Churning: (1) Where an insurance broker or agent encourages clients to trade existing policies or purchase new ones with the selfish purpose and intent of earning large sales commissions and under the guise of acting in the best interests of the client; (2) excessive or inappropriate trading for a client's account by an insurance broker or agent who has control over the account with the intent to generate commissions rather than benefit the client. It's also been defined as excessive trading done primarily to benefit the broker by generating commissions in excess of those justified.
In a recently published 2017 decision - Mahan v. Charles W. Chan Ins. Agency, Inc., et al. - the California Court of Appeal dealt with issues at the intersection of insurance broker duties and financial elder abuse. The opinion holds that the trial court erred in entering judgment in favor of the insurance defendants. Stated otherwise, the opinion holds that the elderly plaintiffs had stated facts sufficient to constitute a cause of action for financial elder abuse and should be permitted to pursue that claim in court.
Plaintiff Fred Mahan (age 86) and his wife, Martha (age 79), and their trust filed suit against their independent insurance broker and others asserting, among other things, a cause of action for financial elder abuse. The suit was based on the conduct of the defendants in connection with "churning" arising from two separate existing life insurance policies. (Certain defendants were deemed by the Court to have been acting in a retail agency capacity, while others were acting in a brokerage capacity.)
The crux of the allegations of Mahen involves the insurance defendants acting in their own best interests by churning 2 existing and valuable life insurance policies primarily for the purpose of lining their own pockets with substantial commissions, all the while acting to the detriment of the plaintiffs best interests (resulting in a sharp escalation of costs to the insured plaintiffs).
Notably, at the time of the incident, Martha had already been diagnosed with Alzheimer's and was in a state of cognitive decline. The opinion also suggests that: (i) Fred was likewise in a state of cognitive decline at all relevant times; and (ii) the insurance defendants had knowledge of the declining mental capacity of both Fred and Martha.
The alleged wrongful conduct at issue includes, among other things:
(a) false representations made by defendants to Fred concerning his ability to use cash value in existing policies to get substantial additional coverage while keeping the annual premium costs at $14,000;
(b) dealing almost exclusively with Fred and excluding the trustee of the family trust (his daughter Maureen) with the purpose and intent of getting Fred's easy approval upon which defendants knew Maureen would rely - thereby exploiting her trust and deference (e.g., providing Maureen with only signature pages and blank forms to sign - while presenting her with Fred's signature in order to signal his approval);
(c) presenting insurance applications to the elderly defendants for execution before filling them out, thereby depriving them from valuable information that could have stopped the scheme early in the process;
(d) steering the elderly plaintiffs into borrowing against an existing, long-standing life insurance policy to purchase a new one - without explaining the risks and consequences (i.e., need to finance the interest payments on that loan and without explaining the risk of (i) causing the older policy to lapse if that additional expense were not timely paid and (ii) exposure to income tax liability; and
(e) failure to pass along crucial pricing information associated with the transaction.
The consequence to the elderly plaintiffs was significant. The trust became drained of cash; tax advantages of the prior, existing plan were destroyed; and the elderly plaintiffs were forced to sell assets in order to fund the trust. All the while, the plaintiffs ended up with less valuable and more limited term life insurance.
Plaintiffs argued that they had been deprived of property rights by the conduct of defendants in that they were forced to conduct donative transfers to the trust. The trial court ruled in favor of defendants on their attack of the complaint - ruling that plaintiffs failed to state a cause of action for elder abuse because the transfer of funds to the trust by the elderly plaintiffs was a voluntary act that occurred after the fraudulent activity and also because none of those new funds went to any of the defendants. Stated otherwise, according to the trial court's reasoning, the defendants did not take property of an elder to get the commission they allegedly were paid.
The Court of Appeal disagreed with the trial court, primarily because the Elder Abuse Act is a remedial statute and must, therefore, be liberally construed. The appellate court ruled that the plaintiffs' complaint alleges a claim for deprivation of a property right.
"We agree with the [plaintiffs] ... that '[b]ecause Defendants' misconduct made the donation or voluntary transfer of' the Mahans' chosen gift assets 'in their estate plan much more expensive and of lesser value, [their] right to dispose of their property has been damaged."
"Stating things in blunt terms, the [complaint] alleges that, by manipulation and use of the Children's Trust as an instrument, the [defendants] managed to separate the [plaintiffs] from their money. That, in our view, constitutes a 'depriv[ation]' or '[property].'"
Citing to prior appellate decisions, the Court of Appeal also noted "commissions paid by a third party to a defendant arising from an abusive transaction are sufficient to constitute elder abuse."
"Here, whether the commission money flowed directly into the [defendants'] pockets, it seems to us, makes no difference. ... [Defendants'] 'scheme depleted all of the cash in [the] trust' and ..., as a result, all commissions payments by the Trust are fairly traceable to them."
Ultimately, the Court of Appeal concluded that the complaint "sufficiently alleges the[plaintiffs] felt [a] need to pay more into the Trust to keep it afloat [and that that] need was brought about by 'undue influence' ...." (Emphasis added.)
The Takeaway: If you're over the age of 65 and your insurance broker and agent are getting you involved in making changes to your insurance policies that ultimately end up costing you more while lining their pockets with unjustified, high commissions (at your expense) - you may be the victim of financial elder abuse and you should consult a qualified attorney about the possibility of filing a lawsuit. If you do and you win, you may be entitled to recovery of your damages plus your attorneys' fees and costs of suit. In egregious instances, you may also be entitled to an award of treble (punitive) damages as well (i.e., a multiple of your actual damages designed to punish the defendants).