As the secondary market for life insurance, usually referred to as “life settlements”, has expanded rapidly, so have the number of difficult questions to be addressed. One of the most persistent and important issues is that of the privacy of the insured. The information most critical to valuing a life insurance policy in the secondary market is the insured’s life expectancy, which can be assessed accurately only by review of the insured’s medical records. In most life settlement transactions, which are extensively regulated in forty of the fifty states, consent of the insured is a prerequisite before their medical information can be obtained.
What, then, if the insured person refuses to give this consent? In most situations, this terminates the transaction. If the insured refuses to consent to the release of his or her medical records, then it is impossible to accurately value the policy. However, an insured’s right to privacy does not, in every case, trump the need for their medical information. In Adam Aircraft Industries, Inc. v. George F. Adam, Jr., 2009 Bankr. LEXIS 4137 (June 22, 2009), the court faced this precise question and incorrectly, in my opinion, decided the insured’s right to privacy outweighed the debtor’s need for the insured’s medical information.
Mr. Adam, the debtor’s founder, left the failing company shortly before it filed for Chapter 7. After his departure, but before the bankruptcy filing, the company transferred the ownership of three life insurance policies worth a combined $10,000,000 to Mr. Adam for unknown, and possibly no, consideration. Because the transfers occurred within two years of the bankruptcy filing, the trustee-in-bankruptcy sought to void the transfers. In order to determine the policies’ true values (which Mr. Adam claimed were worthless), the trustee issued discovery requests seeking current information about Mr. Adam’s health and physical condition.
Mr. Adam filed a motion for protective order seeking to avoid responding to the discovery requests related to his health citing HIPAA and other privacy concerns. The court agreed, holding that “[u]nder the circumstances of this case… the duty of the Trustee to collect and preserve potential assets of the estate does not trump a non-debtor’s right to privacy in his medical records and health information.”
In its analysis, the court correctly stated that it must balance Mr. Adam’s right to privacy versus the trustee’s need for information to maximize the value of the debtor’s estate. However, its statement that Mr. Adam’s “medical condition is only one factor the Trustee, or life settlement company, may use to determine the value of the term life insurance policies” evidences its lack of comprehension of how life insurance policies are valued. While an insured’s medical condition is not the only factor used to value a policy, it is far and away the most determinative.
In my view, under the specific circumstances of this case, the court’s decision to grant the protective order was incorrect. A trustee’s duty is to increase the value of the debtor’s estate for the benefits of its creditors. The policies transferred to Mr. Adam just a few months before the filing of the bankruptcy might have added significant value to the debtor’s estate. These were company-owned policies, and Mr. Adam would have been required to undergo a physical examination and disclose his medical information as a step in their issuance. Having thus consented to the dissemination of his medical information in connection with obtaining the policies, there is no consistent, logical basis for the court’s holding that granting the protective order would “protect Adam from annoyance, embarrassment, oppression, or undue burden or expense. . . .” Ultimately, it appears the court imposed its own view based on the nature of the transaction, rather than simply following the law and allowing the trustee to carry out his duties to the fullest extent possible.
James W. Maxson is Of Counsel in the firm’s Insurance and Reinsurance Practice and co-chair’s the firm’s Life Settlement Practice. Mr. Maxson concentrates his practice in corporate and regulatory matters for the life settlement industry, as well as focusing on mergers and acquisitions and securities transactions. Jim received his bachelor’s degree from Denison University and law degree from the Ohio State University School of Law.