Appendix — Life Partners Partners, Inc. v. Morrison (No. 07-261)

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APPENDIX A

LIFE PARTNERS, INCORPORATED,

Plaintiff-Appellant,

Vv.

Theodore V. MORRISON, Jr.; Mark C.

Christie, in their official capacities as

Commissioners of the State Corporation

Commission; Alfred W. Gross, in his offi-

cial capacity as the Commissioner of In-

surance; Judith Williams Jagdmann, in

her official capacity as Commissioner of

the State Corporation Commission, De-

fendants—Appellees,

Robert F. McDonnell, in his official capacity

as the Attorney General of the Common-

wealth of Virginia, Intervenor-Appellee,

and

Clinton Miller, in his official capacity

as Commissioner of the State Corpo-

ration Commission, Defendant.

National Association of Insurance Commis-

sioners; North American Securities Ad-

ministrators Association, Incorporated,

Amici Supporting Appellees,

and

Viatical Settlement Professionals,

Incorporated, Movant.

Life Partners, Incorporated,

Plaintiff-Appellee,

Vv.

Theodore V. Morrison, Jr.; Mark C. Christie,

in their official capacities as Commis-

sioners of the State Corporation Commis-

sion; Alfred W. Gross, in his official ca-

pacity as the Commissioner of Insurance;

Judith Williams Jagdmann, in her official

capacity as Commissioner of the State

Corporation Commission, Defendants-

Appellants,

and

Clinton Miller, in his official capacity

as Commissioner of the State Corpo-

ration Commission, Defendant,

and

Robert F. McDonnell, in his official capacity

as the Attorney General of the Common-

wealth of Virginia, Intervenor-Defendant.

North American Securities Administrators

Association, Incorporated; National Asso-

ciation of Insurance Commissioners,

Amici Supporting Appellants,

and

Viatical Settlement Professionals,

Incorporated, Movant.

Nos. 06-1370, 06-1371.

United States Court of Appeals,

Fourth Circuit.

Argued Nov. 30, 2006.

Decided April 30, 2007.

ARGUED: Douglas Michael Palais, Leclair

Ryan, P.C., Richmond, Virginia, for Appel-

lant/Cross—Appellee. Maureen Riley Matsen,

Office of the Attorney General of Virginia,

Richmond, Virginia; Robert A. Dybing, Thomp-

son & McMullan, Richmond, Virginia, for Ap-

pellees/Cross—Appellants. ON BRIEF:

Cameron S. Matheson, Leclair Ryan, P.C.,

Richmond, Virginia; Lee E. Goodman, Robert

P. Howard, Leclair Ryan, P.C., Washington, D.C.,

for Appellant/Cross—Appellee. Faisal S. Qureshi,

Thompson & McMullan, Richmond, Virginia;

Ronald N. Regnery, Office of the Attorney Gen-

eral of Virginia, Richmond, Virginia; Philip R.

de Haas, William H. Chambliss, Pamela B.

Beckner, Scott A. White, State Corporation

Commission of Virginia, Richmond, Virginia, for

Appellees/Cross—Appellants. Rex A. Staples,

Stephen W. Hall, Lesley M. Walker, North Ameri-

can Securities Administrators Association, Inc.,

Washington, D.C., for North American Securities

Administrators Association, Incorporated,

Amicus Supporting Appellees/Cross-—

Appeilants. Elizabeth Mason Horsley, Williams

Mullen, P.C., Richmond, Virginia, for National

Association of Insurance Commissioners,

Amicus Supporting Appellees/Cross—Ap-

pellants.

Before NIEMEYER, MICHAEL, and TRAX-

LER, Circuit Judges.

Affirmed by published opinion. Judge NIE-

MEYER wrote the opinion, in which Judge MI-

CHAEL and Judge TRAXLER joined.

OPINION

NIEMEYER, Circuit Judge.

We decide, in this case of first impression,

whether the Virginia Viatical Settlements Act,

Va. Code Ann. § 38.2—6000, et seg., which regu-

lates viatical settlements with insureds who

are residents of Virginia, is saved from the

dormant Commerce Clause of the U.S. Consti-

tution by the McCarran-—Ferguson Act, 15

U.S.C. §§ 1011, 1012, as a state law that ‘re-

lates to” the regulation of the business of in-

surance or as a state law enacted “for the pur-

pose of regulating the business of insurance.”

“Jane Doe,” a terminally ill resident of Vir-

ginia with 6 to 18 months to live, sold her life

insurance policy to Life Partners, Inc., a Texas

corporation, at a deep discount to provide her

with cash needed for the remaining months of

her life. This transaction, known as a “viatical

settlement,” is purportedly regulated by Virgi-

nia to protect its residents who, in the vulner-

able circumstances of being terminally ill,

might find it necessary to sell their life insur-

ance policies.

Following the transaction, Jane Doe sought

to improve the sale price of her policy by invok-

ing the minimum pricing provisions of the Vir-

ginia Viatical Settlements Act. Life Partners,

contending that the Virginia Act violated the

dormant Commerce Clause, commenced this ac-

tion to declare the Act unconstitutional and to

enjoin its enforcement. Virginia defended the

Act as serving a legitimate and important local

interest in regulating viatical settlements with

its residents. Virginia also argued that, in any

event, it properly acted pursuant to the com-

merce power conferred on it by the McCarran-

Ferguson Act, which authorizes States to enact

laws relating to or for the purpose of regulat-

irg the business of insurance.

On cross-motions for summary judgment,

the district court entered judgment for Vir-

ginia, holding that the Virginia Viatical Set-

tlements Act did not violate the dormant

Commerce Clause. Relying on the balancing

test of Pike v. Bruce Church, Inc., 397 U.S.

137, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970), the

district court concluded (1) that the Virginia

Viatical Settlements Act did not discriminate

against interstate commerce; (2) that the Act

served a legitimate and important local pur-

pose; and (3) that any burden on commerce was

only incidental.

On appeals by both parties, we conclude

that the sale of life insurance policies by ter-

minally ill patients directly and substantially

affects the business of insurance and that the

Virginia Viatical Settlements Act “relates to”

such business and was enacted “for the purpose

of regulating” such business. The McCarran-

Ferguson Act thus saves the Virginia Act from

preemption of the Commerce Clause and ren-

ders it constitutional. Based on this conclu-

sion, we affirm.

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. The viatical

settlement provider is often backed by inves-

tors under arrangements reached between the

provider and the investors. Once a viator sells

a policy to a provider, the provider assumes the

responsibility for paying the premiums and

designates itself as the beneficiary of the pol-

icy. Upon the viator’s death, the provider col-

lects the face value of the policy, and the pro-

vider’s profit is the difference between the face

value of the policy and the amount paid to the

viator, premiums paid to the insurance com-

pany, and the administrative expenses in-

curred. Because the sooner the viator dies the

greater the provider’s profit, a provider takes

special care in calculating a viator’s life expec-

tancy by hiring an independent doctor to exam-

ine the insured and his medical records and by

monitoring the viator’s health until death.

The viatical settlements industry was born

in the 1980s in response to the AIDS crisis. In

the early years, AIDS was a rapidly fatal dis-

ease, 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. More-

over, investors were willing to purchase the

life insurance policies of AIDS sufferers. In-

asmuch as AIDS sufferers had predictably

short life expectancies, their policies were reli-

able investments. See generally, Liza M. Ray,

Comment, The Viatical Settlement Industry:

Betting on People’s Lives is Certainly No “Ex-

acta,” 17 J. Contemp. Health L. & Policy 321,

321-22 (2000); Joy D. Kosiewicz, Comment,

Death for Sale: A Call to Regulate the Viatical

Settlement Industry, 48 Case W. Res. L. Rev.

701, 704 (1998).

The viatical settlements market expanded

to include other terminal illnesses, especially

as AIDS became a more treatable disease. Peo-

ple suffering from cancer, heart disease, Alz-

heimer’s disease, and other progressive ill-

nesses, as well as elderly people in need of

funds for assisted living, found viatical settle-

ments a useful source of immediate cash. To-

day, the industry is growing exponentially as

investors seek out not only the terminally ill,

but the swelling ranks of generally healthy,

elderly Americans. It is estimated that $13

billion worth of life insurance policies were

sold by policyholders to providers in 2005—up

from $5 million in 1989 and $200 million in

1998—and it is projected that by 2030 the

number could reach $160 billion. See Holman

W. Jenkins, Jr., Life Insurers Face the Future,

Grudgingly, Wall St. J., Aug. 9, 2006, at All;

Liam Pleven & Rachel Emma Silverman, /nves-

tors Seek Profit in Strangers’ Deaths, Wall St.

J., May 2, 2006, at Cl; see generally Miriam R.

Albert, The Future of Death Futures: Why Viat-

ical Settlements Must Be Classified as Securi-

ties, 19 Pace L. Rev. 345, 353-55 (1999).

The need for regulating the business of vi-

atical settlements became apparent from the

beginning. The power imbalance between the

viator and the provider creates a substantial

potential for abuse. The viator is usually in a

weakened physical condition, often facing im-

minent death, often in financial hardship due

to medical and healthcare costs, and often ig-

norant of industry practices. The provider, on

the other hand, has extensive resources, is

usually backed by investors, and is armed with

sophisticated industry knowledge. Moreover,

because of his illness and lack of time and en-

ergy to “comparison shop” for the best pay-

ment, a viator often agrees to sell at a drasti-

cally reduced price, particularly when he fails

to understand the nature and value of the

rights that he has in the insurance policy that

he is selling. The potential for harassment of

the viator after the sale is also real, as the

providers, acting under the terms of the viati-

cal settlement, closely monitor the viator’s

health, subjecting him to regular medical ex-

aminations. In addition, the life insurance in-

dustry began to face new risks, including the

increased risk of fraud, as potential insureds

sought to hide their illnesses in order to obtain

policies and thereafter to sell them to viatical

settlement providers. Finally, many have

questioned the ethics of an industry whose

profits depend on, and whose investors hope

for, the early death of its customers.

Because of the need to protect viators and

to create a transparent and fair viatical set-

tlements market, the National Association of

Insurance Commissioners developed the Viati-

cal Settlements Model Act in 1993 and Viatical

Settlements Regulations in 1994 to guide

States in their regulation of the viatical set-

tlements industry. To date, approximately 38

States, including Virginia, have adopted a ver-

sion of the Model Act or similar legislation.

The Virginia Viatical Settlements Act

(sometimes hereafter the “Act”) was enacted in

1997 to address Virginia’s concern with the

“potential for exploitation of vulnerable and

seriously ill individuals.” Legislative Sum-

mary, House Bill 871 (Va. 1997). The Commis-

sioner of Insurance for the Bureau of Insurance

of the Virginia State Corporation Commission,

the state agency charged with implementing

and enforcing the Act, stated that some of the

Act’s specific objectives and purposes include

“ensuring that entities providing viatical set-

tlement services are licensed, operated by per-

sons of good character, and do not engage in

illegal, unfair or unethical conduct” and “en-

suring that fair compensation be paid to via-

tors.”

Thus, the core provisions of the Act ensure

that providers are reliable; require full disclo-

sures to viators; protect the privacy of viators;

establish minimum prices for policies; and pro-

hibit fraud.

More particularly, the Act requires that

brokers (defined as viators’ agents) and provid-

ers be licensed if they contract with a Virginia

resident in connection with a viatical settle-

ment. Va. Code Ann. §§ 38.2-6002, -6003.

The Act provides that before issuing a license

to a provider, the State Corporation Commis-

sion is required to investigate the applicant to

ensure it is “competent and trustworthy,” “in-

dicates its intention to act in good faith within

the confines of the license,” “has a good busi-

ness reputation,” and “has provided an anti-

fraud plan.” Jd. § 38.2-6002(D). The Act also

requires providers to “be bonded” or submit to

10a

“other mechanisms for financial accountability”

adopted by the Commission. Id. § 38.2-

6002(I).

The Act imposes extensive disclosure obli-

gations on providers. For instance, providers

must disclose to viators, among other things,

the “possible alternatives to viatical settlement

contracts including any accelerated death

benefits or policy loans offered under the via-

tor’s life insurance policy”; the tax conse-

quences of selling the policy; the right of a via-

tor to rescind a viatical settlement for 15 days

after receipt of the proceeds; the fact that en-

tering into a viatical settlement may cause a

viator to forfeit rights and benefits under the

policy; the fact that the provider may require

medical visits as frequently as once a month to

determine the viator’s health status; and the

possible loss of coverage for third parties if the

life insurance policy involves family riders or

includes coverage of a life other than the via-

tor’s. See Va. Code Ann. § 38.2—6007.

Section 38.2—6005 of the Act is devoted to

the protection of a viator’s privacy and the con-

fidentiality of information about the viator.

See also Va. Code Ann. § 38.2—6008(A)(1)(b),

(B), (F).

The Act requires providers to pay a viator a

minimum percentage of the face value of the

insurance policy sold, depending upon the via-

tor’s life expectancy. Thus, if the viator’s life

expectancy is less than 6 months, he must be

paid a minimum of 80% of the policy’s face

value; if his life expectancy is at least 6 but

less than 12 months, then he must be paid at

lla

least 70% of the policy’s face value; if his life

expectancy is at least 12 but less than 18

months, he must be paid at least 65% of the

policy’s face value; and if his life expectancy is

at least 18 but less than 25 months, he must be

paid at least 60% of the policy’s face value. See

14 Va. Admin. Code § 5—71-—60(A) (2006).

And the Act contains several provisions

prohibiting false or misleading advertising, Va.

Code Ann. § 38.2-6010; prohibiting fraud in

connection with viatical settlements, id.

§ 38.2-6011; and making violations of the Act

unfair trade practices, id. § 38.2-6013.

Other miscellaneous provisions designed to

protect Virginia viators are also included in

the Act, such as a requirement that providers

submit to the Commission all viatical settle-

ment contracts for review and approval before

closing. Va. Code Ann. § 38.2—6003(A). Funds

must be paid to the viator within three busi-

ness days after the viatical settlement provider

has received the insurer’s acknowledgment

that the beneficiary of the life insurance policy

has been changed. Id. § 38.2—6007(A)(6). Be-

fore entering into a viatical settlement con-

tract, a provider must obtain “a written state-

ment from a licensed attending physician that

the viator is of sound mind and under no con-

straint or undue influence to enter into a viati-

cal settlement contract.” Id. § 38.2-

6008(A)(1)(a).

Finally, we note that the Act does not regu-

late the relationship between viatical settle-

ment providers and their investors, a relation-

12a

ship that is most often regulated by securities

laws. See Va. Code Ann. § 38.2-6016.

“Jane Doe,” a resident of Martinsville, Vir-

ginia, who was terminally ill with AIDS, began

in March 2004 to explore ways to liquidate her

life insurance policy. Her policy had a face

value of $115,000 and contained no accelerated

death benefit of any value.

