1. MAKING SENSE OF THE INTERPLAY BETWEENSECURITIES LAW/BROKER-DEALER RULES ANDINSURANCE STATUTORY REQUIREMENTS IN CONNECTION WITH THE SALE OFVARIABLE LIFE AND ANNUITY PRODUCTSRobert R. Pohls Pohls & Associates 1550 Parkside Drive, Suite 260 Walnut Creek, CA 94596 Phone: 925.973.0300 Fax: 925.973.0330rpohls@califehealth.com

2. AGENDA Trusts, IRAs, qualified accounts and pension plans Framework for analysis / resolution Claim Disputes: Standing Impact of trust, wills and estates law Sales Practices Standing Measure of damages 3. TRUSTS AND QUALIFIED ACCOUNTSFollow The Money! 4. TRUSTS AND QUALIFIED ACCOUNTSTrusts Settlor Trustee BeneficiaryTraditional and Roth IRAsIndividual IRA Individual or BeneficiarySEP IRAsEmployer IRA Employee or BeneficiarySIMPLE IRAsEmployer/IRA Employee orEmployee Beneficiary 5. TRUSTS AND QUALIFIED ACCOUNTSQualified AccountsEmployerPlan Employee or BeneficiaryPension Plans Employer/Plan Employee or EmployeeBeneficiaryVariable Life InsurancePolicyowner InsurerBeneficiaryAnnuitiesPolicyowner InsurerBeneficiary 6. FRAMEWORKCLAIM DISPUTESPolicyownerInsurer Beneficiary SALES PRACTICES PERFORMANCE 7. LITIGATION: CLAIM DISPUTESCLAIM DISPUTESPayment obligationdictated by termsof the contract.InsurerBeneficiaryBeneficiaries have no enforceable right to the proceedsof a life insurance policy during the insureds lifetime. In re Marriage of Brown, 15 Cal. 3d 838, 845 (1976)The designated beneficiarys interest is a mere revocableexpectancy vesting only on the insureds death.In re Marriage of OConnell, 8 Cal. App. 4th 565, 577 (1992) 8. LITIGATION: CLAIM DISPUTES CLAIM DISPUTESIf the beneficiary isa trust . . . only thetrustee has standing. InsurerTrustTrust beneficiary has no legal title orownership interest in the trust assets,so may not sue in the name of the trust Beneficiaryas the beneficiary. Wolf v. Mitchell, Silberberg & Knupp, 76 Cal. App. 4th 1030, 1036 (1999)A trust beneficiarys right to sue is ordinarily limited to theenforcement of the trust, according to its terms.Saks v. Damon Raike & Co., 7 Cal. App. 4th 419, 427 (1992) 9. LITIGATION: CLAIM DISPUTESCLAIM DISPUTESIf the beneficiary isan estate . . . onlythe estates legal InsurerEstaterepresentative hasstanding. Interpleaders Beneficiary Delay in PaymentEstate of Grant v. State Farm Life Insurance Co.Case No. 05-02389 FCD (E.D.Cal.) MSJ forUnited Investors Life Insurance Co. v. GrantCase No. 05-01716 MCE (E.D.Cal.) $1M extra-contractual 10. LITIGATION: EXAMPLESALES PRACTICES Policyowner Insurer Whole life policy Lapse Non-forfeiture provision Extended term insurance 1099 issued Litigation: Insurers duty to warn of tax consequences? 11. LITIGATION: EXAMPLE RESCISSION PolicyownerInsurer Consideration must be restored Policy is canceled Premiums are refunded If the policyowner was the insured and has died: Premiums must be refunded to the policyowner Not a substitute for death benefit 12. LITIGATION: PERFORMANCEPolicyowner InsurerBeneficiary PERFORMANCETrusts Trust Agreement Duty of Care Fiduciary DutiesIRAs/QAs/PensionsAccount Agreement / Plan Duty of Care Fiduciary Duties ERISA (if employer-sponsored) 13. LITIGATION: PERFORMANCEPolicyowner InsurerBeneficiary PERFORMANCEVariable Life/AnnuitiesContract TermsAn insurer is not a fiduciary of an insured.Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. 115 Cal.App. 4th 1145 (2004)In life or disability insurance, the only measure of liabilityand damage is the sum or sums payable in the mannerand at the times as provided in the policy to the personentitled thereto. California Insurance Code 10111 14. LITIGATION: PERFORMANCEPolicyownerInsurerBeneficiaryPERFORMANCEVariable Life/Annuities Contract TermsConsider the impact of actions by policyholder: Investment choices Payment of premiums Policy loans 15. LITIGATION: SALES PRACTICES Policyowner InsurerIf the policyowner isa trust . . . trustees SALES PRACTICESpower is presumed.With respect to a third person dealing with a trustee orassisting a trustee in the conduct of a transaction, if the thirdperson acts in good faith and for a valuable considerationand without actual knowledge that the trustee is exceedingthe trustees powers or improperly exercising them: . . . (b)The third person is fully protected in dealing with or assistingthe trustee just as if the trustee has and is properlyexercising the power the trustee purports to exercise. California Probate Code 18100 16. LITIGATION: SALES PRACTICESPolicyownerInsurer If the policyowner is a trust . . . consider SALES PRACTICES STOLI.Trusts and special purpose entities that are used toapply for and initiate the issuance of policies of insurancefor investors, where one or more beneficiaries of thosetrusts or special purpose entities do not have aninsurable interest in the life of the insured, violate