Claims of Exploitation of the Elderly in the Sale of Financial Products
A new wave of litigation sweeping across our nation involves the sale of financial products, particularly annuities,1 that are sold to senior citizens. Savvy attorneys have brought lawsuits against sellers of these products under elder abuse statutes in the form of class actions and individual claims.
Before any analysis of the elder abuse statutes, it is important to have a basic understanding of the financial products that are the subject of elder abuse claims. There are two basic types of annuities on the market:
• Fixed annuities — Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three, or five years. Once the guarantee period is over, a new interest rate is set for the next period. This guarantee of both interest and principal makes fixed annuities somewhat similar to certificates of deposit (CDs) purchased from a bank. Unlike the typical CD, an annuity is not backed by the Federal Deposit Insurance Corporation.
A subclass of fixed annuities is equity indexed annuities. These are for a fixed term; however their interest is not guaranteed, but rather tied to an index, such as the S&P 500. Therefore, these annuities are capable of increasing the return if the market is good, yet they typically have a minimum interest guarantee of usually two to three percent. These annuities also generally have high surrender periods, which means that if the annuities are surrendered before the expiration of the fixed term, they will incur substantial penalties, as high as 15 to 18 percent. Generally, the surrender period makes them a disadvantageous investment vehicle for seniors who will need access to their money as they age and their health deteriorates.
• Variable Annuities — Variable annuities offer a range of investment or funding options which may include stocks, bonds, or money market instruments. Neither principal nor return are guaranteed in these types of annuities since they are tied to the performance of the underlying investment options. Some variable annuities offer a fixed account option that guarantees both principal and interest, much like a fixed annuity. In this manner, the monies can be split between a low risk option and an aggressive, more risky option.
Elder Abuse Statutes
More than half of the states in the U.S., as well as the Virgin Islands and Guam, have statutes that prohibit exploitation of the elderly.2 Most state statutes provide penalties for physical abuse or neglect of an elder or dependent adult, and eight states provide penalties for physical or emotional abuse of an elder or vulnerable adult.3 Other states penalize mere failure to report suspected elder abuse to the proper authorities. Once elder abuse is reported, the state social workers or other state agency representatives are charged with the responsibility of correcting the abusive situation. In these states, no cause of action is available to the family or the victim against the abuser. Other states have elder or dependent adult statutes that create some sort of protection but do not provide specific penalties for abuse.4
As a state with vast numbers of senior citizens, Florida enacted in 1973 the Adult Protective Services Act, F.S. §§415.101 through 415.113. This statute creates a private cause of action for a violation of the act and provides that “a vulnerable adult who has been abused, neglected or exploited as specified in this chapter has a cause of action against any perpetrator and may recover actual and punitive damage for such abuse, neglect or exploitation.”5 As an incentive to plaintiffs’ attorneys, the statute provides for recovery of attorneys’ fees and costs.6
Other state statutes have even broader powers and are being invoked on a regular basis by both private litigants and regulatory bodies. For instance, California has enacted a statute titled, “Elder Abuse and Dependent Adult Civil Protection Act.”7 The California statute defines “financial abuse” as when a person or entity does any of the following: 1) takes, secretes, appropriates, or retains real or personal property of an elder or dependent adult to a wrongful use or with intent to defraud, or both; or 2) assists in taking, secreting, appropriating, or retaining real or personal property of an elder or dependent adult to a wrongful use or with intent to defraud, or both. The California regulations specifically provide for 1) reasonable attorneys’ fees and costs, including a conservator’s costs related to the institution of litigation; and 2) general damages for a decedent’s pain and suffering, in an amount no greater than $250,000. (Normally, under Probate Code §573, damages cannot be recovered for a decedent’s pain and suffering upon the decedent’s expiration. The legislature created an exception to that rule in the California elder abuse statute). In contrast, Florida’s statute does not allow recovery for pain and suffering in the absence of a physical impact or injury.
• Vulnerable Adult — Under this broad rubric, creative plaintiffs’ attorneys are taking typical insurance sales and turning them into claims for elder abuse and financial exploitation, simply because the product was sold to a senior citizen rather than a younger working person. These statutes typically define a “vulnerable adult” as a “person 18 years of age or older whose ability to perform the normal activities of daily living or to provide for his or her own care or protection is impaired due to a mental, emotional, physical or developmental disability or dysfunctioning or brain damage or the infirmities of aging.”8
Typically, in the case of seniors, plaintiffs’ attorneys attempt to avail themselves of the statute by asserting that the senior suffers from unspecified “infirmities of aging.” Because there is no case law construing this term, the defense will argue that age alone is insufficient to establish that a senior is “infirm.” Thus, the discovery process in these types of cases is medically oriented. The defendant will typically seek to obtain medical records and financial records to show that a senior citizen is not infirm or unable to physically or mentally care for himself. The establishment of a guardianship is critical in these cases to demonstrate that the senior citizen is incapable of making such decisions on his own. Since Florida recognizes the right to a speedy trial if a plaintiff is over the age of 65,9 medical discovery will need to be done on an expedited basis.