Researching on the Internet, Doe located

two brokers—Ideal Settlements, Inc., located

in New Jersey, and Individual Benefits, Inc.,

located in North Carolina—and signed broker-

age contracts with both. Ultimately, however,

she chose Ideal Settlements to negotiate on her

behalf. Ideal Settlements contacted Life Part-

ners, located in Waco, Texas, inviting a bid for

Doe’s life insurance policy.

Life Partners engages nationally in the

business of viatical settlements. It locates in-

vestors to provide the money, and it negotiates

with viators or their brokers for the purchase

of life insurance policies. Its profits and those

of the investors are determined by the differ-

ence between (1) the face amount of the policy

paid upon the viator’s death and (2) the cost of

the policy, the cost of paying premiums until

death, and administrative expenses. While

Life Partners is licensed as a viatical settle-

ment provider under Texas law, it is not so li-

censed in Virginia.

Life Partners hired an independent phy-

sician to assess Jane Doe’s medical condition,

and the physician determined that Doe had a

life expectancy of 6 to 18 months. Life Part-

13a

ners also located 12 investors from 7 States—

none from Virginia—who, acting as a group,

were interested in bidding on Doe’s policy. On

behalf of these purchasers, Life Partners sub-

mitted a bid to Ideal Settlements in the

amount of $26,000. When Doe rejected that of-

fer, Life Partners raised the bid to $27,000,

which Doe also rejected. Life Partners then

submitted a final bid of $29,900 which Doe ac-

cepted. The bid represented 26% of the face

value of Jane Doe’s policy.

Life Partners sent the necessary forms, dis-

closures, and other information required by

Texas law to Doe for her review and signature.

Doe completed the forms and executed the viat-

ical settlement, returning them to Life Part-

ners for final review and execution in Texas.

Life Partners closed the transaction in Texas

on May 13, 2004, and wired $29,900 to Doe in

Virginia.

Five months later, on October 11, 2004, Doe

contacted Life Partners demanding that it pay

her more money, based on the Virginia Viatical

Settlements Act. That Act would have re-

quired Life Partners to pay Doe at least

$69,000, and maybe more, depending on the

applicable range of life expectancy. Life Part-

ners refused her demand but offered to rescind

the transaction, even though the period for re-

scission had expired. Doe refused rescission

and instead filed a complaint with the Virginia

Bureau of Insurance, the relevant enforcement

arm of the State Corporation Commission.

The Bureau of Insurance conducted an in-

quiry and concluded that Life Partners had

l4a

acted as an unlicensed viatical settlement pro-

vider with a Virginia resident. At the request

of the Bureau of Insurance, the Virginia State

Corporation Commission issued a “rule to show

cause” against Life Partners, requiring it to

explain why it was conducting business with a

Virginia resident without proper licensing, in

violation of Virginia law. It also warned Life

Partners that unless it subjected itself to Vir-

ginia’s regulatory regime, Life Partners would

be barred from making any further purchases

from Virginia residents, under threat of prose-

cution for a “knowing and willful violation of

the law.”

On May 26, 2005, Life Partners commenced

this action under 42 U.S.C. § 1983, asserting

that the State Corporation Commission and the

Bureau of Insurance (herein jointly, “Virginia”

or the “Commission”) violated the dormant

Commerce Clause of the United States Consti-

tution by attempting to enforce the Virginia

Viatical Settlements Act against Life Partners.

Life Partners’ dormant Commerce Clause chal-

lenge was particularly grounded on the juris-

dictional provision of the Virginia Act which

gave the Commission oversight authority over

all viatical settlements involving Virginia via-

tors. Life Partners contended that this scope

of jurisdiction rendered Virginia’s regulatory

control so broad that it affected commerce oc-

curring wholly outside of Virginia. It also ar-

gued that Virginia’s regulatory regime, in par-

ticular the licensing requirement and price

controls, discriminated against and burdened

interstate commerce.

15a

Life Partners filed a motion for summary

judgment based on its dormant Commerce

Clause challenge, and the Commission filed a

cross-motion for summary judgment, contend-

ing that it had an important and legitimate in-

terest in regulating viatical settlements and

that its law had only incidental effects on

commerce. The Commission also argued that

Congress had explicitly authorized state regu-

lation of viatical settlements in the McCarran-

Ferguson Act, a statute that delegates to the

States Congress’ commerce power to regulate

the insurance industry.

The district court granted the Commission’s

motion for summary judgment and denied Life

Partners’ motion, agreeing with the Commis-

sion that the Act did not violate the dormant

Commerce Clause. The court conducted a full

Commerce Clause analysis, concluding that

Virginia’s regulation of viatical settlements

comfortably survived the scrutiny. The district

court declined to reach the Commission’s ar-

gument that Congress had authorized States to

regulate viatical settlements with the McCar-

ran—Ferguson Act.

These cross-appeals followed. Life Partners

challenges the district court’s holding that the

Virginia Act does not violate the dormant

Commerce Clause, and the Commission chal-

lenges the district court’s failure to address its

argument based on the McCarran-—Ferguson

Act. The Commission contends also that the

district court should have abstained in favor of

Commission proceedings, under Younger ov.

Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d

669 (1971).

16a

Ill

Because we conclude that in the McCarran-

Ferguson Act, Congress delegated its commerce

power to Virginia in sufficiently broad terms to

cover viatical settlements, thereby saving the

Virginia Viatical Settlements Act from any

dormant Commerce Clause challenge, we need

not decide whether, in the absence of such

delegation, the Act would violate the dormant

Commerce Clause.

Through the McCarran—Ferguson Act or

any other act, Congress holds the authority to

“redefine the distribution of power over inter-

state commerce” by “permit(ting] the states to

regulate the commerce in a manner which

would otherwise not be permissible.” Southern

Pacific Co. v. Arizona, 325 U.S. 761, 769, 65

S.Ct. 1515, 89 L.Ed. 1915 (1945); see also

Northeast Bancorp, Inc. v. Bd. of Governors,

472 U.S. 159, 174, 105 S.Ct. 2545, 86 L.Ed.2d

112 (1985) (“When Congress so chooses, state

actions which it plainly authorizes are invul-

nerable to constitutional attack under the

Commerce Clause”). Thus, if the McCarran-

Ferguson Act authorizes the States to regulate

viatical settlements, the issue of whether the

Virginia Viatical Settlements Act burdens in-

terstate commerce becomes irrelevant. We

therefore address whether the Virginia Act

falls within the scope of the McCarran-—

Ferguson Act.

The McCarran—Ferguson Act was passed in

1945 in reaction to the Supreme Court’s deci-

sion in United States v. South-Eastern Under-

writers Ass’n, 322 U.S. 533, 64 S.Ct. 1162, 88

17a

L.Ed. 1440 (1944). Prior to that decision, it

had been understood that “[i]Jssuing a policy of

insurance [was] not a transaction of com-

merce.” Paul v. Virginia, 75 U.S. (8 Wall.) 168,

183, 19 L.Ed. 357 (1868). Consequently, “the

States enjoyed a virtually exclusive domain

over the insurance industry.” St. Paul Fire &

Marine Ins. Co. v. Barry, 438 U.S. 531, 539, 98

S.Ct. 2923, 57 L.Ed.2d 932 (1978). Before

South-Eastern Underwriters, the States regu-

lated the insurance business free from any con-

cerns arising under the dormant Commerce

Clause, and federal statutes, such as the

Sherman Act, were thought to be inapplicable

to the insurance industry. See SEC v. Nat'l Se-

curities, Inc., 393 U.S. 453, 457-58, 89 S.Ct.

564, 21 L.Ed.2d 668 (1969). In South-Eastern

Underwriters, the Supreme Court altered this

understanding by holding that the business of

insurance was a part of interstate commerce

and therefore subject to the Commerce Clause

and federal enactments based on the Commerce

Clause, such as the Sherman Act. South-

Eastern Underwriters, 322 U.S. at 552-53, 64

S.Ct. 1162.

Congress reacted by enacting the McCar-

ran--Ferguson Act the very next year. Making

its mission unmistakably clear, Congress de-

clared “that the continued regulation and taxa-

tion by the several States of the business of in-

surance is in the public interest.” 15 U.S.C.

§ 1011. Shortly thereafter, the Supreme Court

stated, “obviously Congress’ purpose was

broadly to give support to the existing and fu-

ture state systems for regulating and taxing

the business of insurance.” Prudential Ins. Co.

18a

v. Benjamin, 328 U.S. 408, 429, 66 S.Ct. 1142,

90 L.Ed. 1342 (1946). The McCarran—Ferguson

Act achieved this purpose “by removing ob-

structions which might be thought to flow from

[Congress’] own power, whether dormant or ex-

ercised,” and “by declaring expressly and af-

firmatively that continued state regulation and

taxation of this business is in the public inter-

est and that the business and all who engage

in it ‘shall be subject to’ the laws of the several

states in these respects.” Id. at 430, 66 S.Ct.

1142.

To understand the McCarran—Ferguson Act

as it might apply in this case, we start with

“the language of the statute itself.” Group Life

& Health Ins. Co. v. Royal Drug Co., 440 U.S.

205, 210, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979).

The substantive portions of the McCarran-

Ferguson Act are found in its first two sec-

tions. The first provides:

The Congress hereby declares that the

continued regulation and taxation by the

several States of the business of in-

surance is in the public interest, and

that silence on the part of the Congress

shall not be construed to impose any

barrier to the regulation or taxation of

such business by the several States.

15 U.S.C. § 1011 (emphasis added). And the

second provides:

(a) State regulation. The business of

insurance, and every person engaged

therein, shall be subject to the laws of

the several States which relate to the

regulation or taxation of such business.

19a

(b) Federal regulation. No Act of Con-

gress shall be construed to invalidate,

impair, or supersede any law enacted by

any State for the purpose of regulating

the business of insurance, or which im-

poses a fee or tax upon such business,

unless such Act specifically relates to

the business of insurance: Provided,

That [the federal antitrust laws] shall

be applicable to the business of insur-

ance to the extent that such business is

not regulated by State law.

Id. § 1012 (emphasis added). Section 1011

thus declares that the “business of insurance”

continues to be subject to regulation by the

States, as had been the case before South-

Eastern Underwriters. Section 1012(a) then

confers the federal commerce power on the

States to enact laws which “relate” to the regu-

lation of the business of insurance, and

§ 1012(b) restricts federal authority so that no

federal law can be construed to “invalidate, im-

pair, or supersede” any state law enacted “for

the purpose of” regulating the business of in-

surance—unless the federal law does so explic-

itly. By so restricting federal authority,

§ 1012(b) also defines the scope of state author-

ity, implicitly authorizing States to enact laws

“for the purpose of” regulating the business of

insurance. See U.S. Dep’t of Treasury v. Fabe,

508 U.S. 491, 504, 113 S.Ct. 2202, 124 L.Ed.2d

449 (1993) (explaining that § 1012(b) “was in-

tended to further Congress’ primary objective

of granting the States broad regulatory author-

ity over the business of insurance”).

20a

In short, the McCarran—Ferguson Act “de-

clares” that regulation of the business of in-

surance belongs with the States, and to imple-

ment that declaration, the Act explicitly pro-

tects from a dormant Commerce Clause chal-

lenge (1) any state law that “relates to the

regulation of the business of insurance” or (2)

any state law “enacted for the purpose of regu-

lating the business of insurance.” The Act re-

serves from its operation only the federal anti-

trust laws. 15 U.S.C. § 1012(b).

Important to a proper application of these

provisions is an understanding of the terms (1)

“insurance,” (2) the “business of insurance,” (3)

the nature of laws that “relate to” or are en-

acted “for the purpose of” regulating the busi-

ness of insurance, and (4) the historical context

in which Congress enacted the McCarran-

Ferguson Act.

A contract of insurance is one by which an

insured transfers risks to an insurer for the

payment of a premium. See Union Labor Life

Ins. Co. v. Pireno, 458 U.S. 119, 130, 102 S.Ct.

3002, 73 L.Ed.2d 647 (1982). And so, under a

life insurance policy, the insured purchases a

hedge against his early death by the insurer’s

commitment to pay the face amount of the pol-

icy. Because the insurer must pay the in-

sured’s beneficiary even upon an early death,

the insurer takes the bet that the insured will

not die before the premiums and investment

income accumulate to exceed the face amount

of the policy. The cost of the insured’s risk,

represented by the amount of premiums, is cal-

culated so as to match the anticipated pre-

2la

mium amount with the anticipated payout plus

a profit.

Thus, both parties to an insurance contract

have a large array of factors to consider in de-

termining whether to enter into a contract of

insurance. The insurer considers, among other

things, the insured’s age and life expectancy,

health, work, healthcare and life habits, family

history, and similar data from its relevant pool

of insureds. The insurer also considers the

market for the investment of premiums, data

from the pool of insureds relating to the laps-

ing and early surrender of policies, and mar-

keting, selling, and administrative expenses.

The insured, on the other hand, considers,

among other things, the inmsurer’s financial

strength, its history of honoring policies, its

investment record, the risk represented by the

relevant pool of insureds, and the insurer’s

service. But in the end, both parties enter into

the contract of insurance with the hope that

the insured will not die early. That hope is re-

flected in the insurer’s acceptance of the bet

that the insured will not die before premiums

and investment income at least equal the face

amount of the policy, and that hope is inherent

in the insured’s will to live as part of human

nature.

The “business of insurance” refers to the

marketing, selling, entering into, managing,

servicing, and performing of insurance con-

tracts. See National Securities, 393 U.S. at

460, 89 S.Ct. 564 (explaining that in the

McCarran-—Ferguson Act, “Congress was con-

cerned with the type of state regulation that

centers around the contract of insurance,” in-

22a

cluding “the type of policy which could be is-

sued, its reliability, interpretation, and en-

forcement”). Thus, “(tlhe relationship between

insurer and insured,” which is the heart of the

insurance contract, is also at “the core of the

business of insurance.” See id. (“Whatever the

exact scope of the statutory term [‘business of

insurance’], it is clear where the focus was—it

was on the relationship between the insurance

company and the policyholder”). In applying

these principles, the Supreme Court has dis-

tinguished state statutes that regulate the

merger of insurance companies, which are

aimed at “the relationship between a stock-

holder and the company in which he owns

stock,” from statutes that directly affect con-

tracts of insurance, their risks, and their per-

formance. See National Securities, 393 U.S. at

460, 89 S.Ct. 564 (explaining that even though

the state merger statute only applied to insur-

ance companies, “(t]he crucial point is that

here the State has focused its attention on

stockholder protection; it is not attempting to

secure the interests of those purchasing insur-

ance policies”). Thus, at bottom, any under-

standing of the scope of what amounts to the

business of insurance must be based on the

“commonsense understanding” of whether the

business relates to or affects “the risk pooling

arrangement between the insurer and insured.”

