposed under such policy or contract. This notice may be included in the notice as required by subsection (c), section four of this article or subdivision (1), subsection (b), section eight of this article.
(b) In replacement transactions, the replacing insurer shall, either by inclusion in the new policy or contract or by a rider attached thereto, provide that the new life insurance or annuity issued by the replacing insurer will not be contestable by the replacing insurer in the event of the insured's death to any greater extent than the existing life insurance or annuity would have been contestable by the existing insurer had the replacement not taken place: Provided, That this subsection does not apply to any amount of insurance provided by the new policy or contract which exceeds the amount of insurance provided by the existing policy or contract.
(c) The use of sales material other than that approved by the insurer, the insurer may, as an alternative to the requirements of subsection (e), section four of this article, do all of the following:
(1) Require of and obtain from the producer a signed statement with each application that:
(A) Represents that the producer used only insurer-approved sales material; and
(B) Represents that copies of all sales material were left with the applicant in accordance with subdivision (2), subsection (c), section four of this article;
(2) Provide to the applicant a letter or by verbal communication by a person whose duties are separate from the marketing area of the insurer, within ten days of the issuance of the policy or contract, which shall include:
(A) Information that the producer has represented that copies of all sales material have been left with the applicant in accordance with subdivision (2), subsection (c), section four of this article;
(B) The toll-free number by which the applicant can contact company personnel involved in the compliance function if copies of all sales material were not left with the applicant; and
(C) Information regarding the importance of retaining copies of the sales material for future reference; and
(3) Be able to produce a copy of the letter or other verification obtained pursuant to this subsection in the policy file for at least five years after the termination or expiration of the policy or contract.
§33-13B-7. Duties of the existing insurer.
Where a replacement is involved in the transaction, the existing insurer shall:
(1) Retain and be able to produce all replacement notifications received, indexed by replacing insurer, for at least five years or until the conclusion of the next regular examination conducted by the insurance department of its state of domicile, whichever is later.
(2) Send a letter to the policy or contract owner notifying the owner of the right to receive information regarding the existing policy or contract values including, if available, an in- force illustration or policy summary if an in-force illustration cannot be produced within five business days of receipt of a notice that an existing policy or contract is being replaced. The information shall be provided within five business days of receipt of the request from the policy or contract owner.
(3) Upon receipt of a request to borrow, surrender or withdraw any policy values, send to the applicant a notice advising the policy owner that the release of policy values may affect the guaranteed elements, nonguaranteed elements, face amount or surrender value of the policy from which the values are released. The notice shall be sent separate from the check if the check is sent to anyone other than the policy owner. In the case of consecutive automatic premium loans, the insurer is only required to send the notice at the time of the first loan.

§33-13B-8. Duties of insurers with respect to direct-response solicitations.

(a) In the case of an application that is initiated as a result of a direct-response solicitation, the insurer shall require, with or as part of each completed application for a policy or contract, a statement asking whether the applicant, by applying for the proposed policy or contract, intends to replace, discontinue or change an existing policy or contract. If the applicant indicates a replacement or change is not intended or if the applicant fails to respond to the statement, the insurer shall send the applicant, with the policy or contract, a notice regarding replacements in a form prescribed by the Commissioner or other substantially similar form approved by the Commissioner.
(b) If the insurer has proposed the replacement or if the applicant indicates a replacement is intended and the insurer continues with the replacement, the insurer shall:
(1) Provide to applicants or prospective applicants with the policy or contract a notice in a form prescribed by the Commissioner or other substantially similar form approved by the Commissioner. In these instances the insurer may delete the references to the producer, including the producer's signature, and references not applicable to the product being sold or replaced, without having to obtain approval of the form from the Commissioner. The insurer's obligation to obtain the applicant's signature shall be satisfied if it can demonstrate that it has made a diligent effort to secure a signed copy of the notice referred to in this subdivision. The requirement to make a diligent effort is considered satisfied if the insurer includes in the mailing a self- addressed, postage prepaid envelope with instructions for the return of the signed notice referred to in this subdivision; and
(2) Comply with the requirements of subdivision (2), subsection (a), section six of this article, if the applicant furnishes the names of the existing insurers, and the requirements of subdivisions (3) and (4), subsection (a), section six of this article and subsection (b), section six of this article.
§33-13B-9. Violations and penalties.
(a) Any failure to comply with this article is considered a violation of article eleven of this chapter. Examples of violations include, but are not limited to:
(1) Any deceptive or misleading information set forth in sales material;
(2) Failing to ask the applicant in completing the application the pertinent questions regarding the possibility of financing or replacement;
(3) The intentional incorrect recording of an answer;
(4) Advising an applicant to respond negatively to any question regarding replacement in order to prevent notice to the existing insurer; or
(5) Advising a policy or contract owner to write directly to the company in such a way as to attempt to obscure the identity of the replacing producer or company.
(b) Policy and contract owners have the right to replace existing life insurance policies or annuity contracts after indicating in or as a part of applications for new coverage that replacement is not their intention. Patterns of such action by policy or contract owners of the same producer is considered prima facie evidence of the producer's knowledge that replacement was intended in connection with the identified transactions, and these patterns of action shall be deemed prima facie evidence of the producer's intent to violate this article.
(c) Where it is determined that the requirements of this article have not been met, the replacing insurer shall provide to the policy owner an in-force illustration, if available, or policy summary for the replacement policy or available disclosure document for the replacement contract and the appropriate notice regarding replacements.
(d) Violations of this article shall subject the violators to penalties that may include the revocation or suspension of a producer's or company's license, monetary fines and the forfeiture of any commissions or compensation paid to a producer as a result of the transaction in connection with which the violations occurred, or any other penalties authorized by article eleven of this chapter.
§33-13B-10. Disapproval of rule.
The legislative rule filed in the state register on the sixteenth day of May, one thousand nine hundred ninety-seven (replacement of life insurance, 114 CSR 8), is hereby disapproved as of the effective date of this article. This disapproval shall in no way limit the Commissioner's power to promulgate in the future any rule that the Commissioner considers necessary to discharge his or her duties or to effectuate the provisions of this article.
§33-13B-11. Severability.
In the event any provision of this article, or the application of this provision to any person or circumstances, is held unconstitutional or otherwise invalid by any court of competent jurisdiction, the remainder of this article or the application of the provisions to other persons or circumstances may not be affected thereby.

NOTE: The purpose of this bill is to regulate the activities of insurance companies and their agents with respect to the replacement of existing life insurance and annuities.

This is a new article; therefore, underscoring and strike-throughs have been omitted.

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