• Exploitation — Even if the plaintiff can establish “vulnerability,” he or she must still establish that the plaintiff was exploited. Under F.S. §415.102(7)(a), “exploitation” occurs when a person who:
1) stands in a position of trust and confidence with a vulnerable adult and knowingly, by deception or intimidation, obtains or uses or endeavors to obtain for use, a vulnerable adult’s funds, assets, or property with the intent to temporarily or permanently deprive a vulnerable adult of the use, benefit, or possession of the funds, assets, or property for the benefit of someone other than the vulnerable adult; or 2) knows or should know that the vulnerable adult lacks the capacity to consent, and obtains or uses, or endeavors to obtain or use, the vulnerable adult’s funds, assets, or property with the intent to temporarily or permanently deprive a vulnerable adult of the use, benefit, or possession of the funds, assets, or property for the benefit of someone other than the vulnerable adult.
There is a dearth of case law in Florida construing this statutory scheme. Therefore, the definitions, as supplied by the legislature, are capable of differing interpretations. For instance, plaintiffs may argue that an insurance company or the salesperson are acting as “caretaker” or are involved in a “fiduciary relationship as defined by F.S. §§415.102(4) and 415.104(10). Normally, in the sale of most insurance or financial products, the role of the typical insurance salesperson is simply to act as a conduit for the sale between the insurance company or financial services company and the senior purchaser. The salesperson does not act in a custodial manner, nor as a caretaker of the elderly adult. Only one decision interprets the term “caretaker.” In a case brought by the Department of Children and Family Services, the Second District Court of Appeal held that a daughter was not her mother’s “caregiver.” Thus, the daughter could not be found to have abused, neglected, or exploited her mother when she did not call for help after her mother fell. This was because 1) there was no commitment or agreement that the daughter would act as her mother’s caregiver; 2) calling for help would have required countering her mother’s expressed desire to refuse help; 3) the mother was independent in her daily routine and made decisions for herself; and 4) prior to the fall, the mother knowingly suffered from certain medical conditions and refused to seek medical help.10 Therefore, a legal defense can be mounted that these statutes do not apply in the context of an arms-length commercial transaction. Nevertheless, these statutes are construed on a case-by-case basis, so the relationship between the senior purchaser and the insurance salesperson nevertheless may rise to the level of being fiduciary in nature.
Pending Litigation and Class Action Lawsuits
As noted above, these types of claims are fairly complex and often evolve into class actions by virtue of the number of persons affected. On February 10, 2005, Attorney General Bill Lockyer and Insurance Commissioner John Garamendi of the State of California filed a $110 million-plus lawsuit against a “living trust mill” that allegedly tricked senior citizens into using retirement investments to buy annuities. The complaint alleges that the defendants used the pretext of the offer and sale of estate planning products and services to establish confidential relationships with consumers and to find out about their assets, and then exploited those relationships by using financial information to induce consumers to purchase annuities. This was the second lawsuit brought by the California attorney general’s office against a living trust mill. Two years ago, a state appeals court affirmed a multi-million dollar judgment against Fremont Life Insurance Company, which was found to have conspired with a living trust mill called Alliance for Mature Americans.11
The State Securities Division for the Commonwealth of Massachusetts also has recently questioned 15 financial firms, including some of the largest brokerage companies, in an extensive investigation into whether senior citizens are being sold variable annuities that are not appropriate investments for them. In February 2005, Massachusetts officials accused Citizens Financial Group of “unethical or dishonest conduct” for targeting seniors in selling variable annuities.12 Two large Massachusetts banks are under investigation.13 In response to these investigations, the National Association for Variable Annuities observed that people are living longer, so the sale of annuities that won’t mature for 10 years is not inappropriate for seniors’ changing needs.
Other state regulators are following suit by launching investigations into companies that target senior citizens and the sale of annuities. The insurance commissioner for the State of Delaware in October 2005 proposed regulation to require insurance agents, brokers, and insurance companies to make reasonable efforts to obtain information about the senior’s financial status, tax status, and investment objectives, and to not recommend the purchase of an annuity without having reasonable grounds to believe the annuity is appropriate. In addition, the Delaware regulations propose written procedures and regular audits to ensure compliance.14
In addition to regulatory actions, class actions have been filed against Midland National in California and against American Equity Investment Life Insurance Company in Florida. The class action lawsuit was filed on January 25, 2005, against Midland National Life Insurance Company on behalf of senior citizens who allege that insurance annuities sold by Midland National were unsuitable for seniors because the annuity payment schedule did not begin until long after their life expectancy. The plaintiff there contends that Midland sold him a deferred annuity policy in January 2003, when he was 73 years old. After paying about $43,000 in premiums, based on the company’s payment schedule, the plaintiff was not due to receive payouts until he turned 115 years old. He died 17 months after buying the policy.15 The federal class action case against American Equity Investment Life Insurance Company was settled in 2005.
Insurance companies can attempt to protect themselves by using clear and simple language in their sales literature and by fully explaining the surrender penalties and other negative implications of investment tools. Defense lawyers should explore this, as well as the extent of training the insurance sales force received about the nature and true effect of the products, instead of simply training agents on sales techniques. More complete training should reduce the number of misrepresentation claims.
