Lake County, California, is said to be known for a few things besides having the state's largest freshwater contained lake—pear production, bird watching, wineries, recent meth lab busts and Glenn Neasham, the convicted insurance agent who thought, he claims, he was selling a good product to a competent senior.
In the wake of Neasham's felony conviction for theft, a jail sentence to go along with it, and his ongoing legal battle to get that conviction overturned, financial advisors and insurance agents are wondering if they might also fall into the same legal hole that Neasham cannot seem to escape. While the chances are slim for a replication of all of the factors and personalities in Neasham's case to reassemble themselves elsewhere, there is no safe harbor in current law to prevent a jail sentence for an agent who sells an annuity to a customer who may turn out to have dementia or Alzheimer's at the time of the sale.
As most readers who have followed the case know, a 12-person jury found former insurance agent Neasham, now 52, guilty of felony theft on Oct. 23, 2011 for selling an annuity to a then-83 year-old woman named Fran Schuber.
As ProducersWEB writes, Judge Richard Martin denied the motion for a new trial in February, refused to drop the felony charge to a misdemeanor and sentenced Neasham to probation and 300 days in jail. Martin stayed all but 90 days of the sentence. Neasham, out on bail, plans to appeal.
While the incident occurred in February 2008, an updated suitability model law passed by the National Association of Insurance Commissioners (NAIC) in March 2010 and passed in some 20 states so far remains broad on suitability and does not mention any litmus test for mental capacity.
Meanwhile, suitability itself becomes a circular argument—it must be suitable, there must be "reasonable" efforts to confirm suitability, "reasonable" procedures must be maintained, and there must be "reasonable" grounds to believe the transaction is suitable.
The model law establishes a regulatory framework that holds insurers responsible for three things. One, for ensuring that annuity transactions are suitable. Two, for requiring that producers be trained on the provisions of annuities in general and the specific products they are selling. And three, for making these suitability standards consistent with the suitability standards imposed by the Financial Industry Regulatory Authority (FINRA).
The law requires insurer reviews of every annuity transaction, and clarifies that insurers are responsible for compliance with annuity protection provisions — even when insurers contract with third parties.
"In general terms," an executive summary of the updated model law states, "prior to recommending a particular annuity to a consumer, an insurer or producer must make 'reasonable efforts' to obtain the consumer's 'suitability information'…Based on the suitability information gathered in the transaction, the producer, or insurer if no producer is involved, must have reasonable grounds to believe the transaction being recommended to the consumer is suitable."
Put another way, this time from an unofficial statement from 2012 by the chair and vice chair of the NAIC's Life Insurance and Annuity Committee, "an insurer shall maintain reasonable procedures to detect recommendations that are not suitable. This may include, but is not limited to, confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring."
The NAIC Suitability of Annuity Transactions Model Regulation, however, is not required to become law in each state under Section 989J of the Dodd Frank Wall Street Reform and Consumer Protection Act until June 16, 2013. Moreover, violation of suitability laws does not appear to trip any felony statute. According to the model regulation's summary, a violation "may result in an insurer, general agency, independent agency or insurance producers being ordered to take reasonably appropriate corrective action for any consumer harmed by the violation."
There is no "safe harbor" within the law to protect agents who sell annuities, if those agents are going to be held accountable after the fact for having to ascertain the mental competence of an applicant, says financial advisor and estate planner John L. Olsen of Olsen & Marrion, LLC, publisher of "Index Annuities: A Suitable Approach," with his St. Louis-Based firm's partner Jack Marrion.
Olsen says he and Marrion, who has a doctorate in mental impairment, are working on putting together a packet that will include some tests and other procedures that insurance companies can put into place that will hopefully minimize this problem. Olsen is also co-hosting a webinar on the case.
As for the suitability of the product at hand in this case — the Masterdex 10-year annuity, by Allianz — the California Department of Insurance (CDI) had approved the product, the commissions for it, for sale to people up to age 85. "How could they assist in the prosecution of this in the case of an 83 year-old?" asks Michael Kitces, partner and director of research at Pinnacle Advisory Group in Columbia, Md.
Moreover, Allianz backed the product, but then Allianz threw Neasham under the bus, according to Olsen and others advisors, offering no protection from the underwriter.
