A recent case from California holds that insurance churning can be a form of elder abuse.
What is Elder Abuse in California?
The California Elder Abuse Act covers physical and mental abuse, neglect, financial abuse, abandonment, isolation, abduction, or other treatment resulting in physical harm or pain or mental suffering.
What is Financial Abuse of an Elder in California?
Financial abuse of an elder is depriving the elder of their property. The full definition (California statute section 15610.30):
(a) “Financial abuse” of an elder or dependent adult occurs when a person or entity does any of the following:
(1) Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.
(2) Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.
(3) Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence, as defined in Section 15610.70.
(b) A person or entity shall be deemed to have taken, secreted, appropriated, obtained, or retained property for a wrongful use if, among other things, the person or entity takes, secretes, appropriates, obtains, or retains the property and the person or entity knew or should have known that this conduct is likely to be harmful to the elder or dependent adult.
(c) For purposes of this section, a person or entity takes, secretes, appropriates, obtains, or retains real or personal property when an elder or dependent adult is deprived of any property right, including by means of an agreement, donative transfer, or testamentary bequest, regardless of whether the property is held directly or by a representative of an elder or dependent adult.
(d) For purposes of this section, “representative” means a person or entity that is either of the following:
(1) A conservator, trustee, or other representative of the estate of an elder or dependent adult.
(2) An attorney-in-fact of an elder or dependent adult who acts within the authority of the power of attorney.
What is Insurance Churning?
In the life insurance context, the term “churning” refers to the removal, through misrepresentations or omissions, of the cash value, including dividends, of an existing life insurance policy or annuity to acquire a replacement insurance policy. The value of the first policy may be reduced either by borrowing against the policy or by virtue of the policy’s lapse. Churning often results in financial detriment to the policyholder, a financial benefit to the agent by virtue of a large commission on the first year premium, and administrative charges being paid to the insurer.
In re Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 450 (D.N.J. 1997).
Can Insurance Churning Be Considered Elder Abuse?
Yes. Under the California Elder Abuse Act, insurance churning can be remedied as a form of financial abuse of an elder.
In Mahan v. Charles W. Chan Ins. Agency, Inc., 14 Cal. App. 5th 841, 222 Cal. Rptr. 3d 360 (2017), the court treated life insurance policy churning as a form of elder abuse.
The plaintiffs, Fred and Martha Mahan, purchased two life insurance policies in the mid-1990s, with death benefits of approximately $1,000,000. The policies were placed into a revocable trust established by the children (the “Children’s Trust”) of which the Mahan’s daughter Maureen as the trustee. The plaintiffs funded the trust with premiums to sustain the insurance plan for many years.
About twenty years after the policies were purchased, defendant insurance agents carried out a scheme to have the Mahan family surrender one of the life insurance policies and replace it with a new policy involving a massive premium increase and less death benefit (insurance churning). The premiums increased by more than $100,000 per year and the transaction generated approximately $100,000 in commissions for the defendants. Maureen as trustees and the Mahans separately brought suit against defendants, with the Mahans alleging (among other things) financial elder abuse as a result of the insurance churning.
The defendants moved to dismiss the financial elder abuse claim, contending that the real party in interest was the Children’s Trust, which owned the policies and suffered the deprivation. Because the Children’s Trust was not an individual over age 65, there could be no financial elder abuse claim.
The Court held that the Mahans were deprived of their property rights, in terms of damage to their estate plan, the loss of money spent to pay the massive increase in premiums, and the loss of the money transferred to the Children’s Trust to pay defendants commissions. The Court reasoned that a deprivation for financial elder abuse purposes does not require “the direct taking by one person of the property of another,” nor does it necessitate the satisfaction of “some kind of privity requirement.”
No one disputes that the Mahans were “elders” when the acts alleged in the FAC took place, or that the alleged chicanery of the Respondents, either directly or in assisting one another, potentially exposes them to liability under the statute — if the Mahans have adequately alleged a “deprivat[ion]” of the “property of an elder” for a “wrongful use” or by “undue influence.” Placing great emphasis of the words “the property of an elder,” the Respondents contend the Mahans were not “deprived” of any such property, and, even assuming there was a “depriv[ation]” of something, the Trust owned whatever was allegedly taken here. Thus, it is claimed, the Respondents committed no statutory violation because they “did not `take the property of an elder’ to get the commission they allegedly were paid.”