Ky. Ass’n of Health Plans, Inc. v. Miller, 538

U.S. 329, 341-42, 123 S.Ct. 1471, 155 L.Ed.2d

468 (2003) (examining the scope of the busi-

ness of insurance in determining whether, un-

der ERISA, a state law regulates insurance);

23a

see also Pireno, 458 U.S. at 129, 102 S.Ct.

3002.

Finally, we understand that the McCarran-

Ferguson Act confers more commerce power to

the States than is necessary simply to regulate

the business of insurance directly. The grant

of power sweeps more broadly, giving States

the power to enact laws that “relate to” the

regulation of the business of insurance or are

enacted “for the purpose of” regulating the

business of insurance. See Fabe, 508 U.S. at

504, 113 S.Ct. 2202 (“The broad category of

laws enacted ‘for the purpose of regulating the

business of insurance’ consists of laws that ...

necessarily encompass{ ] more than just the

‘business of insurance”). This grant of power

to the States was deliberately broad “to allay

fears” about the “widely perceived ... threat to

state power” that followed the Supreme Court’s

decision in South-—Easiern Underwriters. See

Fabe, 508 U.S. at 499-500, 113 S.Ct. 2202; see

also Prudential Ins. v. Benjamin, 328 U.S. 408,

429-30, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946).

With this understanding of the McCarran-

Ferguson Act, we now turn to address whether

the Virginia Viatical Settlements Act is pro-

tected from a dormant Commerce Clause chal-

lenge as a state law that relates to or was en-

acted for the purpose of regulating the business

of insurance.

While obvious, it must first be stated that

the subject of every viatical settlement is an

insurance policy. Moreover, the viaticai set-

tlement is not collateral to the policy. Rather,

24a

it modifies it, changing the parties’ obligations

and benefits, while yet leaving the insurance—

i.e., the transfer of the specified risk—in place.

At its essence, a viatical settlement is a trans-

action that fractures the two-part insurance

contract between the insurer and the insured

and creates a new tripartite arrangement (al-

beit not a three-party agreement) among the

insurer, the insured, and the insured’s as-

signee—the viatical settlement provider. Be-

cause of this new tripartite arrangement, each

party has, with respect to the preexisting in-

surance contract, new or different obligations

and benefits.

The insurer is faced with the newly divided

obligations reflected in the interests of the in-

sured and the viatical settlement provider.

While the insured gives up her financial inter-

est in the insurance contract, her life and the

risk of her death remain the subject of the in-

surance contract. But now, the insurer, in-

stead of carrying its obligation to pay on the

insurance contract with an insured “who

guards against possible loss and disaster to

[her] as an individual,” see 1 Appleman on In-

surance § 1 (2d ed. 2006) (defining life insur-

ance), carries its obligation with a viatical set-

tlement provider, who hopes, for financial rea-

sons, for the early death of the insured. The

insurer must also now keep track adminis-

tratively of both the insured, whose life re-

mains essential to the arrangement, and the

viatical provider, who now must pay the in-

surer the premiums. Moreover, the fact that a

new contract—the viatical settlement—

introduces a new interested party to the ar-

25a

rangement raises the possibility that the in-

surer can become involved in legal disputes be-

tween the insured and the viatical provider.

The insurer is also faced with changed eco-

nomic risks that were not factored into its cal-

culation of premiums. Under the two-party ar-

rangement that preexisted the viatical settle-

ment, the insured was in a class of persons

that statistically surrendered a portion of its

policies or let a portion of them lapse. Insur-

ance companies rely on these surrender and

lapse rates to calculate premiums to charge for

life insurance policies. The viatical provider

distorts these rates, however, because it will

always hold onto the policy until the insured

dies in order to protect its investment. Thus,

as the initial actuarial risk is distorted with

each new viatical settlement, the _ risk-

spreading profile of the insurer becomes less

reflective of its initial calculations.

The insured too faces changed obligations

and risks. Fundamentally, instead of relating

to the insurer as an insured whose own life is

the subject of financial benefits that she con-

trols, she now relates as an insured whose

death is meaningful only to financial investors.

Also, while she likely subjected herself to a

health examination by the insurer when she

initially purchased the life insurance policy,

under the tripartite arrangement with a viati-

cal provider, she must subject herself to rou-

tine, periodic medical examinations—perhaps

even monthly. She also might have unwit-

tingly given up rights provided by her insur-

ance policy that could have generated cash

through loans or cash surrender value because

26a

she lacked adequate knowledge and informa-

tion about the value of those rights. Finally,

the insured is subjected to additional privacy

concerns relating to her medical records and

financial information. While generally these

are already regulated to some degree, certain

private financial and health matters none-

theless could legally become public as a result

of a viatical settlement.

Not only are the parties to insurance con-

tracts affected by viatical settlements, but the

State too has interests, especially in ensuring

(1) that its residents not be subjected to un-

scrupulous conduct by the viatical settlement

providers who might defraud, harass, or abuse

insureds in the State and (2) that its residents

not defraud insurance companies in an effort to

realize a quick financial return by entering

into insurance contracts while hiding the fact

that they will soon, within a determinable

time, die.

Virginia addressed these concerns in the

Virginia Viatical Settlements Act, recognizing

that each party to the new tripartite arrange-

ment has interests meriting attention and pro-

tection. The insured’s privacy rights are ad-

dressed in Virginia Code § 38.2—6005; the in-

sured’s potential lack of information and

knowledge about her policy and what she loses

in a viatical settlement are addressed by man-

dating disclosures, id. § 38.2-6007. A re-

quirement that the insured be of sound mind

when entering into a viatical settlement is im-

posed in § 38.2-6008(A)(1). Section 38.2-6008

also regulates the practices of viatical settle-

ment providers and § 38.2-6011 prohibits un-

27a

fair advertising with respect to viatical settle-

ments. The insurers are protected by being

provided in advance with applications of their

insureds for viatical settlements and the in-

sured’s medical records to allow the insurers to

conduct fraud investigations. See id. § 38.2-

6008(A)(3), (4). The Act requires viatical set-

tlement providers to submit to the Commission

for review and approval all viatical settlement

contracts before closing, see id. § 38.2—6003,

and they must pay viators (within three days

of the change of beneficiary) a minimum per-

centage of the face value of the life insurance

policy, see 14 Va. Admin. Code § 5-71-60. Fi-

nally, the Act requires that any viatical set-

tlement provider dealing with Virginia citizens

have a plan of operation, be competent and

trustworthy, indicate an intention to act in

good faith and in compliance with state licens-

ing requirements, have a good business reputa-

tion, and be present within the State for pur-

poses of regulation and enforcement. See Va.

Code Ann. § 38.2—6002.

All of these matters, and more, regulated

by the Virginia Viatical Settlements Act surely

“relate to” the business of insurance in that

they regulate the new ordering of the tripartite

insurance arrangement involving the insurer,

the insured, and the viatical settlement pro-

vider. See 15 U.S.C. § 1012(b). The term ‘re-

late to” as used in the McCarran—Ferguson Act

is parallel to the same language used in the

preemption provision of the Employee Re-

tirement Income Security Act of 1974 (“ER-

ISA”), as both words define the scope of pre-

emption. In ERISA, Congress preempted “any

28a

and all State laws” that “relate to any em-

ployee benefit plan” covered by ERISA. 29

U.S.C. § 1144(a) (emphasis added). And of

course, the McCarran-—Ferguson Act narrows

the preemption of the Commerce Clause by

conferring commerce power to the States to en-

act laws that “relate to” the regulation of the

business of insurance.

The Supreme Court has described ERISA’s

“relate to” language as “clearly expansive.”

See N.Y. State Conf. of Blue Cross & Blue

Shield Plans v. Travelers, 514 U.S. 645, 655,

115 S.Ct. 1671, 131 L.Ed.2d 695 (1995). Hop-

ing to focus judicial analysis, the Court com-

mented that a state “law ‘relates to’ an em-

ployee benefit plan, in the normal sense of the

phrase, if it has a connection with or reference

to such a plan.” Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 96-97, 103 S.Ct. 2890, 77 L.Ed.2d

490 (1983) (emphasis added). But even these

terms, if “taken to extend to the furthest

stretch of [their] indeterminacy,” would have

preemption “never run its course.” Travelers,

514 U.S. at 655, 115 S.Ct. 1671. Faced with

such expansive language capable of swallow-

ing, by its own terms, much more than Con-

gress intended, the Court surrendered: “We

simply must go beyond the unhelpful text and

the frustrating difficulty in defining its key

term [‘relate to’], and look instead to the objec-

tives of the ERISA statute as a guide to the

scope of the state law that Congress under-

stood would survive.” Jd. at 656, 115 S.Ct.

1671.

Interpreting the “relate to” language in

§ 1012(a) of the McCarran-Ferguson Act, we

29a

may similarly say that it is “clearly expansive”

and that a state law that has a “connection

with” or “reference to” the regulation of the

business of insurance is saved from the Com-

merce Clause’s preemption. But these terms

too prove to be somewhat indeterminate in the

context of the McCarran—Ferguson Act. There-

fore, we likewise look “to the objectives of the

[McCarran-Ferguson Act] as a guide to the

scope of the state law that Congress under-

stood would” be immune from dormant Com-

merce Clause attack. See Travelers, 514 U.S.

at 656, 115 S.Ct. 1671.

Congress made its objectives in passing the

McCarran-Ferguson Act clear by declaring

“that the continued regulation and taxation by

the several States of the business of insurance

is in the public interest.” 15 U.S.C. § 1011. By

passing the McCarran—Ferguson Act, Congress

“put the full weight of its power behind exist-

ing and future state legislation” that relates to

the business of insurance “to sustain it from

any attack under the commerce clause to what-

ever extent this may be done with the force of

that power behind it.” Prudential Ins., 328

U.S. at 431, 66 S.Ct. 1142. It was “Congress’

purpose ... to give support to the existing and

future state systems for regulating and taxing

the business of insurance.” Jd. at 429, 66 S.Ct.

1142.

Thus, focusing on the business of insurance

insofar as it involves the marketing, sale, exe-

cution, performance, and administration of in-

surance contracts, Congress gave States broad

authority to regulate, and we conclude that be-

cause the Virginia Viatical Settlements Act

30a

addresses these aspects of insurance contracts

with Virginia residents, the Act “relates to” the

regulation of the business of insurance.

The Virginia Viatical Settlements Act was

also enacted “for the purpose of regulating the

business of insurance.” 15 U.S.C. § 1012(b).

“The broad category of laws enacted ‘for the

purpose of regulating the business of insur-

ance’ consists of laws that possess the end, in-

tention, or aim of adjusting, managing, or con-

trolling the business of insurance.” Fabe, 508

U.S. at 505, 113 S.Ct. 2202 (citation omitted).

Just as the Virginia statute relates to the

business of insurance, it also clearly “manages”

and “controls” the relationship between the in-

surer and the insured and is “aimed at protect-

ing or regulating” that relationship, as it dic-

tates in what manner an insured may alter

fundamental aspects of her relationship with

the insurer.

Our holding that the Virginia Act was

passed “for the purpose” of regulating the in-

surance business is bolstered by a comparison

to the Supreme Court’s holding in National Se-

curities, where the Securities and Exchange

Commission sought to rescind the merger of

two Arizona insurance companies based on ma-

terial misstatements made in violation of fed-

eral law during the merger process. 393 U.S.

at 462-63, 89 S.Ct. 564. Arizona argued that

under the McCarran-—Ferguson Act, its merger

law should govern the transaction. In holding

that federal law governed, the Supreme Court

noted that the state law was focused on pro-

tecting the insurance company’s stockhoiders

rather than “attempting to secure the interests

3la

of those purchasing insurance policies,” distin-

guishing regulations involving stockholders

from regulations involving insurance poli-

cyholders. Id. at 460, 89 S.Ct. 564 (emphasis

added). National Securities thus would control

here if the Virginia Viatical Settlements Act

purported to regulate the relationship between

viatical settlemerit providers and their inves-

tors—the so-called “securities” side of the viat-

ical settlements business. But the Virginia Vi-

atical Settlements Act regulates only the “in-

surance” side of the transaction—involving the

providers’ purchase of life insurance policies

from viators—with the clear purpose of secur-

ing the interests of those originally purchasing

the policies by mandating that they receive a

fair price from licensed providers for the poli-

cies that become the subject of viatical settle-

ments. Indeed, the Virginia Act states that it

does not apply to the securities side of the viat-

ical settlements business. See Va. Code Ann.

§ 38.2-6016.

Consistently, in Fabe, the Supreme Court

upheld under the McCarran-—Ferguson Act a

state-created bankruptcy priority favoring in-

surance policyholders in bankruptcy proceed-

ings because the state law carried out “the en-

forcement of insurance contracts by ensuring

the payment of policyholders’ claims despite

the insurance company’s intervening bank-

ruptcy.” 508 U.S. at 504, 113 S.Ct. 2202.

Thus, if a statute assigning priority in an in-

surance company’s bankruptcy proceedings is

passed “for the purpose of regulating the busi-

ness of insurance,” as the Supreme Court held

in Fabe, then surely a statute regulating the

32a

transferability of life insurance policies is also

passed for the purpose of regulating the busi-

ness of insurance.

Indeed, in this case, we need not even rely

on the full breadth of the McCarran—Ferguson

Act, which protects any law that “relates to”

the regulation of the insurance business or was

enacted “for the purpose of” regulating such

business. We can rely on the McCarran-

Ferguson Act’s core protection of laws that ac-

tually regulate the “business of insurance.”

The subject matter of the Virginia Viatical Set-

tlements Act is life insurance policies issued to

Virginia residents—policies that are altered by

viatical settlements. As already noted above,

the insured, whose life remains the insurable

interest, is given new duties and has reduced

rights under the policy. By introducing a third

party to the transaction whose interests are

different from those of the original insured, the

effect of the insured’s policy on the insurer’s

risk pool changes.

Most importantly, however, the Virginia

Viatical Settlements Act regulates directly the

conduct and relationships of those traditionally

engaged in the insurance business—insurers

and insureds. The insurers on such contracts

must be given infermation about every viatical

settlement before the settlement is entered

into. See Va. Code § 38.2—6008(A)(3). More-

over, in connection with every such viatical

settlement, the insurer is required to respond

to a request for verification of coverage within

a specified time or to “indicate whether, based

on the medical evidence and documents pro-

vided, [it] intends to pursue an investigation

33a

regarding possible fraud or the validity of the

insurance contract.” Jd. § 38.2-—6008(A)(4). In

addition, insurers are, under the Act, prohib-

ited themselves from being viatical settlement

providers. Id. § 38.2-6002(F). Of course, the

insureds involved in viatical settlements are

the principal subjects of the Virginia Viatical

Settlements Act, for the Act is devoted mostly

to giving them rights when they sell their fi-

nancial rights in insurance contracts.