The CDI said in a press release that it discovered "that Neasham, doing business as Glenn Neasham Insurance Agency, sold a $175,000 annuity to an 83-year-old woman on Feb. 6, 2008."
"The investigation determined that the victim lacked the mental capacity to enter into this contract, and that the terms and conditions of the annuity contract were not in her best financial interest," said CDI in its press release, not stating why the product was not in her financial best interest.
One question that has arisen is whether Allianz Life itself reviewed its Masterdex product with Schuber. When asked for comment, Sara Thurin Rollin, Allianz Life's director of external communications, explained that on February 18, 2008, it began a program where consumers age 75 or older are called to confirm their understanding of key features of the Allianz fixed annuity product they have purchased.
"Fran Schuber purchased an annuity from Allianz Life just before this program began. As a result, she was not contacted as part of the 75+ Calls Program at Allianz Life," Rollin said. "The 75+ calling program is designed to confirm that consumers understand the key features of the product they are purchasing and is not designed to assess that person's mental capacity."
In the absence of any current safe harbors, industry observers such as Olsen think that the NAIC needs to produce some model regulations to address this, so that agents can avoid prosecution for falling on the wrong side of a mental capacity assessment done at point of sale.
While the NAIC has done much work on suitability, it does not seem to have plans to pursue this issue. It appears that neither the NAIC's Life Committee or the Market Conduct Committee are working on it. It has been suggested that some feel it would not be appropriate for regulators to develop standards regarding mental competency, since that would require a professional medical opinion. Diagnostic services are indeed a whole other ball of wax, and requires, besides a degree, much more liability coverage. At least for now, the regulators' focus will continue to be on suitability and unfair trade practice standards.
However, the fact that the strengthened model law covers annual income, financial situation and needs, objectives and intended use of the annuity, there would appear to be all of the ingredients for at least a cursory test of mental acuity at the point of sale. "In a discussion with a client of all of these matters, I think it is going to be pretty apparent if there is impairment in having this conversation that would give an adviser cause to say, 'Gee, I can't get this information that I need,'" said Ron Panneton, National Association of Insurance and Financial Advisors (NAIFA) senior counsel.
Another factor in whether this situation is part of a future trend centers on whether the verdict is upheld upon appeal. It could set a precedent then, but so many have pointed to glaring holes in the case, the way it was handled and, more so, that it ultimately could be overturned.
R. Brian Fechtel, CFA and Agent at Breadwinners' Insurance in Larchmont, N.Y., said he couldn't "imagine this case having any ramifications among agents because it seems that the court and the prosecution has been so misguided that the jury verdict will not stand."
Another reason why agents might want to fret a little more are the sheer numbers provided by demographics—dementia is expected to triple by 2050, but the process is under way now.
Con artists aside, with interest in the demographics and the disease from Congress and the Federal Government agencies all have their eyes on the aging of Americans, so there may be a redoubling of efforts to protect them, which might spill over into the courts.
There are other compelling factors that signal that this case is a one-time fluke, including whether the cases might even find time in courts.
Calls and emails to various district attorneys' state and national associations yielded not one drop of interest, nor a call back, even in consumer-friendly, and high senior population states like Florida and New York.
"I don't see it as a trend," said Ingrid Evans of Evans Law, an elder abuse law firm in San Francisco and Los Angeles, of DAs prosecuting agents who sell annuities to people who have dementia.
"A lot of the district attorney and attorney generals, the agencies don't have money to prosecute —there are a lot of cases that should be prosecuted generally that aren't because financial abuse cases have not been a priority if you have an understaffed agency," Evans says.
"Financial elder abuse cases are typically brought in civil lawsuits and the trial lawyers that bring them are essentially one of the last lines of defense in helping to protect and to secure justice for senior citizen victims," Evans said.
She said many cases are not reported at all. The senior may die, and the family doesn't want to pursue action.
Evans Law is engaged in pursuing a class action case of multiple lawsuits involving Allianz and AVIVA USA alleging deceptive sales tactics for deferred annuities to seniors. The MasterDex 10, among other products, are involved, according to the list on the company website.
Lake County, Calif., Deputy District Attorney Rachel Abelson, who prosecuted the case, isn't getting calls from across the country or state asking for feedback or tips on prosecuting annuity sales agents, she said.
Abelson also mentioned the budget.
