Imagine a soap opera about a wealthy family that includes two parents and five grown daughters. One of the daughters marries a financial advisor. The parents buy a life insurance policy from him worth close to a million dollars. However, after the father dies, the family finds out that the policy is worth far less than they thought. A lawsuit ensues, pitting two sisters against their brother-in-law. This actually happened to an agent in Maryland.
In 1990, the parents bought a “second to die” life insurance policy that named their five daughters as both owners and beneficiaries. One of the daughters was married to an insurance agent who served as the parents’ financial advisor, and he managed the life insurance purchase and maintenance.
The parents sought to avoid estate taxes by arranging a procedure by which they would reduce their assets by making cash gifts to their children. The women would then use the gifts to pay the premiums on the policy. The financial advisor set up a process that would automatically pay the premiums out of the daughters’ bank accounts after the cash gifts were deposited. According to the appellate court’s opinion, “It was never envisioned that the children would pay the premiums with their own funds, and they never did.”
For the first several years, this process worked. However, no premiums were paid in seven out of the eight following years. During these years, the premium invoices were sent to an address in care of the brother-in-law. The policy contained a “paid-up life insurance” clause stating that, if a premium was not paid and the policy had cash value, at the time of the second death the insurer would take the cash value, subtract any outstanding debt, and use the remainder as a single premium payment. The amount of insurance would be computed based on the amount that could be purchased with that single payment.
During the years that no premiums were paid, the insurer borrowed $900,000 from the cash value to keep the policy in force. Upon the father’s death in 2005, the siblings learned that their policy was worth much less than they thought. They looked for someone to blame, and they chose their brother-in-law and the companies involved with the policy. Two of the sisters sued him and five financial services companies for negligent misrepresentation, deceit, conversion, negligence, constructive fraud and negligent supervision.
It took another seven years before the case finally went to a jury trial. The jury found the brother-in-law liable for all of the allegations, concluded that he acted with actual malice, and found that one of the financial services companies was negligent in supervising him. They awarded the two sisters a total of $1,482,899 (split evenly between them) plus $150,000 in punitive damages. The defendants appealed.
The appellate court reversed the jury’s finding of liability for conversion and constructive fraud. It also ruled that the trial court was wrong to exclude certain evidence of the parents’ intentions with the gifts and that its instructions to the jury were incorrect. However, it also found that the instructions did not properly advise the jury on the advisor’s and his agency’s duties to the two sisters. Based on that, it ordered a new trial on the negligence, negligent misrepresentation, deceit, and negligent supervision allegations. Lastly, it also ruled that the jury had incorrectly calculated the amount of damages.
The court’s opinion does not say why the premiums were not paid during those seven years, nor does it say what the advisor did with the invoices. By inserting himself into the process as the recipient of the invoices, he opened himself up to charges of misconduct when something went wrong. If he was unable to arrange to have the premiums paid, he should have forwarded the invoices to the person who could make that happen. His mishandling of them caused a sizable loss and resulted in years of litigation, made worse because it was an intra-family dispute.
Financial advisors must take great care to ensure the proper handling of premium bills, particularly when they are advising family. As this agent found out, the failure to do so can have catastrophic consequences.