These direct regulations focused on selling

insurance policies and the altering of insur-

ance contracts surely satisfy the factors listed

in Pireno. See Pireno, 458 U.S. at 129, 102

S.Ct. 3002 (directing courts to consider “first,

whether the practice has the effect of transfer-

ring or spreading a policyholder’s risk; second,

whether the practice is an integral part of the

policy relationship between the insurer and the

insured; and third, whether the practice is lim-

ited to entities within the insurance industry”).

Even as the Court in Pireno noted that none of

the enumerated criteria was “necessarily de-

terminative,” see id,, the Court in Kentucky As-

sociation of Health Plans, considering the

business of insurance in the context of ERISA,

later chose to make a “clean break” from the

Pireno factors insofar as they might be restric-

tive, relying on a “common-sense understand-

ing” of whether the state law “substantially af-

fect{[ed] the risk-pooling arrangement between

the insurer and the insured.” Ky. Ass’n of

Health Plans, 538 U.S. at 341, 123 S.Ct. 1471.

Speaking in even broader terms, the Supreme

Court has held that “[s]tatutes aimed at pro-

tecting or regulating [the] relationship [be-

34a

tween insurer and insured], directly or in-

directly, are laws regulating the ‘business of

*nsurance.” National Securities, 393 U.S. at

460, 89 S.Ct. 564 (emphasis added).

In sum, we have little difficulty in con-

cluding that the Virginia Viatical Settlements

Act relates to the regulation of the business of

insurance; was enacted for the purpose of regu-

lating the business of insurance; and indeed

regulates directly and substantially the actual

business of insurance. Thus the McCarran-

Ferguson Act saves the Act from any dormant

Commerce Clause challenge.

Were there any residual doubt on this is-

sue, Congress’ treatment of viatical set-

tlements under the Internal Revenue Code lays

it to rest. In 1996, Congress amended the In-

ternal Revenue Code to exclude from taxable

income proceeds from tbe sale of a life insur-

ance policy by a person who is terminally or

chronically ill to a viatical settlement provider

so long as the viatical settlement provider is

“licensed ... in the State in which the insured

resides.” 26 U.S.C. § 101(g)(2)(B)(i)(I) (em-

phasis added). Moreover, if a State in which

the insured resides does not provide for the li-

censing of viatical settlement providers, the

insured still receives the tax benefit if the viat-

ical settlement provider meets both “the re-

quirements of sections 8 and 9 of the Viatical

Settlements Model Act,” and “the requirements

of the Model Regulations ... relating to stan-

dards for evaluation of reasonable payments.”

26 U.S.C. § 101(g)(2)(B)Gi)(I-II). Section 8 of

the Model Act requires the viatical settlement

provider to make extensive disclosures to the

35a

viator, and § 9 regulates the settlement process

and post-sale relationship between the pro-

vider and the viator. Viatical Settlements

Model Act §§ 8-9 (Nat’l Ass’n of Ins. Comm’rs

2006).

Thus, in amending the Tax Code in 1996,

Congress did far more than just extend signifi-

cant tax benefits to viators in § 101l(g)(2). It

made those tax benefits contingent upon the

viatical settlement provider’s compliance with

state licensing requirements, and when the in-

sured’s State did not require licensing, they

were contingent upon compliance with numer-

ous safeguards found in the Model Act and

regulations, including the minimum prices for

policies. This incorporation of state regulation

shows Congress’ concern with the pitfalls of an

unregulated viatical market. It also reveals

congressional trust in state regulatory meas-

ures to address these pitfalls. Most impor-

tantly, the contingency shows that Congress

was aware of existing state regulation in the

area and that it intended that the viatical set-

tlement industry be regulated at the state, not

federal, level.

In addition, § 101(g)(2) of the Tax Code re-

quires not only that the viatical settlement

provider be licensed, but also that it be li-

censed “in the State in which the insured re-

sides.” 26 U.S.C. § 101(g)(2)(B)(i)(1). This re-

quirement contemplates a multi-state licensure

regime. And it too encourages each State to

pass viatical settlement laws because, if a

State does not, its citizens may not receive the

tax benefit, as the State cannot guarantee that

providers will comply with the Model Act.

36a

In short, in order to ensure that their citi-

zens enjoy the tax benefit found in § 101(g)(2),

States must enact licensing requirements. And

the Virginia Viatical Settlements Act imple-

ments the very licensing regime Congress re-

lied upon to confer tax benefits to viators un-

der § 101(g)(2).

Life Partners relies heavily on SEC v. Life

Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996), to

argue that viatical settlements are not part of

the business of insurance which is subject, by

virtue of the McCarran—Ferguson Act, to state

regulation. In Life Partners, the Securities

and Exchange Commission was attempting to

exercise regulatory jurisdiction over the se-

curities’ side of a viatical settlement transac-

tion, in which the provider sells interest in the

purchased policy or policies to investors. 87

F.3d at 540-42. The D.C. Circuit held that the

investment side of the viatical transaction is

not part of the business of insurance under the

McCarran-—Ferguson Act. Id. at 541-42. But

that holding has no application to this case,

which deals with Virginia’s efforts to regulate

the insurance side of the viatical transaction—

the transaction by which the policyholder sells

its policy to a settlement provider. Life Part-

ners’ argument fails to distinguish the two dif-

ferent aspects of the viatical settlement busi-

ness—the one involving the viatical settlement

provider’s transaction with an insured to pur-

chase a policy of life insurance and the other

involving the relationship between the viatical

provider and its investors to raise money for

purchasing the insurance policies. In failing to

make that distinction, Life Partners also ig-

37a

nores the Supreme Court’s holding in National

Securities, 393 U.S. at 460, 89 S.Ct. 564.

In its cross-appeal, the Commission argues

that the district court should have “abstained

from exercising jurisdiction over this case out

of respect for the important State interests im-

plicated in regulating viatical settlements by

Virginia citizens,” citing Younger v. Harris,

401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669

(1971).

Younger abstention is a doctrine requiring

federal courts to refrain from interfering with

ongoing state judicial proceedings that impli-

cate important state interests. See Middlesex

County Ethics Committee v. Garden State Bar

Ass’n, 457 U.S. 423, 432, 102 S.Ct. 2515, 73

L.Ed.2d 116 (1982). When the federal case,

however, involves “an overwhelming federal in-

terest—an interest that is ... a core attribute of

the national government ...—no state interest,

for abstention purposes, can be nearly as

strong at the same time.” Harper v. Public

Serv. Comm’n, 396 F.3d 348, 356 (4th Cir.

2005).

This case involves just such an interest, the

commerce power. Thus, the issue in this case

is not whether Virginia has an interest in regu-

lating viatical settlements—it most certainly

does—-but whether Congress authorized Vir-

ginia to do so, and if not, whether Virginia’s

regulations violate the dormant Commerce

Clause. In such cases, “the commerce power

itself justifies a narrower view of state inter-

38a

ests in the abstention context.” Harper, 396

F.3d at 357.

Under these principles, we conclude that

the district court did not abuse its discretion in

declining to abstain under Younger v. Harris.

For the reasons given herein, we affirm the

judgment of the district court.

AFFIRMED

APPENDIX B

LIFE PARTNERS, INC., Plaintiff,

Clinton MILLER, et al., Defendants,

and

Robert McDonnell, in his official capacity

as Attorney General of the Commonwealth

of Virginia, Intervenor.

No. CIV.A. 305CV368-HEH.

United States District Court,

E.D. Virginia,

Richmond Division.

March 10, 2006.

MEMORANDUM OPINION

HUDSON, District Judge.

(Denying Plaintiff's Motion for Summary

Judgment and Granting the Motions for

Summary Judgment Filed by the Defen-

dants and the Intervenor)

In this suit for declaratory judgment,

Plaintiff challenges the constitutionality of the

Virginia Viatical Settlements Act as violative

of the dormant Commerce Clause of the United

States Constitution. The matter is before the

Court on individual motions for summary

judgment filed by each of the parties, along

with memoranda in support and in opposition

40a

of the respective motions. The Court heard

oral argument on February 27, 2006.

The Virginia Viatical Settlements Act (“the

Act”), codified as Section 38.2-6000, Code of

Virginia, 1950 as amended, regulates the sale

of life insurance policies by terminally-ill per-

sons to third parties for less than the full

amount of death benefits provided under the

policy. The Act defines terminally ill as “hav-

ing an illness or sickness that can reasonably

be expected to result in death in 24 months or

less.” The Act establishes elaborate regulatory

measures governing viatical settlement agree-

ments. The accompanying regulations set forth

a specific minimum pricing schedule for such

agreements. The focus of Plaintiff's challenge

is the jurisdictional provisions of the regula-

tory scheme, including oversight by the Vir-

ginia Bureau of Insurance triggered solely by

the legal residence of the viator. Plaintiff con-

tends that the scope of Virginia’s regulatory

control is sufficiently broad to effect commerce

occurring wholly outside the geographic

boundaries of the Commonwealth of Virginia.

Plaintiff further maintains that the price con-

trols and regulatory scheme are inspired by

economic protectionism and has the effect of

discriminating against and discouraging inter-

state commerce.

Because aspects of this Court’s dormant

Commerce Clause analysis turn on the intra-

state elements of the transaction giving rise to

this controversy, a thorough recital of the un-

derlying facts is critical. There appears to be

no material facts in dispute.

4la

The Court’s findings of fact are mined from

the statements of undisputed facts contained

in each party’s Memorandum in Support of Mo-

tion for Summary Judgment. A close examina-

tion of those statements reveal the following

factual premise. The opinions of defense ex-

perts are considered separately.

I. Background

The viator, Jane Doe (“Ms. Doe”),! was a

resident of Martinsville, Virginia, and a client

of Life Partners, Incorporated (“LPI”). There is

no dispute that Ms. Doe met the statutory

definition of a terminally-ill patient under the

Act. Ms. Doe had a life insurance policy with a

value of $115,000 at death. For undisclosed

reasons, Ms. Doe elected to sell her life insur-

ance policy, presumably to generate cash.

In order to market her policy, Ms. Doe con-

tacted Ideal Settlement, Inc. (“Ideal”), a New

Jersey corporation, through the internet. On

March 16, 2004, Ms. Doe entered into an

agreement (“the Agreement”) with Ideal to

market her policy. Under the terms of the

Agreement, Ideal was engaged to serve as a

broker and obtain bids for the purchase of Ms.

Doe’s policy. It appears to be undisputed that

Ms. Doe never left the Commonwealth of Vir-

ginia, so presumably, the Agreement was ar-

ranged and negotiated by telephone. In order

to locate an interested buyer, Ideal contacted

the plaintiff, LPI.

1 Jane Doe is a pseudonym used by the Court to protect

the identity of the viator.

42a

LPI is a Texas corporation with its sole of-

fice in Waco and is a licensed viatical settle-

ment provider under Texas law. LPI describes

itself as an agent that represents purchasers in

viatical transactions, but is not a broker. LPI

is neither licensed in Virginia nor does busi-

ness in the state. LPI markets their services

nationally. The evidence is unclear whether

LPI has purchased other insurance policies

from Virginia residents.

At the invitation of Ideal, LPI assembled a

consortium of twelve (12) interested persons

located in seven (7) states, who were interested

in purchasing Ms. Doe’s policy as a group.

None of the twelve (12) members of the in-

vestment group resided in the Commonwealth

of Virginia. In negotiating the viatical settle-

ment at issue in this case, LPI contacted Ms.

Doe in Virginia at least twice by telephone.

LPI submitted three (3) bids, or sales propos-

als, to Ms. Doe with progressively increasing

sales prices. The Agreement was sent by LPI

from Texas to Ms. Doe in Virginia by FedEx.

By its terms, Ms. Doe sold her $115,000 life in-

surance policy to the investment group for

$29,900. The Agreement specified that “this

agreement was entered into in the State of

Texas and its validity, construction, interpre-

tation and legal effects should be governed by

the laws and judicial decisions of that State

..” (See Agreement at Section 7.11.) The

Agreement further provided “that the transac-

tion is governed by and subject to the rules and

regulations governing viatical settlements un-

der the Texas Insurance Code”. (See Agree-

ment at Section 7.12.) Ms. Doe executed the

43a

Agreement in Virginia and returned it to LPI

in Texas, where it was countersigned by a cor-

porate officer of LPI.

Subsequent to executing the Agreement,

Ms. Doe contacted LPI and demanded payment

of the minimum price prescribed by Virginia

law for her insurance policy, which would have

been $69,000 under the Virginia regulations.

LPI declined, citing the provisions of the

Agreement designating Texas law as control-

ling. Ms. Doe then filed a complaint with the

Virginia Bureau of Insurance (“VBI”). After

conducting a inquiry, the VBI concluded that

LPI may need to obtain a Virginia license be-

fore transacting business in viatical settle-

ments with a resident of the Commonwealth of

Virginia. At the request of the VBI, the Vir-

ginia State Corporation Commission (“SCC”)

issued a rule to show cause against LPI requir-

ing it to explain why it was conducting busi-

ness without proper registration in violation of

Section 38.2-—6,000, et seg. This lawsuit fol-

lowed.

II. Standard of Review

Under Rule 56(c) of the Federal Rules of

Civil Procedure, the Court must grant sum-

mary judgment if the moving party demon-

strates that there is no genuine issue as to any

material fact, and that it is entitled to judg-

ment as a matter of law. See Fed.R.Civ.P.

56(c); Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 247, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202

(1986). After the movant has met this burden,

the nonmoving party must come forward with

specific facts showing that evidence exists to

44a

support its claims and that there is a genuine

issue for trial. Celotex Corp. v. Catrett, 477

U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d

265 (1986). The mere existence of some alleged

factual dispute between the parties will not de-

feat an otherwise properly supported motion

for summary judgment; the requirement is that

there be no genuine issue of material fact.

See Anderson, 477 U.S. at 248, 106 S.Ct. 2505.

“Rule 56(e) requires the non-moving party to go

beyond the pleadings and by [his] own affida-

vits, or by the ‘depositions, answers to inter-

rogatories, and admissions on file,’ designate

‘specific facts showing that there is a genuine

issue for trial.’ ” Celotex, 477 U.S. at 324, 106

S.Ct. 2548. Summary judgment is proper if af-

ter viewing all the evidence, including supple-

mental affidavits, in the light most favorable

to the non-moving party, the Court finds no

genuine issue exists. Anderson, 477 U.S. at

255, 106 S.Ct. 2505.

III. Standing

Before addressing the merits of the under-

lying action, the Court must first determine if

the plaintiff has standing to contest the Act.

Plaintiff has stated equivocally that its claim

is limited to an as applied rather than a facial

challenge.

Article III of the United States Constitu-

tion requires a plaintiff to demonstrate their

standing by showing that they have suffered a

judicially cognizable and redressible injury.