The sale of financial and investment vehicles is generally fraught with obstacles. When the sale involves annuities and seniors, however, the mix can be even more disastrous. Plaintiffs’ lawyers are using state elder abuse statutes to transform these claims into more extensive and complex class action lawsuits. Insurance carriers, along with their agents, are being targeted by state regulators and private plaintiffs’ firms. Since there are no established protocols for when sales are appropriate for seniors, all of these claims are treated on a case-by-case basis, with the court system as the final arbiter.
1 An annuity is a savings instrument which accumulates sufficient funds to pay a fixed income to the annuitant for a definite period of time or for the annuitant’s lifetime, which provides interest on a tax-deferred basis. In re LifeUSA Holding Inc., 242 F.3d 136, 139 n.2 (3d Cir. 2001). As insurance products, annuities are approved by the state regulatory body on insurance, such as the Department of Insurance or Department of Financial Services.
2 Cal. Welf. & Inst. Code §§15600-15675; Il. Stat. Ch. 320 §20/11 et seq.; Iowa Code §726.8 (addressing dependent adults rather than elders specifically); Md. Code Criminal Law §3-604; Mich. Comp. Laws. Ann. §§750.145n (criminalizing vulnerable adult abuse, rather than elder abuse specifically); Mo. Ann. Stat. §§198.070 (failure to report) and 198.067 (civil penalties for abuse in nursing homes); Neb Rev. Stat. §28-386(1); N.Y. Penal Law §§260.32 and 260.34 (McKinney); Ore. Rev. Stat. Ch. 124; S.D. Codified Laws Ann. tit. 22 Ch. 46; Utah Code §76-5-111; Va. Code Ann. §18.2-369, as amend. by 2001 Va. Laws Ch. 181 (S.B. 801); Rev. Code of Wash. §§74.34.005 through 74.34.210; W. Va. Code §9-6-1; Wy. Stat. §§35-20-101 through 35-20-108.
3 Ala. Code. §§38-9-1 through 38-9-11; Ariz. Rev. Stat. Ann. §13-3623); Fla. Stat. Ann. §§415.101 through 415.113; Minn. Stat. Ann. §§609.231 and 626.557(d) (as amend. by 2001 Minn. Sess. Law Serv. 1st Sp. Sess. Ch. 9 (S.F. 4) (West); Nev. Rev. Stat. §§200.5091 through 200.50995; S.C. Code Ann. tit. 43 Ch. 35; Tenn. Code Ann. §§71-6-101 through 71-6-120; Vt. Stat. Ann. tit. 33, Ch. 69 (2000).
4 Alaska Stat. §47.24.010, as amended by Alaska Law Exec. Ord. 2001-1023; Conn. Gen. Stat. §17b-407(a); Ga. Code §31-8-84; 10 Guam Code Ann. §2954; Haw. Rev. Stat. §346-224); Idaho Code §39-5303; Iowa Code §235B.3, as amend. by 2001 Ia. Legis. Serv. H.F. 680 (West); Kentucky Rev. Stat., tit. XVII, Ch. 209 and tit. 194A700 et seq.; La. Rev. Stat. Ann. §14:403.2), as amend. by La. Sess. Law Serv. Act 1032 (S.B. 973) (West); N.H. Rev. Stat. Ann. §161-F:46 ; N.J. Stat. Ann. §52:27G-7.1; 43A Okla. Stat. Ann. s. 10 §101-105; N.M. Stat. Ann. 27-7-30; R.I. Gen. Laws §42-66-8.2; Tex. Human Res. Code Ann., tit. 2 Ch. 48.; Virgin Islands Stat., tit. 34 §453; Wis. Stat. §46.90(1)(f).
5 Fla. Stat. §415.1111.
7 California Welfare and Institutions Code §§15600 – 15675.
8 Fla. Stat. §415.102(26).
9 Fla. Stat. §415.1115.
10 S.S. v. Department of Children and Family Services, 805 So. 2d 879 (Fla. 2d D.C.A. 2001).
11 Press Release 05-102, Office of Attorney General, State of California, February 10, 2005.
12 Press Release, Secretary of State, State of Massachusetts, February 18, 2005.
13 Andrew Caffrey, 15 Firms Now Face Annuities Inquiries, The Boston Globe, February 18, 2005.
14 Press Release. Insurance Commissioner and Department of Insurance for the State of Delaware, October 19, 2005.
15 Josh Friedman, Annuities Coming Under Increased Scrutiny, The Los Angeles Times, Jan 26, 2005, at C1.
Geralyn M. Passaro is a partner in the Ft. Lauderdale office of Stephens, Lynn, Klein, La Cava, Hoffman & Puya, P.A. She concentrates her practice in litigation, with a particular focus on professional liability defense of insurance agents, real estate brokers, and title agents.
This column is submitted on behalf of the Trial Lawyers Section, Bradley E. Powers, chair, and D. Matthew Allen, editor.