H. B. 2937
(By Delegates H. White, R.M. Thompson, Hrutkay,
Perry, Azinger and L. White )
[Introduced March 8, 2005; referred to the
Committee on Banking and Insurance then the Judiciary.]
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be repealed; and that said code be amended by adding thereto a new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 article is new; therefore, underscoring and
strike-throughs have been omitted.