JOHN J. O’BRIEN, JD, C.L.U., C.P.C.U.
A Professional Corporation
Attorney, Insurance Consulting & Expert Testimony
255 Land’s End Drive (843) 737-2738
Charleston, South Carolina 29407 lionsthree@aol.com
January 29, 2009
XXXXXXXXXX
Attorney at Law
XXXXXXXXX
XXXXXX, Florida 34994
Dear Mr. XXXXXXX,
In reference to the case of XXXXXXXXXXXXXXXXXXXXXX et al, I have been asked by you to express my opinion or opinions on industry practices regarding hiring insurance agents, due diligence in the supervision of insurance agents, suitability of particular insurance products, the practices of “churning” and “twisting,” replacement of insurance products, the duty of an insurance company to monitor an insurance agent and measure the suitability of recommendations made to policyholders and activity in the client’s accounts. This assignment will entail my utilization of information, experience, training, and practice from the disciplines of insurance law and regulation, best practices in the insurance industry both in the field and in the home office and industry standards within the insurance industry and customs and usage there. I consider myself qualified to assume this responsibility.
I am an insurance professional with considerable insurance experience in both personal lines and commercial lines insurance including life insurance and annuity sales. This experience ranges from education, teaching, work experience both in the field as an agent as well as in home offices of insurance companies and in addition in the management of insurance companies as CEO of my own insurance management company. My experience is reflected in the curriculum vitae, which is attached and made a part of this document as Exhibit “A.”
In addition to my training as an attorney, I hold the two highest credentials conferred both by the life and health insurance industry as well as the property and casualty insurance industry, namely, the Chartered Life Underwriter designation and the Chartered Property and Casualty Underwriter Designation. The Chartered Life Underwriting Designation was conferred based on completion of five years of testing and training in areas of life insurance, annuities, product suitability, estate planning and law.
In the area of insurance regulation, I have participated in drafting insurance law and regulations in the state and at the NAIC level. I have drafted insurance product language and policy forms including life insurance and annuity forms. I am familiar with the legal and regulatory requirements that govern personal and commercial lines as well as life and health insurance. The National Association of Insurance Commissioners is the regulatory body that formulates and adopts model legislation that individual state insurance commissioners present for enactment in their individual states. I have participated in and I am familiar with this process and have been for the last thirty years.
I have testified and served as a consultant on the regulation and compliance of personal lines, life and health insurance as to policy language, policy service and claims. In addition, I have been qualified and testified concerning agent’s activities and licensing and suitability of insurance products. I am familiar with the high standards required for the recruitment and hiring of insurance agents and the duties to monitor an agent’s activities and ethical performance after hiring.
I have been trained in the various types and lines of insurance and have an understanding of the various segments of the industry, industry practices, marketing, service organization and the operation of commercial insurance companies from capitalization, regulation and operation and even through insolvency and run off. I am familiar with the traditional operations of life and health companies including sales and underwriting and agency administration.
I have been licensed as an insurance agent for sales of annuities, life insurance and variable annuities including NASD licensing. I have worked in the home offices of life and health insurance companies and advised the agency department on licensing and disciplinary issues involving life insurance agents.
I have participated in drafting replacement regulations and testified before legislative groups concerning their adoption particularly as they relate to suitability of insurance, annuity and investment products to policy holders and efforts to avoid twisting a consumer’s insurance and annuity programs.
As an attorney, I have worked with life underwriters and insurance agents on designing pension and investment and products for clients to meet a client’s estate planning and investment goals. I have also represented agents on disciplinary matters and represented insurance companies on issues involving agencies particularly in recovering agent’s commissions or debit balances. I have represented agents in matters before the insurance commissioner and administrative hearings.
I have taught insurance agents in the life and health insurance fields, worked with the American College in designing curriculum for life insurance agents and I am familiar with the qualifications and requirements for hiring and supervising insurance agents and the industry standards applicable thereto. I am also familiar with education material related to agency administration at the home office level offered by Life Office Management Association as well as educational materials and industry practices reflected in the curriculum of the Life Insurance Training Counsel, the American College and The Life Insurance Agency Management Association.
As owner of Charleston Captive Management Company during its operation I have developed business plans for insurance companies, formed companies, designed policy forms, licensed companies and worked with agents in licensing and offering products to third parties.
As an insurance attorney and through many years of insurance law practice as well as expert testimony and teaching, I am knowledgeable in the rules of insurance contract as well as insurance contract interpretation.
