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Premium of America, LLC v. Sanchez

Court of Special Appeals of Maryland

August 29, 2013


Kehoe, Berger, Thieme, Raymond G., Jr. (Retired, Specially Assigned) JJ.


Kehoe, J.

In this case, we address a familiar issue—the scope of a party's liability for financial harm caused by negligent misrepresentations—in an unusual context: the marketing of viatical settlements. As we will explain in greater detail, a viatical settlement is a transaction in which an investor purchases the beneficial rights in an existing life insurance policy on a terminally ill person in return for the policy proceeds upon the insured's death. The investor also assumes the obligation of paying the policy premiums. Whether to purchase a viatical policy in the first place and, if so, how much to pay for it, depends in no small part upon the life expectancy of the insured. Some of those who invested in viatical settlement contracts in the 1990's did so with the expectation that medical science would continue to be ineffective in treating HIV/AIDS and related maladies. They were wrong and their investments became worthless.

Premium of America, LLC, ("Premium"), whose members are such investors, filed claims of negligence, negligent misrepresentation, and gross negligence in the Circuit Court for Baltimore County against appellee, William C. Sanchez, M.D., [1] a District of Columbia physician who provided life expectancy estimates for persons suffering from HIV/AIDS in this time period. Premium asserted that Sanchez significantly underestimated the life expectancies of these persons because he did not take into account advances in HIV/AIDS treatment and that his failure to do so was the result of his negligence or gross negligence. Sanchez filed a motion for summary judgment arguing, among other grounds, that the claims failed as a matter of law because there was no nexus, privity, or any other relationship between him and any investor that established a duty on his part to them. After holding a hearing, the circuit court granted the motion because it concluded that Sanchez did not owe a duty to Premium's members and therefore was not liable to them for any errors in his evaluations.

Premium filed a motion to alter or amend the judgment or, in the alternative, a motion for leave to file an amended complaint to add a breach of contract claim against Sanchez. The circuit court denied both motions. Premium appeals and presents three questions, which we have reworded and combined as follows:[2]

I. Did the circuit court err in granting Sanchez's motion for summary judgment on the basis that Sanchez did not owe a duty to those who invested in the viatical life insurance policies?
II. Did the circuit court abuse its discretion in refusing to grant Premium's motion for leave to file an amended complaint?

We will affirm the circuit court's judgment.


"In reviewing the grant of summary judgment, we construe the facts properly before the court and any reasonable inferences that may be drawn from them, in the light most favorable to the non-moving party . . . ." Benway v. Md. Port Admin., 191 Md.App. 22, 45-46 (2010) (citing Laing v. Volkswagen of Am., 180 Md.App. 136, 152-53 (2008)).

We think it useful to begin with some terminology and background information. In Life Partners, Inc. v. Morrison, 484 F.3d 284, 287 (4th Cir. 2007), Judge Paul V. Niemeyer explained that "[a] 'viaticum' in ancient Rome was a purse containing money and provisions for a journey. A viatical settlement, by which a dying person is able to acquire provisions for the remainder of his life's journey by selling his life insurance policy, is thus thought to provide a viaticum. In the language of the industry, the insured is the 'viator, ' who sells his policy at a discount to a 'provider' of the viaticum." Judge Niemeyer continued:

The viatical settlements industry was born in the 1980s in response to the AIDS crisis. In the early years, AIDS was a rapidly fatal disease, and its victims usually died within months of diagnosis. Many AIDS sufferers were in great need of cash to pay for their care after they had become debilitated. Their life insurance policies were not only expensive to maintain but could, upon liquidation, provide some of the desperately needed cash. Moreover, investors were willing to purchase the life insurance policies of AIDS sufferers. Inasmuch as AIDS sufferers had predictably short life expectancies, their policies were reliable investments.


A. The Purchase of Viatical Policies on Behalf of Premium's Members

This case arises out of the actions of several affiliated companies, including Beneficial Assurance, Ltd. and Premium Escrow Services, Inc. (collectively, "Beneficial"). Beneficial was an agent for investors who were seeking to purchase viatical policies, that is, to become "providers." While the specifics varied from case to case, Beneficial sought out potential investors and identified each investor's financial goals and the amounts he or she was willing to invest. Beneficial entered into written agreements with each investor by which the investor authorized Beneficial to purchase viatical policies on his or her behalf. These contracts included a disclaimer as to the reliability of estimates of viators' life expectancies.[3] The investor placed funds into an escrow account administered by Beneficial to cover the purchase price of the policy and the life insurance premiums that would come due between the date of purchase and the date of the insured's death. The funds reserved for premium payments were usually calculated based on the viator's life expectancy—as determined by a third-party physician—plus one year.

Viatical policies were often sold at auction and, as part of the auction process, Beneficial obtained the viator's medical records. Beneficial submitted the medical records to a third-party physician who would review the information and provide a life expectancy estimation for the viator. Based in part upon the life expectancy evaluation, Beneficial would match a viatical policy to one or more investors and would bid on it. If Beneficial was successful, at closing, the viator assigned the beneficial interest in the policy to an escrow agent, which, while purportedly independent, was actually under Beneficial's control. The escrow agent held the policy for the investor and disbursed funds as needed to pay policy premiums.

After closing, Beneficial sent a package of closing documents to the purchasers whose funds were used in the settlement. The package usually included information about the insurance policy, the financial rating of the insurer, an assignment, documentation as to the transfer of the beneficial interest in the policy to the escrow agent, and a copy of the report from the physician who had reviewed the viator's medical records and provided an estimate of the viator's life expectancy to Beneficial.[4]

B. The Collapse of Beneficial and the Formation of Premium

Almost from its inception, the viatical settlement industry was permeated with fraud, bad faith and sharp practice. The primary victims were viators, who were gravely ill and typically in desperate need of money. See Life Partners, 484 F.3d at 287-88. As a result, many states enacted legislation providing some measure of protection to viators. Id.[5] The degree to which these regulations affected Beneficial's operation is unclear but there is no question that some of Beneficial's business practices regarding its relations with investors were improper.[6] Moreover, because of advances in HIV/AIDS treatments, many viators were outliving the life expectancy assumptions used by Beneficial to value viatical policies. Because investors only set aside enough money in escrow to cover premium payments for the life expectancy of the viator plus one year, Beneficial did not have sufficient funds in escrow to continue to pay the insurance policy until the viator's death. In such cases, the premium payments went unpaid and the viatical policies lapsed.

For these reasons, Beneficial went into bankruptcy in 2002. As part of the bankruptcy proceedings, the bankruptcy court confirmed a reorganization plan under which Premium was established as a limited liability company. The members of Premium are the investors who purchased viatical policies through Beneficial. The members assigned their interests in the policies to Premium as well as any claims that a member might have against any third party, such as Sanchez, retained by Beneficial in connection with the marketing, sale, and administration of the viatical policies.

C. Dr. Sanchez

A board-certified pediatrician, Sanchez opened a family medicine practice in Washington, D.C., after his discharge from the Army in 1977. As the AIDS epidemic took hold in the 1980's, Sanchez provided medical care to a number of patients suffering from the disease. He co-authored four articles during that decade regarding HIV/AIDS which were published in respected medical journals such as The Lancet and The New England Journal of ...

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