Lujan v. Defenders of Wildlife, 504 U.S. 555,

559-61, 112 S.Ct. 2130, 119 L.Ed.2d 351

(1992). In order to demonstrate a cognizable

45a

injury, the plaintiff must show that: (1) they

have personally suffered an actual or threat-

ened injury that is concrete and particularized,

not conjectural or hypothetical; (2) the injury

fairly can be traced to the challenged action;

(3) the injury is likely to be redressed by a fa-

vorable decision from the Court. Burke v. City

of Charleston, 139 F.3d 401, 405 (4th Cir.

1998) (citing Lujan, 504 U.S. at 560-61, 112

S.Ct. 2130).

Assuming Plaintiff satisfies these constitu-

tional requirements, they must also meet the

requirements of prudential standing. Id.

“Prudential considerations constitute a sup-

plemental aspect of basic standing analysis

and address concerns regarding the need for

judicial restraint.” Oxford Assocs. v. Waste

Sys. Auth., 271 F.3d 140, 145 (3rd Cir. 2001).

“Prudential standing entails an inquiry into a

plaintiff's role because ‘the aim of this form of

judicial self-governance is to determine

whether the plaintiff is a proper party to in-

voke judicial resolution of the dispute and the

exercise of the court’s remedial powers.’ ” Id.

To satisfy prudential requirements, plaintiffs

must assert their own legal rights and inter-

ests rather than those of a third party. Plain-

tiffs must also show that their interests fall

arguably within the zone of interests that the

statute, rule or constitutional provision in

question protects or regulates. Finally, the

court should refrain from adjudicating a

“ ‘generalized grievance shared in substantially

equal measure by all or a large class of citizens

.... ” Burke, 139 F.3d at 405 (quoting Warth

46a

v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45

L.Ed.2d 343 (1975)).

Assuming without deciding that the Act

discriminates against interstate commerce,

Plaintiff clearly has shown a concrete and re-

dressible injury. Plaintiff's injury stems from

the SCC’s issuance of the rule to show cause.

This puts Plaintiff in the dilemma of either

complying with an arguably unconstitutional

statute or facing administrative sanction. A

favorable ruling by this Court, invalidating the

underlying statute, would clearly redress

Plaintiffs injury and presumably terminate

the show cause proceedings. As a result, this

Court is convinced that the plaintiff has consti-

tutional standing to challenge the Act.

Plaintiff has also fulfilled the requirements

of prudential standing. Enforcement of the Act

would require the plaintiff to comply with all

of its provisions. Therefore, Plaintiffs claim is

not a generalized grievance, rather LPI has as-

serted its own individualized legal interest in

assuring that it is not required to comply with

an unconstitutional statutory provision. Fur-

thermore, the plaintiff has alleged that the Act

infringes on its right to engage in interstate

commerce, and as a result, the claim falls

squarely within the zone of interest the dor-

mant Commerce Clause was designed to pro-

tect. As the United States Supreme Court has

explained, Commerce Clause jurisprudence is

designed to protect the states and “to benefit

those who ... are engaged in interstate com-

merce.” Dennis v. Higgins, 498 U.S. 439, 450,

111 S.Ct. 865, 112 L.Ed.2d 969 (1991). Asa

viatical provider, Plaintiff is engaged in inter-

47a

state commerce and falls into the zone of inter-

est protected by the dormant Commerce

Clause. Accordingly, Plaintiff has demon-

strated both constitutional and prudential

standing to bring the present action.

IV. Analysis

A. The Commerce Clause

The Commerce Clause of the United States

Constitution provides “Congress shall have

Power ... [to] regulate Commerce ... among

the several states.” U.S. Const. Art. I, § 8, cl.

3. Congress’s authority to regulate commerce

pursuant to the Constitution inherently carries

with it a prohibition to the states to refrain

from enacting laws which impede the flow of

interstate commerce. See Cooley v. The Board

of Wardens, 53 U.S. 299, 318, 12 How. 299, 13

L.Ed. 996 (1851). This authority, known as the

dormant Commerce Clause, “has long been un-

derstood ... to provide ‘protection from state

legislation inimical to the national commerce

[even] where Congress has not acted.’ ” Bar-

clays Bank, PLC v. Franchise Tax Bd. of Cal.,

512 U.S. 298, 310, 114 S.Ct. 2268, 129 L.Ed.2d

244 (1994) (quoting Southern Pacific Co. v.

Arizona ex rel. Sullivan, 325 U.S. 761, 769, 65

S.Ct. 1515, 89 L.Ed. 1915 (1945)). The dor-

mant Commerce Clause “limits the power of

the States to erect barriers against interstate

trade.” Dennis, 498 U.S. at 446, 111 S.Ct. 865.

However, this limitation on state power “is by

no means absolute. In the absence of conflict-

ing federal Jegislation, the States retain au-

thority under their general police powers to

regulate matters of ‘legitimate local concern,’

48a

even though interstate commerce may be af-

fected.” Star Scientific, Inc. v. Beales, 278

F.3d 339, 355 (4th Cir. 2002) (quoting Lewis v.

BT Inv. Mgrs., Inc., 447 U.S. 27, 36, 100 S.Ct.

2009, 64 L.Ed.2d 702 (1980)).

Review of a dormant Commerce Clause

challenge to a state statute requires a two-tier

analysis. Brown-Forman Distillers, Corp. uv.

New York Liquor Auth., 476 U.S. 573, 578-79,

106 S.Ct. 2080, 90 L.Ed.2d 552 (1986). The

first tier of analysis, referred to as the dis-

crimination tier, is a “virtually per se rule of

invalidity” and applies “when a state statute

clearly discriminates against interstate com-

merce.” Wyoming v. Oklahoma, 502 U.S. 437,

454, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992).

When a statute is clearly discriminatory, the

Court will apply strict scrutiny and the statute

will be struck down unless the state demon-

strates “that the discriminatory law is demon-

strably justified by a valid factor unrelated to

economic protectionism, and that there are no

nondiscriminatory alternatives adequate to

preserve the local interests at stake ....”

Envtl. Tech. Council v. Sierra Club, 98 F.3d

774, 785 (4th Cir. 1996) (internal citations

omitted.) If the state statute does not “clearly

discriminate” but instead “regulates evenhand-

edly to effectuate a legitimate local public in-

terest, and its effects on interstate commerce

are only incidental...” a less strict scrutiny

applies, known as the undue burden tier or the

Pike balancing tier. Yamaha Motor Corp. uv.

Jim’s Motorcycle Inc., 401 F.3d 560, 567 (4th

Cir. 2005) (quoting Pike v. Bruce Church, Inc.,

397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174

49a

(1970) (internal quotation marks omitted)).

Under a Pike analysis, a nondiscriminatory

statute with only an incidental effect on com-

merce “will be upheld unless the burden im-

posed on ... commerce is clearly excessive in

relation to the putative local benefits.” Id.

The Supreme Court has acknowledged that

“there is no clear line separating close cases on

which scrutiny [or which tier of analysis]

should apply.” Wyoming, 502 U.S. at 455 n.12,

112 S.Ct. 789.

B. Discrimination Tier

Under the discrimination tier, a statute

clearly discriminates when it “discriminates

facially, in its practical effect, or in its pur-

pose.” Envitl. Tech. Council, 98 F.3d at 785

(4th Cir. 1996). A statute discriminates in its

practical effect when it favors in-state eco-

nomic interests over out-of-state economic in-

terests, or when it has an extraterritorial

reach such that it regulates commerce wholly

outside the state’s borders. See Brown-

Forman, 476 U.S. at 579, 106 S.Ct. 2080, See

also Healy v. Beer Inst. 491 U.S. 324, 336, 109

S.Ct. 2491, 105 L.Ed.2d 275 (1989); Baldwin v.

G.A.F., Seelig, Inc., 294 U.S. 511, 521, 55 S.Ct.

497, 79 L.Ed. 1032 (1935).

Plaintiff mounts its constitvtional attack

on all fronts. LPI argues that the regulatory

scheme is per se unconstitutional because it di-

rectly affects interstate commerce. Specifi-

cally, LPI maintains that the Act regulates

transactions predominately interstate in na-

ture, transactions occurring outside the Com-

monwealth of Virginia, influences out-of-state

50a

pricing behavior, and subjects market partici-

pants to inconsistent regulations. Alterna-

tively, LPI asserts that the Act is unconstitu-

tional under a second or Pike tier analysis, in

that it imposes undue burdens on interstate

commerce, which are not outweighed by its pu-

tative local benefits.

Defendants counter that the Act does not

violate the dormant Commerce Clause because

it regulates evenhandedly with only incidental

effects which do not excessively burden inter-

state commerce. In the alternative, Defen-

dants offer two (2) independent grounds on

which this Court could find the Act to be a con-

stitutionally appropriate exercise of power,

without reaching the core issue, namely that:

(1) Congress has expressly approved state

regulation of the viatical settlement industry;

and (2) the Act is immunized from a dormant

Commerce Clause attack by the McCarran-

Ferguson Act (“McCarran-—Ferguson”). See 15

U.S.C. § 1011 et seg. The Court will address

these arguments before reaching its dormant

Commerce Clause analysis.

“Where state or local government action is

specifically authorized by Congress, it is not

subject to the Commerce Clause even if it in-

terferes with interstate commerce.” White v.

Massachusetts Council of Constr. Employers,

Inc., 460 U.S. 204, 213. 103 S.Ct. 1042, 75

L.Ed.2d 1 (1983). However, in order to exempt

a state statute from the implied implications of

the Commerce Clause, Congress’s intention to

do so must be “ ‘unmistakably clear’ or ‘ex-

pressly stated.’” Enuvtl. Tech. Council, 98 F.3d

at 782 (4th Cir. 1996) (quoting South-Central

5la

Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 91-

92, 104 S.Ct. 2237, 81 L.Ed.2d 71 (1984)).

Defendants argue that Congress specifically

authorized states to regulate viatical settle-

ments by enacting Title 26 #£U.S.C.

§ 101(g)(2)(B) of the United States Tax Code.

This statute provides tax exempt status to pro-

ceeds of the sale of an insurance contract sold

to a viatical settlement provider if the provider

is licensed in the state in which the insured re-

sides, or complies with certain provisions of

the Model Regulations or the Model Act. See

26 U.S.C. § 101(g)(2)(B).

On careful review, the Court is of the opin-

ion that the statute neither provides express

congressional authority to regulate interstate

viatical transactions, nor is “unmistakably

clear” as to Congress’s intent to authorize

states to do so. In fact, there is no evidence in

the legislative history that Congress ever in-

tended § 101(g) to grant such authority to the

states. Rather, the statute only evidences a

legislative desire to extend tax benefits to via-

tors. Accordingly, this Court declines to adopt

Defendants’ overly broad interpretation of the

effect of this statute. The Court, however, will

not entirely discount the _ significance of

§ 101(g). As will be explored in greater detail

below, this statute conveys undeniable benefits

to viators and plays a role in the Court’s dor-

mant Commerce Clause analysis.

With respect to Defendants’ argument con-

cerning the applicability of McCarran-

Ferguson, it is unnecessary for the Court to

reach the merits of this argument given its ul-

52a

timate finding that the Act does not violate the

dormant Commerce Clause.

Turning back to the merits of LPI’s Com-

merce Clause challenge, central to the ele-

ments of Plaintiff's direct regulation argument

is the contention that the viatical settlement

agreement in this case was a Texas transac-

tion, placing it beyond the reavh of Virginia

regulatory laws. Plaintiff's position flows from

the language of the Agreement, namely Sec-

tions 7.11 and 7.12, and the fact that signifi-

cant portions of the underlying course of deal-

ings occurred from Plaintiffs Texas headquar-

ters. As further evidence of tenuous Virginia

ties, Plaintiff notes that Ms. Doe initially

placed her policy with Ideal, a New Jersey

based company, through the internet.

The two provisions of the Agreement relied

upon by Plaintiff read in pertinent part:

Section 7.11: This Agreement was entered into in

the State of Texas and its validity, construc-

tion, interpretation and legal effect shall be

governed by the laws and judicial decisions of

that state .

Section 7.12: This Agreement is governed by and

subject to the rules and regulations relating to

viatical settlements as that term is defined

under the Texas Insurance Code and regula-

tions promulgated thereunder. The Parties

hereby agree that the Texas Department of In-

surance has regulatory jurisdiction over this

transaction irrespective of the residence of the

Seller....

Section 7.11 appears to be a _ standard

choice of law provision. If the terms of the

53a

Agreement were in dispute, or their legal effect

uncertain, a reviewing court would look to the

law of the State of Texas to resolve the contro-

versy. Furthermore, the parties agreed in Sec-

tion 7.12 that the Texas Department of Insur-

ance would have regulatory jurisdiction over

the transaction irrespective of the residence of

the seller. However, this stipulation did not

totally divest the Commonwealth of Virginia of

regulatory jurisdiction over transactions occur-

ring with its residents within its borders. If

the transaction between Ms. Doe and LPI had

occurred “wholly outside” the boundaries of the

Commonwealth of Virginia, the regulatory

scheme at issue may be unconstitutional. Ed-

gar v. MITE Corp., 457 U.S. 624, 642, 102 S.Ct.

2629, 73 L.Ed.2d 269 (1982). If on the other

hand the transaction occurred within the

boundaries of the Commonwealth of Virginia, it

would be constitutional so long as the regula-

tion furthered legitimate in-state interest. Id.

at 643-46, 102 S.Ct. 2629. In the immediate

case, the agreement formed between LPI and

Ms. Doe implicated the regulatory interest of

both Texas and Virginia. “Thus, when an offer

is made in one state and accepted in another,

we now recognize that elements of the transac-

tion have occurred in each state, and that both

states have an interest in regulating the terms

and performance of the contract.” A.S. Gold-

men & Co. v. New Jersey Bureau of SEC, 163

F.3d 780, 787 (3rd Cir. 1999).

Plaintiff relies on Dean Foods Co. uv.

Brancel, 187 F.3d 609 (7th Cir. 1999), for its

contention that the Agreement in this case was

the product of a transaction occurring wholly

54a

outside the Commonwealth of Virginia. Dean

Foods involved a constitutional challenge to

Wisconsin’s milk pricing regulations. Wiscon-

sin farmers conducted what the court described

as preliminary negotiations for the sale of milk

with Illinois dairy plants. This included tele-

phone contact and meetings with field repre-

sentatives. However, the transaction was not

complete until Wisconsin farmers transported

their product to Illinois plants. The contract

was not final until the product had been exam-

ined and accepted. The court in Dean Foods

held that the contract was formed in Illinois

and that Wisconsin could not regulate the price

of milk sold in Illinois.

The court in Dean Foods distinguished the

case from A.S. Goldmen & Co.:

There, an offer was made by a securities

dealer in New Jersey and accepted by

various individuals outside of New Jer-

sey.... That stands in marked con-

trast to the situation here, where we

have held that the contract was created

and performed wholly in Illinois. This

is not a case where ‘elements of the

transaction have occurred in each state.’