In addition, I am familiar and knowledgeable on compliance issues concerning sales and marketing material having reviewed same for insurance companies to assure compliance with state insurance statutes and regulations.
I serve on the boards of captive insurance companies, reciprocals, and risk retention groups as an independent director and member or chairman of the audit committee. As such I bring and promote high ethical standards within those companies. I have addressed industry groups on ethics and what motivates an individual and company to engage in behavior that is less than ethical. I teach the web based ethics course to insurance professionals in this company and abroad for the International Center for Captive Insurance where I also serve on the board of directors of ICCIE. I am an adjunct professor at the College of Charleston teaching a junior level course on Principles of Risk Management and Insurance including sales practices and consumer protection including twisting, rebating and licensing of insurance agents and brokers.
I have been accepted as an insurance expert by the state and federal courts.
I have been retained by you at the hourly rate of $300 to assist the court in certain areas of this case where my knowledge and experience might be beneficial. The information supplied to me by counsel appears to be all the pleadings and discovery of the case to date including all depositions taken in the cases.
It is my opinion that XXXXXXXXX should not have allowed XXXXXXXXXX to represent XXXXXXXXX in the sale of insurance and annuity products. In my testimony I will emphasize the high standards required of insurance professionals and the reasons for these high standards. The character of an individual who is given permission to represent a leading insurance company in advising customers and handling customer’s money should be beyond reproach for obvious reasons such as placing this individual in a position where that individual will be handling substantial amounts of a customer’s funds. I have concluded that XXXXXX at the home office level and in the branch office saw XXXXXXX as an extraordinary producer with a large circle of influence. It is my opinion that the criteria employed for the selection of agents should not fall influence to expectation of production numbers.
You have alleged in your complaint that:
The XXXX Companies should have known that XXXXXX was engaging in or otherwise had the propensity to engage in fraudulent conduct like that committed by him on the XXXXX. The XXXXX Companies knew or should have known that XXXX was not fit to be employed by XXXX based upon a myriad of factors, including but not limited to his own financial instability, trustworthiness and character. However, XXXX overlooked XXXX’s short-comings in order to bring in someone whom they considered a “big producer.”
My professional opinion would support your position. Based on my review of the pleadings and documents is that XXXX should not have hired XXXX based on the information produced at the time of application and that they should have removed him after that and that they should have known that XXXX was engaging in fraudulent conduct. His ethics are questionable in that he does not take responsibility at all for any of his actions. In my opinion he simply was not fit to serve as a XXXX representative. I cannot imagine that XXXX would attempt to rationalize and suggest that he was.
There are several areas of concern each, by itself and definitely taken together would be reason not to hire XXXX. These include his misrepresenting his education record, his being embroiled in a controversy with XXXXX Insurance regarding clients funds that were not applied and left in files and that a U5 could not be issued, a Choice Point credit report that displayed the fact that he had a history of not paying his bills, unpaid taxes, driving records disclosing twelve unpaid tickets leading to suspension of his driver’s license, and that he was subject to a complaint from a XXXXXX customer that he had misdirected clients funds to a company in which he had an ownership interest in. During the application process, it is my opinion that XXXXX placed too much credence on XXXXXXX’s explanations without going further in its due diligence inquiry. There is a pattern of explanation on almost every issue where XXXXX takes no responsibility and blames the problem on others. These are indications of at least rationalization on his part if not actual deceitfulness. At the very least XXXXXX should have questioned how the information they had gathered concerning his financial conditioned paired with a claim that he was a member of the Million Dollar Round Table. Members of that group usually are high-income earners and have control of their personal finances. XXXXX was embroiled in a controversy with the XXXXX Insurance Company regarding a client’s funds. The only explanation that seems plausible for XXXXX decision to hire XXXX seems to be that they were influenced by his claimed potential to produce business.
XXXXX seems to give credence to XXXX explanation on all issues rather than conducting an independent inquiry. For example, XXXX informs XXXXX that he was let go by XXXXXX because of a delay in XXXXX issuing a U5. XXXXX was investigating him at the time of his termination for possible fraud. It also appears that Choice Point National Credit Report discloses accounts that were not kept current and were in fact turned over for collection. Further inquiry and due diligence would have disclosed that taxes were also unpaid by XXXXXX.
The Choice Point Agency Series Employment Record discloses that twelve driving tickets were issued and that there is a pattern of not paying the fines. XXXXXXX is a very reputable company and had discharged the applicant because of the failure to receive clearance from XXXXXXXX according to XXXXXX. Further inquiry with XXXXX would disclose that XXXX had transferred funds of a XXXXXX customer without authorization to a company in which XXXX had an interest.
