Coventry First, a Fort Washington, Pa.-based life settlement firm, is an example of much of what’s wrong with the life settlement industry, according to a Florida regulator’s testimony at a recent hearing of the U.S. Senate Special Committee on Aging.

Meanwhile, at the same hearing, a Coventry First executive accused life insurance companies of prohibiting agents from mentioning life settlements as an option, terminating agents who help clients sell life policies, rescinding policies sold in the secondary market and imposing restrictions on policy sales.

“All of these efforts are calculated to protect [insurers'] corporate profits at the expense of consumers,” said Michael Freedman, a Coventry First vice president, in his prepared remarks.

Freedman’s allegations against insurers came as Florida’s deputy insurance commissioner, Mary Beth Senkewicz, lashed out at Coventry First.

Mary Beth Senkewicz (Courtesy: Cabrini College)

“To illustrate the challenges in the marketplace, one should look no further than Coventry First LLC, a principal player in the market,” Senkewicz said in her prepared testimony.

Over the last 25 years, Coventry First, one of the largest life settlement firms in the U.S., has paid more than $2 billion to policyholders beyond the surrender value, according to company officials.

Senkewicz then explained the long regulatory history of Coventry First in Florida. She explained that after then-New York Attorney General Eliot Spitzer sued the company in October 2006, alleging it of bid-rigging and other forms of fraud in acquiring more than $3.6 million worth of life insurance policies, Florida regulators began to investigate the company and filed suit in May 2007. The case was settled for $1.5 million.

Last year, Florida regulators wanted to conduct an on-site examination of the company and sought information about settlements in Florida and nationwide. Coventry argued that Florida regulators were not authorized for such a search. In March, a federal court gave Florida’s Office of Insurance Regulation the right to view any of Coventry’s life settlement records.

Coventry, Senkewicz said, has appealed that ruling to the U.S. Court of Appeals.

Coventry, she added, has also opposed filing an annual report, due Dec. 31, 2008, saying it cannot submit the report because the form has not been adopted by rule.

“To put this in perspective, Florida has issued licenses to 24 entities to offer these [life settlement] products,” Senkewicz testified, noting that 10 have either surrendered or had their licenses revoked. “Despite the fact this is such a small industry relative to other lines of insurance, the industry has incurred 18 different legal orders, two administrative complaints, and 11 examinations or investigations with additional accompanying consent orders that include assess fines and costs of $1.95 million.”

She called the expenditure of government resources “egregious” since the industry only represents 14 of the 3,900 regulated entities in 2008.

Freedman said Coventry First company supports “fair competition in the market regulated to provide transparency for consumers and a fair playing field for business,” according to his prepared remarks. “Such a market is the best way to protect and provide the most value to consumers,” he added.

In his prepared remarks, Freedman called it “common practice” among insurers to prohibit their agents from informing policy owners about the life settlement option.

“Insurance companies have terminated agents for helping consumers sell their policies, leaving the consumer with few, if any, options beyond the lapse or surrender of these policies,” he said in the prepared remarks. “Insurers have sought to rescind policies sold in the secondary market and have imposed contractual restrictions on policy sales. Some have even refused to issue policies when a prospective policy owner indicates an awareness of the policy’s market value.”

At the same hearing, Scott Peden, president and general counsel of Life Partners Inc., another life settlement firm, encouraged legislators to recognize that life settlements should not be regulated as insurance and should pass legislation pre-empting state legislation to give uniformity to regulation. He also said in his prepared remarks that many of the reported abuses and problems with the issuance of policies to unqualified insureds “rests with the practices of insurance agents and insurance companies, not with life settlement companies.”

Peden also asked Congress to create regulation that recognizes “a distinction between ordinary insurance consumers and sophisticated insurance consumers,” saying strict regulation may not be necessary for those with an understanding of life settlements.