Respondents’ narrow construction of the Elder Abuse Act as incompatible not only with its overall remedial purpose, but also with the breadth of the “financial abuse” provisions of the Act as those provisions have evolved by amendment in recent years.
Respondents’ insistence that any compensation for their services came from the Trust, and that the Mahans never paid a dime themselves, strikes us as an argument going to the scope of the relief available, not to the question of whether a claim for relief has been stated in the first instance. Certainly, the adverse financial consequences flowing from the Respondents’ actions cannot be awarded twice in damages, both to the Trust and to the Mahans, but any damages apportionment issues must be dealt with as a matter of proof, not as a matter of pleading. On this record, we cannot say what specific items of damages may be awardable to the Mahans, as distinguished from the Trust. All we can say definitively is that (1) it can be fairly inferred from the allegations of the FAC that the Mahans suffered at least some damages unique to themselves, and (2) the Respondents are entitled to object to any effort at double recovery.
What is Undue Influence Under the California Elder Abuse Act?
The California Elder Abuse Act allows damages for undue influence of an elder resulting in harm. Undue influence is defined as (Section 15610.70):
(a) “Undue influence” means excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity. In determining whether a result was produced by undue influence, all of the following shall be considered:
(1) The vulnerability of the victim. Evidence of vulnerability may include, but is not limited to, incapacity, illness, disability, injury, age, education, impaired cognitive function, emotional distress, isolation, or dependency, and whether the influencer knew or should have known of the alleged victim’s vulnerability.
(2) The influencer’s apparent authority. Evidence of apparent authority may include, but is not limited to, status as a fiduciary, family member, care provider, health care professional, legal professional, spiritual adviser, expert, or other qualification.
(3) The actions or tactics used by the influencer. Evidence of actions or tactics used may include, but is not limited to, all of the following:
(A) Controlling necessaries of life, medication, the victim’s interactions with others, access to information, or sleep.
(B) Use of affection, intimidation, or coercion.
(C) Initiation of changes in personal or property rights, use of haste or secrecy in effecting those changes, effecting changes at inappropriate times and places, and claims of expertise in effecting changes.
(4) The equity of the result. Evidence of the equity of the result may include, but is not limited to, the economic consequences to the victim, any divergence from the victim’s prior intent or course of conduct or dealing, the relationship of the value conveyed to the value of any services or consideration received, or the appropriateness of the change in light of the length and nature of the relationship.
(b) Evidence of an inequitable result, without more, is not sufficient to prove undue influence.
Back to the Mahan case, one of the claims against the insurance agents was for undue influence. The Court allowed the claim to proceed, reasoning:
The last question we address in applying the Elder Abuse Act is whether the FAC sufficiently alleges “depriv[ation]” committed by “undue influence” (§§ 15610.30, subds. (c), (a)(3), 15610.70), which is an alternative to “depriv[ation]” by “wrongful use or with intent to defraud” (§ 15610.30, subd. (a)(1), (2)), under the revised liability scheme created by amendment in 2008. We think the FAC sufficiently alleges the Mahans’ felt need to pay more into the Trust to keep it afloat was brought about by “undue influence” as now defined in section 15610.70. The Respondents are alleged to have taken advantage of two aged individuals, both in a state of cognitive decline (§ 15610.70, subd. (a)(1)); and, by use of their professed expertise as insurance professionals (id., subd. (a)(2)), carried out an elaborate plan of replacing insurance on the victims’ lives by “actions or tactics” that included “haste or secrecy” (id., subd. (a)(3)(C)), ultimately visiting serious inequity on them, which included adverse “economic consequences,” “divergence from [their] prior intent,” and commissions paid that are out of proportion to the value of the services rendered to them (id., subd. (a)(4)). Thus, the plain terms of section 15610.70, subdivision (a), fit what is alleged here quite well. The Respondents are free to argue in their defense that, factually, and as a matter of causation, the Mahans’ actions in paying more money into the Trust were volitional and somehow independent of their alleged bad acts, but for now the FAC sets forth plenty to permit a finding to the contrary.