187 F.3d at 620.

LPI also draws the Court’s attention to

Shafer v. Farmers’ Grain Co. of Embden, 268

U.S. 189, 45 S.Ct. 481, 69 L.Ed. 909 (1925). At

issue in Shafer was the interstate effect of the

North Dakota Grain Grading Act. The act es-

tablished an elaborate system for grading and

regulating wheat earmarked for interstate

shipment. The purpose or intent of the act was

55a

to prevent unreasonable margins of profit. 268

U.S. at 200, 45 S.Ct. 481. The Supreme Court

struck down the act as violative of the dormant

Commerce Clause because it directly affected

the price of wheat sold in other states. Shafer

is distinguishable from the immediate case be-

cause here the sale of Ms. Doe’s life insurance

policy occurred, at least in part, in Virginia.

In addition, unlike Shafer, the Virginia Act,

and accompanying regulation, prescribes iden-

tical regulation and pricing for in-state and

out-of-state transactions.

A survey of dormant Commerce Clause ju-

risprudence reveals no widely accepted stan-

dard to assess the sufficiency of a state’s con-

tacts and interests to justify regulatory meas-

ures. Perhaps the most instructive case on

this point, decided by the United States Court

of Appeals for the Fourth Circuit, is Underhill

Assoc., Inc. v. Bradshaw, 674 F.2d 293 (4th

Cir. 1982). In Underhill, a group of discount

securities brokers challenged the power of the

Commonwealth of Virginia to regulate the ac-

tivities of non-resident securities brokers un-

der both the Commerce Clause and the Due

Process Clause of the Fourteenth Amendment.

In upholding the regulatory scheme, the

Fourth Circuit noted “[t]o determine Virginia’s

power to reguiate the activities of nonresi-

dents, we must look to the extent of these non-

residents’ contacts with Virginia and to the na-

ture and extent of the state’s interest in exer-

cising its authority.” Jd. at 295. The court

cited approximately a dozen decisions of the

U.S. Supreme Court or other circuits consis-

tent with this conclusion, including Travelers

56a

Health Ass’n v. Virginia, 339 U.S. 643, 648, 70

S.Ct. 927, 929, 94 L.Ed. 1154 (1950), and

Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37

S.Ct. 227, 61 L.Ed. 498 (1917). The court went

on to conclude in Underhill that “[i]t is not

only desirable, but Virginia’s interest in pro-

tecting its citizens from possibly dishonest or

incompetent securities dealers is obvious.”

Underhill, 674 F.2d at 295.

Applying the contacts and interest ap-

proach announced in Underhill to the immedi-

ate case, it is this Court’s opinion that the vi-

atical settlement transaction at issue involved

sufficient contacts with the Commonwealth of

Virginia to warrant compliance with its regula-

tory scheme if the underlying statute is consti-

tutionally sound. Not only did Ms. Doe reside

in Virginia, but it is undisputed that she never

left the Commonwealth during the negotiations

leading up to this viatical settlement agree-

ment. She placed and received calls in Vir-

ginia. She received multiple settlement agree-

ments sent to Virginia for her review, two (2)

of which she rejected. Most importantly, she

signed the final Agreement in Virginia.

The choice of law provisions contained in

the Agreement do not change this result. If

this case were a dispute over the terms of the

Agreement, Section 7.11 would clearly dictate

that the law of Texas would control. Further-

more, if the Agreement had been consummated

outside of the Commonwealth of Virginia, Sec-

tion 7.12 would give the Texas Department of

Insurance exclusive regulatory jurisdiction.

However, since the transaction touched both

Virginia and Texas, it implicated the legisla-

57a

tive interests of both states. See A.S. Goldmen

& Co., 163 F.3d at 786-87.

The Court therefore concludes that the vi-

atical settlement agreement in this case was

not the product of a purely Texas based trans-

action as Plaintiff argues. The contacts with

Virginia are sufficient to give the Common-

wealth regulatory jurisdiction. If the factual

basis on which this case is premised involved a

viatical settlement agreement negotiated and

consummated totally beyond the borders of

Virginia, even by a Virginia resident, portions

of the Act may well offend the dormant Com-

merce Clause. That, however, must be left for

a later date.

The Court will turn next to the individual

parts of Plaintiffs first tier or per se invalidity

argument. This facet of Plaintiff's challenge

has four (4) components, namely that the Act:

1) regulates transactions predominately inter-

state in nature; 2) regulates transactions oc-

curring outside the Commonwealth of Virginia;

3) influences out-of-state pricing behavior; and

4) subjects market participants to inconsistent

regulation.

For the reasons discussed above, this Court

rejects the contention that under the facts of

this case, the Act regulates only interstate

commerce and is extraterritorially regulating

“a Texas contract.” Significant parts of this

transaction occurred in Virginia, which justi-

fied regulatory oversight. The fact that there

are no viatical settlement providers with of-

fices in Virginia is inconsequential. Twelve

(12) viatical settlement providers are licensed

58a

in Virginia. If a provider chooses to enter the

Virginia viatical settlement market and do

business with a terminally-ill viator physically

located in Virginia, it does not overly burden

interstate commerce to require compliance

with the Commonwealth’s regulatory scheme.

Moreover, the Act affects providers situated

both within and without the Commonwealth

equally.

Relying on the opinions of its experts, LPI

contends that Virginia’s pricing regulations for

viatical agreements unduly influence the mar-

keting of similar agreements in other states.

In its experts’ view, the higher prices required

by the regulations accompanying the Act, skew

prices elsewhere and directly affect the inter-

state market. The experts opine that Vir-

ginia’s price controls are a barrier to the mar-

ketability of policies offered for sale by Vir-

ginia residents. Their position is based in part

on the fact cited by LPI that over a designated

period, 170 policies were sold by Virginia via-

tors, and only three (3) were sold in conformity

with the price regulations at issue. LPI argues

that it is a reasonable inference that the price

controls were evaded, because otherwise, the

policies would have been unmarketable. Es-

sentially, Plaintiff contends that the Virginia

minimum price controls set a price that is so

artificially high that no reasonable viatical

settlement company would ever agree to enter

into a sale or purchase at those prices. Assum-

ing that LPI’s experts are correct, this inciden-

tal effect does not necessarily transgress the

dormant Commerce Clause.

59a

Contrary to Plaintiffs argument, the Vir-

ginia pricing schedule does not discriminate

against out-of-state transactions. The pricing

regulations affect all markets equally, irre-

spective of whether the policy is sold in Vir-

ginia, Texas or California. By electing to

transact business with a client physically lo-

cated in Virginia, Plaintiff chose to enter a

regulated market, fully cognizant of the price

restrictions. This is not the case of a product

being exported to another state for sale in that

jurisdiction. The incidental effect of the intra-

state pricing of viatical settlements on the in-

terstate market is no different than the price

of any other commodity sold in the Common-

wealth, regulated or unregulated.

The opinion advanced by LPI’s experts that

Virginia pricing regulations are a direct bar-

rier to interstate marketability adds little to

Plaintiffs argument. If the pricing schedule

chills the interstate market, it has an identical

effect on intrastate sales.

The last segment of Plaintiffs first tier

challenge involves the alleged effect of incon-

sistent regulations on interstate commerce.

According to Plaintiff, the Act creates irrecon-

cilable conflicts when dealing with providers

from other states. Plaintiff argues that the Act

violates the dormant Commerce Clause because

it subjects out-of-state businesses to inconsis-

tent regulatory regimes. “A state regulation

might impose a disproportionate burden on in-

terstate commerce if the regulation is in sub-

stantial conflict with a common regulatory

scheme in place in other states.” Nat'l Elec.

Mfrs. Ass’n v. Sorrell, 272 F.3d 104, 112 (2nd

60a

Cir. 2001) (citing Raymond Motor Transp. v.

Rice, 434 U.S. 429, 445, 98 S.Ct. 787, 54

L.Ed.2d 664 (1978)). However, “state laws

which merely creates additional, but not irrec-

oncilable, obligations are not considered to be

‘inconsistent’ for this purpose.” Instructional

Sys., Inc. v. Computer Curriculum Corp., 35

F.3d 813, 826 (3rd Cir. 1994).

Specifically, Plaintiff identifies two (2) con-

flicts between Virginia and Texas regulations.

First, Plaintiff argues that § 38.2-6012(C) of

the Act conflicts with Title 28 Texas Adminis-

trative Code § 3.1710(c)(8) (2006) because “the

Act regulates which state’s laws govern con-.

tractual disputes between competing viators,

irrespective of the contractual agreements exe-

cuted by the parties.” (Pl. Mot. Summ. J. at

17.) Plaintiff asserts that this provision is in

direct conflict with Texas law which states “no

viatical or life settlement provider ... shall

enter into any viatical or life settlement in

which any form used to effect the settlement

... makes any other state’s laws as the law

applicable to the form.” Jd. (quoting 28 Tex.

Admin. Code § 3.1710(c)(8) (2006)).

The Court is of the opinion that Plaintiff

misconstrues § 31710(c)(8) in an attempt to

2 This Court has reviewed Plaintiffs Exhibit 9 in support

of its conflicting regulation argument. However, Plaintiff

highlights no specific inconsistencies other than the two (2)

mentioned above, and the Court will not conduct a line by

line analysis on its own.

6la

create a conflict where one does not exist. Sec-

tion 31710(c)(8) states in full:

[nlo viatical or life settlement provider,

provider representative, or broker shall:

enter into any viatical or life settlement

in this state in which any form used to

effect the settlement, including escrow

or trust agreement, contains a provision

that either requires or limits a viator,

life settlor, or owner to resolve a legal

dispute with the viatical or life settle-

ment provider, provider representative,

or broker in any state other than Texas,

specifies a particular city or county, or

resolving dispute, or makes any other

state’s laws as the law applicable to the

form (emphasis added).

It is clear from the plain language of the

statute that § 31710(c)(8) prohibits a viatical

provider or broker from entering into a viatical

agreement which contains a choice of law pro-

vision, which gives another state regulatory

authority over the transaction if the agreement

is entered into in Texas. As mentioned

above, the Agreement in question was not “en-

tered into in Texas” and as a result, there is no

actual tension between the laws of Virginia

and Texas. As the Second Circuit has advised,

“(i]t is not enough to point to a risk of conflict-

ing regulatory regimes in multiple states;

there must be an actual conflict between the

challenged regulation and those in place in

other states.” Nat’l Elec. Mfrs. Ass’n, 272 F.3d

at 112. Accordingly, this Court declines to in-

validate a state law based on a hypothetical

62a

conflict or mere speculation that there may be

a potential conflict under a different factual

setting.

Plaintiff next contends that there is an ir-

reconcilable conflict between the law of the two

(2) states because the Virginia Act presumes

that a viatical settlement broker is the agent of

the viatical settlement provider, unless there

is a written agreement between the broker and

the viator specifying otherwise. 14 Va. Admin.

Code § 5-71-50 (2005). This, LPI claims, is in

direct conflict with Texas law which requires a

broker to act as a fiduciary to the viator and

forbids a broker from being the agent of the

provider. 28 Tex. Admin. Code § 3.1711 (2006).

Essentially, Plaintiff argues that it is impossi-

ble for a viatical settlement broker to comply

with both regulations because Texas law re-

quires the broker to be the fiduciary of the vi-

atical settlement provider, while Virginia law

requires a broker to be the fiduciary of the via-

tor. The Court is not convinced that this facial

inconsistency rises to the level of an irreconcil-

able conflict. Virginia law does not forbid a

broker from acting as an agent for the viator.

Rather, it merely requires that the broker first

obtain written authorization from the provider

before doing so. As a result, a broker can com-

ply with the laws of both states by simply exe-

cuting a written agreement authorizing it to

act as an agent of the viator. The fact that

Virginia law has additional requirements does

not make it irreconcilable with Texas law. It is

merely the cost of doing business, which the

Plaintiff assumed when they chose to conduct

business in a state other than Texas.

63a

In the final analysis, the Court finds the

Virginia Viatical Settlements Act neither dis-

criminates against interstate commerce fa-

cially nor in its practical effect. It treats those

in-state and out-of-state providers wishing to

do business in the Virginia market similarly.

Furthermore, there is no tenable basis for

Plaintiff's claim that the law was enacted for a

discriminatory purpose. It was clearly not in-

tended to protect the economic interests of Vir-

ginia-based settlement providers. There are

none. Its obvious purpose was to safeguard an

asset of some of its most vulnerable citizens,

the terminally ill.

The Commonwealth of Virginia has a le-

gitimate interest in protecting the welfare of

terminally-ill citizens seeking to liquidate

their life insurance policy within its borders.

Given the fact that thirty-seven (37) other

states have adopted similar versions of the

Model Viatical Settlements Act, on which the

Virginia statute is based, it appears to be an

appropriate exercise of its police powers.

C. Undue Burden Tier

Having determined that the Act does not

clearly discriminate facially or in its direct

practical effect, the Court must now determine

if it violates the second tier of the analysis.

This facet of the analysis is governed by bal-

ancing the factors articulated in Pike v. Bruce

Church, Inc., 397 U.S. 137, 90 S.Ct. 844, 25

L.Ed.2d 174 (1970). Pike applies when a state

law does not consciously discriminate against

interstate commerce, but instead regulates

evenhandedly and only indirectly affects inter-

64a

state commerce. Brown-Forman, 476 U.S. at

579, 106 S.Ct. 2080. “Where [a] statute regu-

lates evenhandedly to effectuate a legitimate

local public interest, and its effects on inter-

state commerce are only incidental, it will be

upheld unless the burden imposed on commerce

is clearly excessive in relation to the putative

local benefits.” Pike, 397 U.S. at 142, 90 S.Ct.

844. In applying the Pike balancing test, the

Court should balance “(1) the nature of the lo-

cal benefits advanced by the statute; (2) the

burden placed on interstate commerce; and (3)

whether the burden is ‘clearly excessive’ when

weighed against these local benefits.” Star

Scientific, 278 F.3d at 357.

The first task is to determine if the Act has

a legitimate local purpose. If the Court finds a

legitimate local purpose, “then the question be-

comes one of degree .. . [aJnd the extent of the

burden that will be tolerated will ... depend

on the nature of the local interest, and on

whether it could be promoted as well with a

lesser impact on interstate activity.” Id. at

356-57. “In determining whether a statute has

a ‘legitimate local purpose’ and ‘putative local

benefits,’ a court must proceed with deference

to the state legislature.” Yamaha Motor Corp.,

401 F.3d at 569.

The Court finds that the Act has a legiti-

mate and important local purpose, namely, the

protection of Virginia viators. It is obvious to

the Court that a terminally-ill person with a

life expectancy of twenty-four (24) months or

less is in a particularly vulnerable position and

could easily fall prey to sharp business prac-

tices and fraud. The Act’s various require-

65a

ments provides the SCC with a regulatory

framework which affo~ "= Virginia viators with

some assurance that *e viatical settlement

industry will transact business in an honest

and ethical fashion. These regulatory burdens

impose requirements similar to those govern-

ing such other industries as banking, insur-

ance and security dealers. The Act also pro-

vides viators with a recourse should the bro-

kers or providers fail to comply with these

standards. Finally, when read in tandem with

26 U.S.C. § 101(g)(2)(B) of the Tax code, the

Act bestows considerable tax benefits on via-

tors by exempting the proceeds from the sale of

their insurance policies from federal income

tax.