There is evidence even during the application for employment process of not taking responsibility for his acts. He was an applicant with a poor credit rating. He exaggerated his academic degrees. He was dismissed by a previous employer and his activities were under review. He had a questionable driving record. Clearly, considering the position that he was being paced in where honesty and integrity are of paramount importance, he should not have been hired.
Further investigation would likely disclose that XXXX had transferred funds and made trades without the customers consent. This was done while employed by his two previous employers.
The material indicates an applicant with a history of financial difficulties and a recent departure from XXXXXX and XXXXX. Due diligence would have suggested that further inquiry be made of these two companies particularly with a company like Vector One that investigates agents’ debit balances and related matters with prior companies.
Dishonest agents often engage in “churning” and “twisting” where they are constantly misrepresenting the actual costs of products, preying on a client’s other products and actually closing large amount of business but it is not good business or suitable business for the customer and there are typically charge backs on the agents account when the customer learns of the true facts and lapses the product. This practice is driven in part by large first year commissions.
Life insurance agents are placed in a superior position representing well-known and well respected insurance companies. It is sometimes difficult to make a new sale; however, clients might have money available in annuities, mutual funds and whole life policies. Dishonest agents make commissions on the sale or transfer of these policies when they replace or transfer them when such action is not in the best interest of the clients.
It appears that none of the information disclosed during the application process prompted XXXXX to engage in a more thorough review of XXXX’s application for employment but it should have done so.
Further investigation of the situation at XXXXXX was warranted. Failure to remit is a serious matter. Essentially, the applicant had a bad credit report, exaggerated his education history, had a dismal driving record and failed to properly apply clients’ monies. Despite all this, he was appointed as a XXXXXX Life agent on February 14, 2000.
Despite an application that called out at least for further due diligence and that reflected an applicant with questionable ethics, XXXXX was appointed. The relationship appears to gotten off to a rocky start and XXXXX became aware that tax liens were filed, that XXXX was a defendant in civil litigation involving a customer who claimed XXXXX had diverted funds to an account that XXXXX had an interest in, and that XXXX was misrepresenting himself as a financial advisor. In addition he was using unapproved marketing material that was not reviewed by his management or by corporate legal. XXXXX continues to not take responsibility for his actions, blaming his tax lien on his accountant. XXXX’s pattern of blaming others rather than himself reaches a high level in a letter dated June 1, 2000 to Healthy Woman Magazine where he chastises them for running an ad and asks for a retraction because the ad had not received clearance from XXXXX Life legal. Clearly, Healthy Woman would have received the ad from XXXX himself. Mr. XXXXX in view of this information and the information already in his file should have been dismissed or at least suspended and a complete investigation made. Instead, it appears that XXXXXX readily accepted XXXX’s own explanation on these new issues.
XXXXX began receiving significant amounts of money from XXXXX in late January and Early February of 2001. A withdrawal of $152, 908.61 from XXXXX Life is clearly indicated as a withdrawal from an annuity. These funds were used to fund the XXXXX Life purchases. Withdrawals from annuities in early years are not a good idea unless there is no other choice. The surrender charges are substantial. It appears that there was no oversight exercised on XXXXX on this transaction. Safeguards and checks should always be in place to make sure annuity clients understand withdrawals from annuities and the early surrender charge. XXXXX ignored this issue and freely moved money out of the XXXX annuity and put money into XXXXXX and then transferred it out of there for a fraudulent real estate investment. XXXXX should have had safeguards in place to assure itself that these withdrawals were with the consent of XXXXX. Carter and that he understood the consequences. Companies in situations where the agent is driving the surrender should always verify that full disclosure has been given to the client by a direct written or verbal contact with the customer. The withdrawals from XXXXX were substantial and early in the life of an index annuity when penalty charges would be substantial. The transaction should have caused an alert within the XXXXXX organization that required assurances that the customer was aware of what he was doing.
