NY lawsuit over premium financing tests oversight promised by Reg 187

A premium financing deal gone bad in New York State is generating a new round of criticism from those say the practice is often misused with troubling results.

Filed in New York State Supreme Court, Ester Aronson and Baruch Aronson are suing Brave Strategies, Penn Mutual Life Insurance Co., MassMutual Life Insurance Co. and New York Life Insurance Co.

The case is notable for two reasons: First, the life insurance policies in the Aronson’s premium finance deal included death benefits totaling more than $150 million. Second, plaintiffs claim that the deal violates New York’s Regulation 187, which took effect in 2020 and is considered the toughest state best-interest law.

Life insurance premium financing involves taking out a loan to pay the premiums. The borrower repays the loan in regular installments until the debt is satisfied or the insured dies Insurance proceeds are used to pay off any balance.

High net worth individuals are candidates for premium financed life insurance because it enables them to maintain liquidity. But critics say many premium financing deals are troubling.

Bobby Samuelson of The Life Product Review is a persistent critic of premium financing deals. While the deals can make sense in some cases, the strategy is often misused, he explained.

“More often, premium financing is used as a justification for buying life insurance because of purported ‘arbitrage’ between the policy performance and the cost of the loan,” Samuelson said. “A large portion of these policyholders couldn’t financially justify the insurance and did the deal because it looked like they were getting something for nothing.

“With interest rates skyrocketing and policy performance lagging, clients are being asked for more collateral and they can’t post it.”

The Aronson complaint was initially filed in June 2023. Since then, the plaintiffs filed two amended complaints, most recently on March 14.

The Aronson strategy

Ester and Baruch Aronson are residents of Rockland County, N.Y. As part of their estate planning, both are trustees of separate life insurance trusts set up in New Jersey.

The Aronsons met with Moses Braver in October 2020, court documents say, to discuss financial planning. Braver is the sole representative of Brave Strategies, according to court documents, an advisory firm established in 2016.

During that meeting, Braver allegedly told Baruch Aronson “that he had brokered high-value life insurance policies for many clients over many years and that he coordinated the financing and refinancing of many millions of dollars of premium financing loans,” the complaint reads.

Aronson did not have any prior experience or knowledge of premium financing, the complaint says. Braver allegedly told the Aronsons that, apart from initial funds and collateral to secure the loans, they would not incur any “significant out of pocket payments” on either the loans or the life insurance policies “for the duration of the instruments,” the complaint says.

“Braver also represented that the Aronsons would not need to post more than $1,500,000 dollars of total collateral over the entire terms of the Life Insurance Policies and the Premium Financing loans,” the complaint states.

Aronson asked Braver whether additional payments would be required if interest rates rose, the complaint says. The advisor insisted that, “in the event of future increases in interest rates resulting in higher Premium Financing payments, that the dividend returns generated by the Life Insurance Policies would also increase at least in tandem,” the complaint states.

The two Aronson trusts purchased nine life insurance policies from the three insurance companies. Two loans taken early in 2021 to pay the premiums totaled nearly $3.6 million at 2.55% interest in the first year, the complaint says.

“Shortly after Plaintiffs acquired the Life Insurance Policies … it became evident that Brave Strategies and Mr. Braver had misrepresented the substantial risks of acquiring the Life Insurance Policies and using Premium Financing,” the complaint states.

More collateral, more money

In August 2021, Brave Strategies informed the Aronsons that in order to secure additional loans to cover the costs of the second-year premiums for the policies, they would be required to provide “a significant amount of additional collateral.”

The Aronsons signed for new loans that brought their total borrowed amount to more than $7.7 million, the complaint says.

“Then, just three months later, in November 2021, [the loan institution] advised Plaintiff that based upon its projections, Plaintiffs would need to provide millions more in additional collateral over the next two years,” the complaint states.

Furthermore, the Aronsons were told that interest rates on further loans would rise to 6.2%.

Throughout 2022, the Aronsons went back and forth with Braver on the performance of the premium financing deal, with Baruch Aronson alleging that Braver said the life policies would eventually “catch up” to the rise in interest rates.

“In December 2022, and in order to mitigate against Plaintiffs’ additional, substantial future losses, Plaintiffs instructed Brave Strategies to surrender each Life Insurance Policy brokered by Brave Strategies and to terminate the Premium Financing loans,” the complaint reads.

In a batch of documents relating to this transaction, Aronson alleged that Braver included a “hold harmless” form that would waive legal action against the advisor, the complaint says. The Aronsons surrendered the life policies and terminated the premium financing deal but did not sign the hold harmless document.

The Aronsons are asking for damages to be determined by the court. They claims losses exceeding $1 million.

“Brave Strategies’s solicitation of and brokering of the Life Insurance Policies was not in the best interest of any Plaintiff,” the complaint reads. “To the contrary, Brave Strategies and those acting on Brave Strategies’s behalf brokered the Life Insurance Policies for their own financial gain.”

Insurers: Reg 187 not relevant

In a response to the Aronsons’ complaint, Braver denied the allegations, said he “acted in good faith” and provided the plaintiffs with all relevant disclosures.

The Aronsons initially sued Brave Strategies alone, adding the three life insurance companies in its amended complaint. In its response, the insurers ask the court to dismiss the complaint because Regulation 187 does not allow for private lawsuits.

Regulation 187 requires insurers to supervise and train its producers to make appropriate recommendations. The Aronsons claim the life insurers failed to perform these duties.

“Plaintiffs’ claim against the Insurer Defendants for violating … Regulation 187 fails as a matter of law because Regulation 187 does not provide them with a private right of action,” the three insurers told the court. “This conclusion is clearly and consistently supported by Regulation 187’s plain language, structure, and history.”

Larry Rybka is president and CEO of Valmark Financial Group. The Aronson case, and others like it, represent a significant test of the best-interest standard, he said.

“There’s at this point dozens of premium financing litigation cases and there’s more every day, but this is the first one that I’ve seen that will be adjudicated under the best-interest standard,” he said. “I’ve often wondered if any premium financing deal could be documented to be in the client’s best interest.”

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.