Plaintiff offers a host of perceived burdens

to be weighed against the local benefits of the

Act. Plaintiff disputes the defendants’ conten-

tion that the statute actually protects Virginia

viators. Aside from Ms. Doe’s complaint, there

is no evidence of any other reported cases of

alleged fraud or abuse in the Virginia viator

settlement industry. Therefore, Plaintiff ar-

gues that there is no demonstrated harm which

warrants the protection of the Act.

Plaintiffs argument, however, fails to ac-

knowledge the possibility that the Act has been

successful in its purported purpose and has de-

terred unethical or fraudulent activity within

the industry. Plaintiffs position also margin-

alizes the rationale underlying the Model Viat-

ical Settlements Act which has been adopted,

at least in part, by over thirty (30) states. Ob-

viously, the legislative bodies of those states

uniformly found a sufficient potential for abuse

66a

to warrant protective measures. Ostensibly,

the Virginia General Assembly made similar

findings. This Court is not “inclined to second

guess the impartial judgments of lawmakers

concerning the utility of legislation.” CTS

Corp. v. Dynamics Corp. of Am., 481 U.S. 69,

92, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987). At

bottom, this Court must limit its consideration

of “whether the legislature had a rational basis

for believing there was a legitimate purpose

that would be advanced by the statute ... [and]

likewise apply a deferential standard in identi-

fying a statute’s putative benefits.” Yamaha

Motor Corp., 401 F.3d at 569 (citing CT'S Corp.,

481 U.S. at 92-93, 107 S.Ct. 1637).

Relying largely on the opinions of its ex-

perts, Plaintiff next counters that the Act,

when carefully examined, provides minimal

benefits to Virginia viators. Plaintiff contends

that the pricing regulations actually disserve

Virginia viators by impeding the marketability

of their policies. Because the regulation-driven

price of Virginia policies exceeds the mean na-

tional market price, Virginia policies are not

competitive. This “argument [however] relates

to the wisdom of the statute, not its burden on

commerce.” Exxon Corp. v. Governor of Mary-

land, 437 U.S. 117, 128, 98 S.Ct. 2207, 57

L.Ed.2d 91 (1978). If Virginia viators find the

price controls to be a barrier to marketing

their policies, they should petition the Virginia

67a

General Assembly or the SCC for relief.3 Fi-

nally, it is important to keep in mind that the

Virginia pricing policy effects intrastate and

interstate sales equally.

Plaintiff further maintains that Ms. Doe

derived no significant protection from the Vir-

ginia regulatory scheme because the laws of

Texas afforded her similar coverage. This may

be true in the abstract, but the obvious flaw in

Plaintiffs position is the necessity for Ms. Doe,

a terminally-ill person, to travel to the State of

Texas to avail herself of a Texas forum. Plain-

tiff further suggests that Virginia’s anti-fraud

laws provide viators with ample protection

from unprincipled practices. The Virginia Vi-

atical Settlements Act is intended to encom-

pass many types of unethical and unfair trade

practices which may not amount to fraud.

Rather than require an injured viator to cobble

together a cause of action from an assortment

of legal theories, the Virginia General Assem-

bly chose to address it directly. The benefits of

this approach are self-evident.

The last category of burdens which alleg-

edly outweigh the local benefits is the elabo-

rate regulatory scheme required of viatical set-

3 The Court also questions the legitimacy of Plaintiffs

argument based on the fact that statistics, produced by the

Bureau of Insurance, indicate that the number of viatical

settlement transactions occurring in Virginia, by parties

licensed in accordance with the Act, has steadily increased

since 2001. These statistics indicate there is an increasing

viatical market in Virginia, despite any incidental effects of

the Act on the market.

68a

tlement brokers and providers in Virginia. Ac-

cording to Plaintiff's experts, Virginia’s redun-

dant licensing and regulatory requirements,

particularly when coupled with price controls,

affect both intrastate and interstate viatical

transactions, with the primary effect of a dis-

proportionate burden on smaller firms.

The Court first notes that any dispropor-

tionate effect the Act has on smaller firms as

opposed to larger firms, is irrelevant to dor-

mant Commerce Clause analysis. The Court

may not limit its focus to the affect of the Act

on one particular type of entity. Rather, the

Court must look to the affect of the Act on the

entire viatical market. As the Supreme Court

advised in Exxon Corp., “the Clause protects

the interstate market, not particular interstate

firms, from prohibitive or burdensome regula-

tions.” 437 U.S. at 128, 98 S.Ct. 2207.

As to the effect of the Act on the intrastate

market, Plaintiffs experts contend that the Act

affects the intrastate market because “volun-

tary transactions that would otherwise have

taken place are blocked, or must take place

outside the state [of Virginia].” There is little

doubt that the Act imposes some burden on

both intrastate and interstate commerce. How-

ever, as mentioned above, the Act burdens both

the in-state and out-of-state markets equally.

This fact substantially undermines Plaintiff's

argument. The Court finds that the incidental

burden imposed by the Act on both markets is

justified as a legitimate function of the state’s

police powers. It is clear that “in the absence

of conflicting legislation by Congress, there is a

residuum of power in the state to make laws

69a

governing matters of local concern which nev-

ertheless in some measure affect interstate

commerce or even, to some extent regulate it.”

Hunt v. Washington State Apple Advertising

Com’n, 432 U.S. 333, 350, 97 S.Ct. 2434, 53

L.Ed.2d 383 (1977) (internal citations omitted).

Furthermore, “(t]he State is entitled to exer-

cise its police power in the manner it sees fit,

so long as it is legislating constitutionally.”

Baltimore Gas & Elec. Co. v. Heintz, 760 F.2d

1408, 1425 (4th Cir. 1985). There can be little

doubt that protecting viators from fraud is a

local concern which falls within the residuum

of the state’s police powers. Assuming without

deciding that some viators will voluntarily

leave the state to do business in order to avoid

the regulatory effects of the Act, this is not the

type of burden that the dormant Commerce

Clause was designed to protect against.

The Court is also of the opinion that the

expert’s analysis of the effect of the Act on the

interstate market is of little value based on the

facts before the Court. The experts contend

that “if a state like Virginia is permitted to en-

force its minimum price control regulation

across the national market, the vast majority

of Virginia sellers would be shut out of the

market.” (Pl.’s Ex. 6 J 30.) However, contrary

to the experts’ conclusion, Ms. Doe’s transac-

tion is not a situation in which Virginia is en-

forcing the provisions of the Act “across the na-

tional market place.” As discussed above, this

is a transaction which occurred at least in part

in the Commonwealth of Virginia. If Virginia

was in fact enforcing the Act across the na-

tional market place, this alleged burden may

70a

be more significant to the Court’s analysis.

However, this is not the case and the Court

will not invalidate a state statute based on

facts which are not before it.

As a result, this Court finds that the Act ef-

fectuates a legitimate local public interest and

that its effects on interstate commerce are only

incidental. Therefore, the Act must “be upheld

unless the burden imposed on such commerce

is clearly excessive in relation to the putative

local benefits.” Pike, 397 U.S. at 142, 90 S.Ct.

844. The Court further finds that the burdens

imposed by the Act are not “clearly excessive”

when compared with the legitimate and impor-

tant purpose behind the Act. The Court is also

of the opinion that nothing short of Virginia’s

comprehensive regulatory scheme, which cou-

ples licensing and registration with price con-

trols, could provide a level playing field for its

physically infirm citizens financially con-

strained to liquidate their life insurance policy.

The Virginia Viatical Settlements Act is far

from a vagrant protectionist whim. It parallels

legislation enacted in over thirty (30) other

states with a common origin, the Model Viati-

cal Settlements Act. Thus, the Court concludes

that the legitimate purpose of the Act cannot

be achieved with a lesser impact on interstate

commerce.

V. Conclusion

The Court finds that the Virginia Viatical

Settlements Act does not violate the Commerce

Clause of the United States Constitution and,

therefore, Plaintiffs Motion for Summary

Judgment will be denied. Defendants’ and In-

T1la

tervenor’s Motions for Summary Judgment will

be granted.

An appropriate Order will accompany this

Memorandum Opinion.

ORDER

(Denying Plaintiffs Motion for Summary

Judgment and Granting the Motions for

Summary Judgment Filed by tie Defen-

dants and the Intervenor)

THIS MATTER is before the Court on cross-

Motions for Summary Judgment. For the rea-

sons stated in the accompanying Memorandum

Opinion, Plaintiffs Motion for Summary

Judgment is DENIED. Defendants’ and Inter-

venor’s Motions for Summary Judgment are

GRANTED.

The Clerk is directed to send a copy of this

Order to all counsel of record.

It is SO ORDERED.

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

FILED

May 29, 2007

No. 06-1370

3:05-cv-00368-HEH

LIFE PARTNERS, INCORPORATED

Plaintiff - Appellant

THEODORE V. MORRISON, JR.; MARK C.

CHRISTIE, in their official capacities as

Commissioner of the State Corporation

Commission; ALFRED W. GROSS, in his of-

ficial capacity as the Commissioner of In-

surance; JUDITH WILLIAMS JAGDMANN,

in her official capacity as Commissioner of

the State Corporation Commission

Defendants — Appellees

ROBERT F. MCDONNELL, in his official

capacity as the Attorney General of the

Commonwealth of Virginia

Intervenor — Appellee

and

CLINTON MILLER, in official capacity as

Commissioner of the State Corporation

Commission

73a

Defendant

NATIONAL ASSOCIATION OF INSUR-

ANCE COMMISSIONERS; NORTH AMER-

ICA SECURITIES ADMINISTRATORS AS-

SOCIATION, INCORPORATED

Amici Supporting Appellees

and

VIATICAL SETTLEMENT PROFESSION-

ALS, INCORPORATED

Movant

No. 06-1371

3:05-cv-00368-HEH

LIFE PARTNERS, INCORPORATED

Plaintiff — Appellee

THEODORE V. MORRISON, JR.; MARK C.

CHRISTIE, in their official capacities as

Commissioner of the State Corporation

Commission; ALFRED W. GROSS, in his of-

ficial capacity as the Commissioner of In-

surance; JUDITH WILLIAMS JAGDMANN,

in her official capacity as Commissioner of

the State Corporation Commission

Defendants — Appellants

and

CLINTON MILLER, in official capacity as

Commissioner of the State Corporation

Commission

Defendant

and

74a

ROBERT F. MCDONNELL, in his official

capacity as the Attorney General of the

Commonwealth of Virginia

Intervenor — Defendant

NORTH AMERICA SECURITIES ADMIN-

ISTRATORS ASSOCIATION, INCORPO-

RATED; NATIONAL ASSOCIATION OF

INSURANCE COMMISSIONERS

Amici Supporting Appellants

and

VIATICAL SETTLEMENT PROFESSION-

ALS, INCORPORATED

Movant

ee ee

ee ee eee

The appellants’ petition for rehearing en

banc was submitted to this Court. As no mem-

ber of this Court requested a poll on the peti-

tion for rehearing en banc,

IT IS ORDERED that the petition for re-

hearing en banc is denied.

Entered for a panel composed of Judge

Niemeyer, Judge Michael, and Judge Traxler.

For the Court,

icia S nnor

CLERK

75a

APPENDIX D

CODE OF VIRGINIA

CHAPTER 60

VIATICAL SETTLEMENTS ACT.

§ 38.2-6000. Definitions.

As used in this chapter:

“Advertising” means any written, electronic, or

printed communication or any communication

by means of recorded telephone messages or

transmitted on radio, television, the Internet,

or similar communications media, including

film strips, motion pictures, and videos pub-

lished, disseminated, circulated or placed be-

fore the public, directly or indirectly, for the

purpose of creating an interest in or inducing a

person to sell a life insurance policy pursuant

to a viatical settlement contract.

“Business of viatical selilements” means an ac-

tivity involved in, but not limited to, the offer-

ing, solicitation, negotiation, procurement, ef-

fectuation, purchasing, investing, financing,

monitoring, tracking, underwriting, selling,

transferring, assigning, pledging, or hypothe-

cating in any other manner, of viatical settle-

ment contracts or purchase agreements.

“Chronically ill” means (i) being unable to per-

form at least two activities of daily living,

which shall include eating, toileting, transfer-

ring, bathing, dressing or continence, (ii) re-

76a

quiring substantial supervision by another

person to protect the individual from threats to

health and safety due to severe cognitive im-

pairment, or (iii) having a level of disability

similar to that described in clause (i) as deter-

mined by the federal Secretary of Health and

Human Resources.

“Financing entity” means an_ underwriter,

placement agent, lender, purchaser of securi-

ties, purchaser of a policy or certificate from a

viatical settlement provider, credit enhancer,

or any entity that has a direct ownership in a

policy or certificate that is the subject of a vi-

atical settlement contract, but whose principal

activity related to the transaction is providing

funds to effect the viatical settlement or pur-

chase of one or more viaticated policies and

who has an agreement in writing with one or

more licensed viatical settlement providers to

finance the acquisition of viatical settlement

contracts. Financing entity does not include a

non-accredited investor or viatical settlement

purchaser.

