Client Alert: Eleventh Circuit Ruling In Viatical Case Provides Lesson For Challenging Validity Of Fraudulently Procured Policies

In a defeat for the life insurance industry, the 11th U.S. Circuit Court of Appeals, in Am. United Life Ins. Co. v. Martinez, No. 05-14920, 2007 WL 677729 (11th Cir. March 7, 2007), affirmed a lower court ruling that effectively bars insurance companies from asserting fraud claims against a class of life insurance policy holders without challenging each policy individually and with particularized pleadings. Of immediate consequence to the parties, the ruling also bars certain insurance companies from canceling policies at the center of a massive fraud investigation into Mutual Benefits Corporation, a Florida viatical company (“MBC”), and its affiliates Viatical Benefits, LLC and Viatical Services, Inc. (collectively, the “Receivership Entities”).

The panel issued the opinion in favor of the Receivership Entities, which were the target of a host of civil lawsuits brought by investors and insurance companies after the companies collapsed in 2004, and Roberto Martinez, an attorney who is currently serving as their receiver (the “Receiver”). By 2004, MBC owned interests in over 9,000 separate life insurance policies and could claim assets in the form of future death benefits totaling $1.067 billion. According to prosecutors, the Receivership Entities ran a Ponzi scheme that duped their investors out of nearly $1 billion, for which several of the Receivership Entities’ top officers have been indicted for securities fraud. This opinion has been touted as a victory for the Receivership Entities’ 30,000 investors who stood to lose more than $100 million if the Court had disaffirmed the lower court’s ruling and left open the door for the seventeen appellant insurance companies, including giants like Indianapolis-based American United Life Insurance (collectively, the “Insurers”), to void all of the policies in dispute.  more...