December 22, 2014
You recommend that a customer make a cash contribution in order to lock-in a minimum rate provision for a protection-plus policy. Within a year of that suggestion, the customer dies. Litigation follows. Why? Well, seems that there was a policy provision that if the covered party died within one year of the contribution that only the face amount gets paid -- the contribution sort of vanishes in the form of what looks to the customer's estate like a forfeiture. Should you have warned the customer of that potentially ticking time bomb? If you did give the warning, how will you prove it in the future? If you didn't give the warning, are you destined to go down in flames? Then, there's this added wrinkle: What if the customer was terminally ill when you told him about paying up to lock in the rate?
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2013, Claimants asserted violations of both the Texas Insurance Code and Deceptive Trade Practices Act, breaches of fiduciary duty and contract, and respondeat superior in connection with allegations that registered representative Respondent Montandon had recommended that Francis Leo McNamara and Patricia McNamara make additional contributions to the Francis Leo McNamara's Life Protection Plus Policy ("Policy") in order to guarantee a minimum 4% rate provision.
Claimants alleged that the recommendation to make additional cash contributions failed to disclose that if Mr. McNamara died while the contribution was in the policy, that only the $215,000 policy face amount would be paid and the contributed cash would essentially be forfeited. Claimants sought $63,161.90 in compensatory damages (apparently the value of the contested contributions), $126,323.80 in punitive damages plus interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Patricia McNamara and David H. Johnson, Independent Executor of the Estate of Francis Leo McNamara, Claimants, vs. Ameriprise Financial Services, Inc. and Justin A. Montandon, Respondents (FINRA Arbitration 13-01087, December 12, 2014).
Respondents Ameriprise and Montandon generally denied the allegations and asserted various affirmative defenses. Respondent Montandon additionally requested an expungement of the matter from his Central Registration Depository record ("CRD").
Less Is More?
At the conclusion of the case, Claimants made an Oral Motion for an Explained Decision. The Panel denied the motion. NOTE: In the Decision, the arbitrators inexplicably assert that only a singular "Respondent" objected to Claimants' motion but there is no indication as to which respondent so objected.
The FINRA Arbitration Panel found Respondents Ameriprise and Montandon jointly and severally liable to Claimants and ordered the Respondents to pay to them:
- $53,688.00 in compensatory damages plus 5% interest frolm August 8, 2011 until the award is paid;
- $1,899.16 in costs;
- $71,852.00 in attorneys' fees pursuant to Texas Ins Code 541.061 and Texas Civil Practices and Remedies Code § 38;
- $300.00 as reimbursement of the non-refundable filing fee;
Bill Singer's Comment
Online FINRA BrokerCheck records as of December 22, 2014, indicated that a civil lawsuit was initially filed in the 250th Judicial District Court of Travis County, TX but stayed by that court and transferred to FINRA Arbitration. Respondent Ameriprise offered the following characterization of Claimants' allegations:
PLAINTIFFS ALLEGE THAT WHILE DECEASED PLAINTIFF WAS TERMINALLY ILL, RESPONDENTS ADVISED THEM TO PLACE $63,161.90 INTO DECEDENT'S EXISTING IDS LP PLUS POLICY IN ORDER TO RECEIVE A GUARANTEED 4% RETURN. PLAINTIFFS ALLEGE THAT RESPONDENTS FAILED TO DISCLOSE THAT IF PLAINTIFF DIED WITHIN THE FIRST YEAR THE CASH WAS IN THE POLICY, THEY WOULD ONLY RECEIVE THE FACE VALUE OF THE POLICY AND NOT THE ADDITIONAL $63,161.90. . .
I consider the fact that the deceased was allegedly "terminally ill" at the time of the disputed recommendation to constitute a material fact; however, that circumstance is not referenced in the FINRA Arbitration Decision. That omission may be based upon a determination by the arbitrators that Mr. McNamara was not, in fact, terminally ill during the time at issue; or, in the alternative, the arbitrators may not have deemed that circumstance worth disclosing. I believe that the Decision should have noted this exacerbating factor or at least noted that the arbitrators did not place any meaningful weight upon it. The alleged non-disclosure of a forfeiture of the contribution should a death occur within one year, takes on increasing significance when pertaining to an individual with a terminal illness. It may well be that the registered person argued that he had made the necessary disclosure or he may have argued that under the totality of circumstances, there was no reason for him to raise that concern. Notwithstanding who said or didn't say what, the Decision should have offered more explanations of the facts and rationale. At a minimum, how about at least the briefest of explanations as to the nature of the disputed policy and the language of the one-year provision?
Finally, I am at a loss as to why this FINRA Arbitration Panel declined to honor the Claimants' request for an Explained Decision. If, in fact, there are sound and compelling reasons for such a declination -- and I acknowledge that, at times, that may be the case -- then arbitrators should at least offer some indication in the Decision as to why they have opted not to entertain a public customer's motion. The fact that a Panel ultimately rules in a Claimant's favor does not counter the concerns raised by refusing to offer more details when requested by a public customer.