Copies of checks from XXXX disclose that annuities were being cashed in to pay into XXXXX. Surrendering annuities is not a good idea because of the surrender charges that a policyholder incurs in the early years because of the load factor and the nature of the annuity where the early individuals who pass on help fund the lifetime benefits of those who stay on. I suspect that there would be little reason to make this transfer as annuities performance with insurance companies are usually similar and the surrender charges would imply that XXXX lost money on the transaction. It is clear though that XXXXX made the transaction relying on XXXXX’s affiliation with XXXXXX Life a company of which XXXXX had a good opinion concerning. The indications are that the agent is engaged in twisting and was more interested in earning a commission than in taking action that was beneficial to XXXXXX. This is an indication that XXXX was engaged in the transactions that would result in high commissions but that were not in the best interest of XXXXX Life’s customers.
In addition the XXXXXX applied for two policies with XXXXXX Life. These policies were not suitable for the XXXXX and the annual premium was misrepresented. When the true facts were learned, then the policies lapsed but the XXXXX were out the premiums they paid. The commissions generated to XXXXX would be greater than XXXXX’s loss and the behavior represents a pattern of behavior that XXXXX was engaged in that should have been evident to XXXXXX Life and he should have been dismissed. The only motivation for such transactions was to derive placement commissions for him without regard for the benefit that the particular product had for his clients.
During 2001 and perhaps before, it appears that other problems began to surface including XXXXXX bouncing checks, negative balances in client’s accounts, XXXXX obtaining a loan from a trust client for the purchase of his home, disclosure that XXXX had check writing problems with XXXXX and that XXXXX Life had threatened legal action against XXXXX for return of $90,000 to XXXXXX Life, that two clerks had been sent over to review his files and the files were not in good shape and had to be brought up to date. XXXXX blamed this again on an assistant and not him. This is reminiscent of his explanation in regards the unapplied funds at XXXXXX. Also, it appears that XXXXX relied solely on an explanation of the situation at XXXXX Life by XXXXXX despite threats of law suits against XXXXX by XXXX and an actual complaint by a XXXXX Life client that XXXX had misdirected funds from XXXXX to an investment company that XXXX had an ownership interest in. Due diligence would require that XXXXXX explore the XXXXXX status of XXXXX more closely. It appears to me more than the simple delay in the R5 filing as XXXXX had used to explain his dismissal by XXXXX Life at the time of his hire. I have reviewed as part of my material a complaint filed by a XXXXXX customer against XXXXX and XXXXX alleging loss of over $600,000 of funds. It appears that XXX was engaging in fraudulent activities’ while serving as agent for XXXXX, XXXXX and XXXX. The information that XXX was engaged in personal loans from clients or client’s family members and that he might have directed a client to invest in a company that he had an interest in clearly deserved more due diligence and would be reason alone for termination.
Despite all of this information XXXX Life in 2001 seems to be satisfied that the problems with XXXXX relate to a misunderstanding of the XXXX Life system and disorganization. XXXXX Life seems to take responsibility only in so far as to chastise itself for not providing better training and monitoring when XXXXX was hired. Indications are very clear of churning, twisting, misuse of funds, personal financial problems, bad credit, recommending transactions that are not in the best interest of the client, lying, unpaid tax liens, misrepresenting qualifications, using unapproved advertising material, and a pattern of consistently not taking personal responsibility and blaming the situation on others whether it be previous employers, accountants, the IRs, clerks or even unsuspecting magazine editors. The point is simply that this individual should have never been unleashed on the investment public carrying the label of a company with XXXXXX Life’s stature. In my opinion, he should not have been hired and once hired when these problems developed, he should have been terminated. These patterns indicate that clearly where there is smoke, there is fire. The agent is placed in a fiduciary position where clients will deliver money to him based upon the reputation of XXXXX Life. XXX Life fosters this reputation thought their marketing and public relations campaign which sends a clear message that the client will be in good hands with XXXX Life. XXX has the highest duty of due diligence to assure itself that the individuals representing it will protect the clients and the client’s assets. In the area of financial and insurance products, it is difficult to imagine how a company would consent to hiring and retaining a financial and estate planning specialist when that person’s own house is in such disorder.
Rather than suspending XXXXX in 2001, a plan was developed by XXXXX Life to complete the year 2001. That plan made the blanket assumption, again based on what appears to be XXXX’s assurances, that a client’s attorney or accountant would always be involved in any dealings that XXXX has with a client. A clerk was assigned to work with XXXXX’s assistant to bring XXXX’s files up to date now that the files had been apparently organized. In addition, unannounced monthly visits were to be made to review XXXX’s overall operation.
I cannot find any evidence that this plan was actually carried out but there is evidence that the situation continued to deteriorate. If there were meetings established for XXXX to attend, it appears that he did not show up.