theinsurable interest laws and the prohibition againstwagering on life. California Insurance Code 10110(d) Applies only to policies issued after 7/1/2010 17. LITIGATION: SALES PRACTICESPolicyowner InsurerIf the policyowner is a trust or estate . . .SALES PRACTICESno emotional distress. Trusts and estates are legal entities. Emotional states are exhibited by natural persons,not legal entities.Diamond View Limited v. Herz180 Cal.App.3d 612, 618 (1986) 18. LITIGATION: SALES PRACTICESPolicyowner Insurer What does theowner receive? SALES PRACTICES Owner pays premiums Owner receives the contract Right to renew coverage Right to designate and change beneficiaries 19. LITIGATION: EXAMPLEPolicyownerInsurerSALES PRACTICES $1.6 million term life policy Owner becomes uninsurable Policy lapses without replacement A term life policy has no value. In re Estate of Mitchell76 Cal.App.4th 1378, 1393 (1999) What has the owner lost? 20. LITIGATION: EXAMPLEPolicyownerInsurerWhat has theowner lost? SALES PRACTICESFace amount?Never payable to policyowner / insuredRight to renew? Renewal requires more premiumsRight to designate beneficiary? No monetary value to policyowner Only provides peace of mind 21. LITIGATION: SALES PRACTICESPolicyowner InsurerVariable Life/AnnuitiesSALES PRACTICESContract usually has some cash value.Typical claims: Contract is not as represented to policyowner Contract was not suitable for policyowner 22. LITIGATION: SALES PRACTICESAgent Who does the agentPolicyowner Insurer represent? SALES PRACTICESThe most definitive characteristic of an insurance agent ishis authority to bind his principal, the insurer; an insurancebroker has no such authority. Marsh & McLennan of Cal., Inc. v. City of Los Angeles 62 Cal.App.3d 108, 118 (1976)An independent insurance broker is not an agent of theinsurer, but rather is an agent of the insured. California Insurance Code 33 23. LITIGATION: SALES PRACTICESAgentWho does the agentPolicyowner Insurerrepresent?SALES PRACTICESIf an insurance agent is the agent for several companiesand selects the company with which to place the insuranceor insures with one of them according to directions, theinsurance agent is the agent of the insured.3 Couch on Insurance (2d ed. 1984) 25:112, p. 477 24. LITIGATION: SALES PRACTICESAgent What are thePolicyowner Insurer agents duties? DUTY OF CARE SALES PRACTICES"[A]n insurance [broker] will be liable to his client in tortwhere his intentional acts or failure to exercise reasonablecare with regard to the obtaining or maintenance ofinsurance results in damage to the client."Saunders v. Cariss, 224 Cal.App.3d 905 (1990) 25. LITIGATION: SALES PRACTICES AgentWhat are thePolicyownerInsureragents duties? DUTY OF CARESALES PRACTICES FIDUCIARY DUTY ?Agency law establishes that the relations of principal andagent, like those of beneficiary and trustee, are fiduciary incharacter.Workmens Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011). . . it is unclear whether a fiduciary relationship existsbetween an insurance broker and an insured.Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. 115 Cal.App.4th 1145 (2004) 26. LITIGATION: SALES PRACTICESAgent What are thePolicyowner Insurer agents duties? DUTY OF CARE SALES PRACTICES FIDUCIARY DUTY ?. . . we are unaware of even a single California precedentpermitting a client to sue an insurance broker for breach offiduciary duty."Workmens Auto. Ins. Co. v. Guy Carpenter & Co. (Cal.App. 2011)This Court will not expand the doctrine of fiduciary duty toinclude insurance brokers, given that it has not beenrecognized by California courts.Miniace v. Pacific Maritime Assoc., 2005 U.S. Dist. Lexis 40708, p. *34 27. LITIGATION: SALES PRACTICES AgentWhat are thePolicyowner Insurer agents duties? DUTY OF CARE SALES PRACTICES FIDUCIARY DUTY ? SUITABILITY? Insurance products: State insurance lawsFINRA Rules (only if variable) Annuities:State insurance lawsFINRA Rules (fixed and variable) 28. LITIGATION: SALES PRACTICESAgentWho else is involvedPolicyowner Insurerin the transaction? Broker/Dealer SALES PRACTICESPlaintiffs point to no evidence that defendant is amember of the NASD. They assert that it is well-knownthat John Hancock sells the variable products through itssubsidiary. . . Lin v. John Hancock Variable Life Insurance Co. (Cal.App. 2007) 29. LITIGATION: SALES PRACTICES Agent Who else is involvedPolicyowner Insurerin the transaction?Broker/Dealer SALES PRACTICESA clearing broker which has no direct contact with theconsumer, does not recommend transactions, and doesnot give advice or determine suitability, may not beconsidered the investors broker. Mars v. Wedbush Morgan Securities, Inc. 231 Cal.App.3d 1608 (1991) 30. CONCLUSIONCLAIM DISPUTESAgentPolicyowner InsurerBeneficiary Broker/Dealer SALES PRACTICES PERFORMANCE