In addition at an early stage of the relationship, XXXX began to develop significant debit charges on his accounts. The compensation arrangements under life and annuity contracts are such that there is a significant load factor or first year omissions. Typically a first year commission on a life insurance contract could be as high as 90% of the first year premium. So for a million dollar policy, an applicant could pay only the first month premium of $3,000 for example and the agent receives a commission of $30,000. If the policy then lapse, it can cause a charge back in the agent commission account. A memo from XXXX in 2002 indicates that XXXXX had substantial lapses in 2002 and also indicates that XXXX is going through some “trying financial times.” Again, the situation is such that would call upon XXXX to assure themselves that their policyholders are being protected. Clearly, accounts should have been audited and action taken to put XXXX and his activities under supervision and/or suspension.
In addition XXXX was selling and servicing 419 plans and making checks payable to XXXXXXXXXX. XXXXX prohibits sales of 419 plans. Also there was evidence of checks written by XXXXXX customers to XXXXX’s personal marketing assistant. He was selling products that were not approved by XXXX. Checks were being written to companies other than XXXXX.
It is difficult for me to understand what XXXX was thinking in allowing XXXXX to continue to represent them. In 2001, instead of termination, he was placed under some type of supervision. However, whatever the plan was, it was not working, as to XXXXX. XXXXX continued to put him into unsuitable investments, sold him life insurance products that were unneeded and lapsed and moved his money out of an annuity into an unsecured real estate investment. (Transglobal). No body was providing oversight over XXXXX. All of this was under the guise of XXXX representing XXXX and that these were XXXX Life Products. The Transglobal investments were not secure and most were made by XXXXX without XXXXs consent. All the money was lost.
Deposition testimony particularly from agent XXXXX as well as XXXX indicates that XXXXX’s reputation was not good and that the volume of business he was writing was also not good business. XXXX had significant lapses in 2002 and was in arrears in July of 2002 in the amount of $98,000. XXXXX who supervised XXXX was questioning method of payments and movement of funds and wanted to make certain policyholders were being protected. This was all surfacing while XXXX was churning XXXXX’s accounts and investing his money in unsuitable investment schemes. XXXXX should have been suspended immediately.
In addition money was being paid to XXXXX Life care of other companies. Policies were being sold where the premium was equal to 50 % of a client’s annual income; sales of 419 plans were being made when XXXX prohibited sales of these products. Checks were being made out from customers personally to XXXXX’s personal marketing assistant, and XXXX had a 76% lapse rate in one month. Clearly XXXX was engaged in activities that were contrary to the best practices XXXX would expect of any agent. The situation called for immediate termination. It became so severe that XXXX worried that XXXXX in a remote location would destroy evidence. A letter of suspension was actually written. Surprisingly and quite frankly quite shockingly, XXXX was permitted to stay on. There is a detailed corporate internal audit report dated May 19, 2003. It reflects numerous company rules violations and additional information concerning tax liens, vehicles being repossessed and $90,000 vehicles being purchased to replace the repossessed vehicle and disclosure that a former client had filed a civil action that XXXX had moved a customer’s funds from XXXXXX to a XXXX Securities a company that XXXX had an ownership interest in. XXXXX seemed to be satisfied with XXXX offering no comment on the civil action. XXXX was also involved in the proceedings involving a former XXXXX XXXX client. It is disturbing that XXXX would accept a no comment response. The sum and substance of the audit report should have called for XXXX to be suspended. Instead, a corrective action plan was entered into. The plan seems to minimize serious issues and portrays XXXXX as being reinvented and entering new markets where his potential is to earn $500,000. Mention is made of specifically churches, Fulton County Sheriffs in Ga for 22 million and Philadelphia for 30 million. It appears that XXXX was willing to look the other way on its own rules rather than lose the money that XXXX promised to produce. I understand that the Fulton County, Georgia/ XXXX deal suffered a similar fate as XXXXX. Also some type of discipline was recommended but it appears nothing was ever done in this respect. It appeared that it was intended to be no more than a slap on the wrist.
It was not until early 2004, when XXXXX was caught red handed misusing client’s funds that XXXXX resigned the next day citing his mistreatment as the reason.
I continue to read material that you are providing to me. At this juncture, I am offering you this letter reflecting my opinion on the matters you asked me to review. I have not yet reviewed the depositions of any XXXXX or XXXXX Life personnel and I would like to supplement my opinion after obtaining that information.
Thank you for the opportunity to be of service.
Very Truly Yours,
John J. O’Brien JD, CLU, CPCU
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