“Fraudulent viatical settlement act” includes:

1. Acts or omissions committed by any person

who, knowingly or with intent to defraud, for

the purpose of depriving another of property or

for pecuniary gain, commits or permits its em-

ployees or its agents to engage in acts includ-

ing:

a. Presenting, causing to be presented or pre-

paring with knowledge or belief that it will be

presented to or by a viatical settlement pro-

vider, viatical settlement broker, viatical set-

tlement purchaser, financing entity, insurer,

77a

insurance producer, or any other person, false

material information, or concealing material

information, as part of, in support of, or con-

cerning a fact material to one or more of the

following: (i) an application for the issuance of

a viatical settlement contract or insurance pol-

icy; (ii) the underwriting of a viatical settle-

ment contract or insurance policy; (iii) a claim

for payment or benefit pursuant to a viatical

settlement contract or insurance policy; (iv)

premiums paid on an insurance policy; (v) pay-

ments and changes in ownership or beneficiary

made in accordance with the terms of a viatical

settlement contract, or insurance policy; (vi)

the reinstatement or conversion of an insur-

ance policy; (vii) in the solicitation, offer, effec-

tuation or sale of a viatical settlement contract

or insurance policy; (viii) the issuance of writ-

ten evidence of a viatical settlement contract

or insurance policy; or (ix) a financing transac-

tion;

b. Employing any device, scheme, or artifice to

defraud related to viaticated policies;

2. In the furtherance of a fraud or to prevent

the detection of a fraud any person commits or

permits its employees or its agents to: (i) re-

move, conceal, alter, destroy, or sequester from

the Commission the assets or records of a li-

censee or other person engaged in the business

of viatical settlements; (ii) misrepresent or

conceal the financial condition of a licensee, fi-

nancing entity, insurer, or other person; (iii)

transact the business of viatical settlements in

violation of laws requiring a license, certificate

of authority, or other legal authority for the

transaction of the business of viatical settle-

78a

ments; or (iv) file with the Commission or the

chief insurance regulatory official of another

jurisdiction a document containing false infor-

mation or otherwise conceals information about

a material fact from the Commission;

3. Embezzlement, theft, misappropriation or

conversion of moneys, funds, premiums, cred-

its, or other property of a viatical settlement

provider, insurer, insured, viator, insurance

policyowner, or any other person engaged in

the business of viatical settlements or insur-

ance;

4. Recklessly entering into, brokering, or oth-

erwise dealing in a viatical settlement con-

tract, the subject of which is a life insurance

policy that was obtained by presenting false in-

formation concerning any fact material to the

policy or by concealing, for the purpose of mis-

leading another, information concerning any

fact material to the policy, where the viator or

the viator’s agent intended to defraud the pol-

icy’s issuer. “Recklessly” means engaging in

the conduct in conscious and clearly unjustifi-

able disregard of a substantial likelihood of the

existence of the relevant facts or risks, such

disregard involving a gross deviation from ac-

ceptable standards of conduct; or

5. Attempting to commit, assisting, aiding or

abetting in the commission of, or conspiracy to

commit the acts or omissions specified in this

subsection.

“Licensee under this chapter” means a person

licensed by the Commission as a viatical set-

tlement provider or viatical settlement broker.

79a

“NAIC” means National Association of Insur-

ance Commissioners.

“Policy” means an individual or group policy,

group certificate, contract or arrangement of

life insurance affecting the rights of a resident

of this Commonwealth or bearing a reasonable

relation to this Commonwealth, regardless of

whether delivered or issued for delivery in this

Commonwealth.

“Related provider trust” means a titling trust

or other trust established by a licensed viatical

settlement provider or a financing entity for

the sole purpose of holding the ownership or

beneficial interest in purchased policies in

connection with a financing transaction. The

trust shall have a written agreement with the

licensed viatical settlement provider under

which the licensed viatical settlement provider

is responsible for ensuring compliance with all

statutory and regulatory requirements and un-

der which the trust agrees to make all records

and files related to viatical settlement transac-

tions available to the Commission as if those

records and files were maintained directly by

the licensed viatical settlement provider.

“Special purpose entity” means a corporation,

partnership, trust, limited liability company,

or other similar entity formed solely to provide

either directly or indirectly access to institu-

tional capital markets for a financing entity or

licensed viatical settlement provider.

“Terminally ill” means having an illness or

sickness that can reasonably be expected to re-

sult in death in 24 months or less.

80a

“Viatical settlement broker” means a person

that on behalf of another and for a fee, com-

mission or other valuable consideration intro-

duces viators to viatical settlement providers,

or offers or attempts to negotiate viatical set-

tlement contracts between a viator and one or

more viatical settlement providers. A viatical

settlement broker may act as agent for a viati-

cal settlement provider or on behalf of the via-

tor, provided that a viatical settlement broker

shall not be deemed to act exclusively for the

viator unless, pursuant to written agreement

between the parties, the broker agrees (i) to

disclose fully all interests in the viatical set-

tlement contract and relationships with the vi-

atical settlement provider, including its affili-

ates and appointed or contracted agents, and

(ii) that compensation for services as a viatical

settlement broker shall be paid directly and

only by the viator. The term does not include

an attorney, certified public accountant, or a

financial planner accredited by a nationally

recognized accreditation agency, who is re-

tained to represent the viator and whose com-

pensation is not paid directly or indirectly by

the viatical settlement provider or viatical set-

tlement purchaser.

“Viatical settlement contract” means a written

agreement establishing the terms under which

compensation or anything of value will be paid,

which compensation or value is less than the

expected death benefit of the insurance policy

or certificate, in return for the viator’s assign-

ment, transfer, sale, devise or bequest of the

death benefit or ownership of any portion of

the insurance policy or certificate of insurance.

8la

A viatical settlement contract also includes a

contract for a loan or other financing transac-

tion with a viator secured primarily by an in-

dividual or group life insurance policy, other

than a loan by a life insurance company pursu-

ant to the terms of the life insurance contract,

or a loan secured by the cash value of a policy.

A viatical settlement contract includes an

agreement with a viator to transfer ownership

or change the beneficiary designation at a later

date regardless of the date that compensation

is paid to the viator. “Viatical settlement con-

tracts” do not include accelerated benefits pro-

visions contained in life insurance policies,

whether issued with the original policy or as a

rider, according to the regulations promulgated

by the Commission.

“Viatical settlement provider” means a person,

other than a viator, that enters into or effectu-

ates a viatical settlement contract. Viatical

settlement provider does not include: (i) a

bank, savings bank, savings and loan associa-

tion, credit union, or other licensed lending in-

stitution that takes an assignment of a life in-

surance policy as collateral for a loan; (ii) the

issuer of a life insurance policy providing ac-

celerated benefits under § 38.2-3115.1 and pur-

suant to the contract; (iii) an authorized or eli-

gible insurer that provides stop loss coverage

to a viatical settlement provider, viatical set-

tlement purchaser, financing entity, special

purpose entity or related provider trust; (iv) a

natural person who enters into or effectuates

no more than one agreement in a calendar year

for the transfer of life insurance policies for

any value less than the expected death benefit;

82a

(v) a financing entity; (vi) a special purpose en-

tity; (vii) a related provider trust; (viii) a viati-

cal settlement purchaser; or (ix) an accredited

investor or qualified institutional buyer as de-

fined respectively in Regulation D, Rule 501 or

Rule 144A of the Federal Securities Act of

1933, as amended, and who purchases a viati-

cated policy from a viatical settlement provider

and does not communicate with the viator or

insured who is a resident of this Common-

wealth except through a licensee under this

chapter.

“Viatical settlement purchaser” means a person

who gives a sum of money as consideration for

a life insurance policy or an interest in the

death benefits of a life insurance policy, or a

person who owns or acquires or is entitled to a

beneficial interest in a trust that owns a viati-

cal settlement contract or is the beneficiary of

a life insurance policy that has been or will be

the subject of a viatical settlement contract, for

the purpose of deriving an economic benefit.

Viatical settlement purchaser does not include

(i) a licensee under this chapter; (ii) an accred-

ited investor or qualified institutional buyer as

defined respectively in Regulation D, Rule 501

or Rule 144A of the Federal Securities Act of

1933, as amended; (iii) a financing entity; (iv)

a special purpose entity; or (v) a related pro-

vider trust.

“Viaticated policy” means a life insurance pol-

icy or certificate that has been acquired by a

viatical settlement provider pursuant to a viat-

ical settlement contract.

83a

“Viator” means the owner of a life insurance

policy or a certificate holder under a group pol-

icy who enters or seeks to enter into a viatical

settlement contract. For the purposes of this

chapter and the application of Article 6.1

(§ 38.2-1865.1 et seq.) of Chapter 18 of this ti-

tle, a viator shall not be limited to an owner of

a life insurance policy or a certificate holder

under a group policy insuring the life of an in-

dividual with a terminal or chronic illness ex-

cept where specifically addressed. Viator does

not include (i) a licensee under this chapter;

(ii) an accredited investor or qualified institu-

tional buyer as defined respectively in Regula-

tion D, Rule 501 or Rule 144A of the Federal

Securities Act of 1933, as amended; (iii) a fi-

nancing entity; (iv) a special purpose entity; or

(v) a related provider trust.

§ 38.2-6001. Viatical settlement brokers.

No person shall act as a viatical settlement

broker with a resident of this Commonwealth

without first obtaining a license from the Com-

mission in accordance with Article 6.1 (§ 38.2-

1865.1 et seq.) of Chapter 18 of this title. If

there is more than one viator on a single pol-

icy, and the viators are residents of different

states, the viatical settlement broker shall be

required to hold a license in the state in which

the viator having the largest percentage re-

sides or, if the viators hold equal ownership,

the viatical settlement broker shall be required

to hold a license in the state of residence of one

viator agreed upon in writing by all the via-

tors.

84a

§ 38.2-6002. Viatical settlement providers,

license requirements.

A. No person shall act as a viatical settlement

provider with a resident of this Commonwealth

without first obtaining a license from the

Commission.

1. A person seeking to be licensed as a viatical

settlement provider in this Commonwealth

shall apply for such license in a form accept-

able to the Commission and shall pay to the

Commission a nonrefundable application fee in

an amount prescribed by the Commission. On

and after July 1, 2003, such fee shall be not

less than $300 and not more than $1,500. The

application fee required by this subdivision

shall be collected by the Commission, paid di-

rectly into the state treasury, and credited to

the “Bureau of Insurance Special Fund—State

Corporation Commission” for the maintenance

of the Bureau of Insurance as provided in sub-

section B of § 38.2-400.

2. A license issued anytime prior to July 1,

2004, shall expire on June 30, 2004, unless re-

newed as set forth herein.

3. On or before March 1 of each year commenc-

ing March 1, 2004, a licensed viatical settle-

ment provider shall remit a renewal applica-

tion form and nonrefundable renewal fee in the

form and amount prescribed by the Commis-

sion. Such fee shall be not less than $300 and

not more than $1,500. The renewal fee re-

quired by this subdivision shall be collected by

the Commission and paid directly into the

state treasury and credited to the “Bureau of

Insurance Special Fund—-State Corporation

85a

Commission” for the maintenance of the Bu-

reau of Insurance as provided in subsection B

of § 38.2-400.

4. A viatical settlement provider’s license ex-

piring on June 30 may be renewed on July 1 for

a one-year period ending on June 30 of the fol-

lowing year if the required renewal application

and a nonrefundable renewal fee have been re-

ceived and the license is not terminated, sus-

pended, or revoked at the time of renewal. The

renewal fee required by this subdivision shall

be collected by the Commission and paid di-

rectly into the state treasury and credited to

the “Bureau of Insurance Special Fund—State

Corporation Commission” for the maintenance

of the Bureau of Insurance as provided in sub-

section B of § 38.2-400.

B. The applicant shall provide information on

forms required by the Commission. The Com-

mission shall have authority, at any time, to

require the applicant to disclose fully the iden-

tity of all stockholders, partners, officers,

members, and employees, and the Commission

may, in the exercise of the Commission’s dis-

cretion, refuse to issue a license in the name of

a legal entity if not satisfied that any officer,

employee, stockholder, partner, or member

thereof who may materially influence the ap-

plicant’s conduct meets the standards of this

chapter.

C. A license issued to a legal entity authorizes

all partners, officers, members, and designated

employees to act as the viatical settlement

provider under the license, and all those per-

86a

sons shall be named in the application and any

application supplements.

D. Upon the filing of an application and the

payment of the nonrefundable application fee,

the Commission shall make such investigation

of each applicant as the Commission may de-

termine to be appropriate and issue a license if.

it finds that the applicant: (i) has provided a

detailed plan of operation; (ii) is competent and

trustworthy; (iii) indicates its intention to act

in good faith within the confines of the license;

(iv) has a good business reputation; (v) if an

individual, has had experience, training or

education that qualifies him for licensure; (vi)

if a resident partnership, limited liability com-

pany, or corporation, has recorded the exis-

tence of the partnership, limited liability com-

pany, or corporation pursuant to law; (vii) if a

corporation, has specific authority to act as a

viatical settlement provider in its charter;

(viii) if a nonresident partnership, limited li-

ability company, or corporation, has furnished

proof of its authority to transact business in

Virginia; and (ix) has provided an anti-fraud

plan that meets the requirements of subdivi-

sion E 2 of § 38.2-6011.

E. If the applicant for a viatical settlement

provider license is a nonresident, such appli-

cant, as a condition precedent to receiving or

holding a license, shall designate a resident of

this Commonwealth as the person upon whom

any process, notices, or order required or per-

mitted by law to be served upon such nonresi-

dent viatical settlement provider may be

served; and such licensee shall promptly notify

the clerk of the Commission in writing of every

87a

change in its designated agent for service of

process, and such change shall not become ef-

fective until acknowledged by the Commission.

Whenever a nonresident viatical settlement

provider transacting business in this Com-

monwealth fails to appoint or maintain a regis-

tered agent in this Commonwealth, or when-

ever its registered agent cannot with reason-

able diligence be found at the registered office,

the clerk of the Commission shall be an agent

of the nonresident upon whom service may be

made in accordance with § 12.1-19.1.

F. A licensed insurer shall be prohibited from

transacting the business of a viatical settle-

ment provider.

G. The Commission may suspend, revoke, re-

fuse to issue, or refuse to renew the license of a

viatical settlement provider if the Commission

finds that the applicant or licensee has (i)

made any material misrepresentation in the

application; (ii) been guilty of fraudulent or

dishonest practices; (iii) been subject to a final

administrative action or has otherwise been

shown to be untrustworthy or incompetent to

act as a viatical settlement provider; (iv) dem-

onstrated a pattern of unreasonable payments

to viators; (v) been convicted of a felony or any

misdemeanor involving fraud or moral turpi-

tude; (vi) entered into any viatical settlement

contract that has not been approved pursuant

to this chapter; (vii) failed to honor contractual

obligations set out in a viatical settlement con-

tract; (viii) demonstrated or represented that it

no longer meets the requirements for initial li-

censure; (ix) has assigned, transferred, or

pledged a viaticated policy to a person other

88a

than a viatical settlement provider licensed in

this Commonwealth, viatical settlement pur-

chaser, an accredited investor, or qualified in-

stitutional buyer as defined respectively in

Regulation D, Rule 501i or Rule 144A of the

Federal Securities Act of 1933, as amended, fi-

nancing entity, special purpose entity, or re-

lated provider trust; (x) violated any provisions

of this chapter or other applicable provisions of

this title or has in its employ or organization

any officer, partner, member, or key manage-

ment personne! who has violated any provision

of this chapter or other applicable provisions of

this title; or (xi) has renewed or requested re-

newal of its license before implementing the

anti-fraud initiatives required by subsection E

of § 38.2-6011.

H. No applicant to whom a license is refused

after a hearing, nor any licensee whose license

is revoked, shall apply again for a license un-

der this chapter until after the expiration of a

period of five years from the date of the Com-

mission’s order, or such other period of time as

the Commission prescribes in its order.

I. A viatical settlement provider shall be

bonded as required by the Commission. Rules

issued pursuant to § 38.2-6014 may identify

other mechanisms for financial accountability.

§ 38.2-6003. Approval of viatical settlement

contracts and disclosure statements.

A. A person shall not use a viatical settlement

contract or provide to a viator a disclosure

statement form in this Commonwealth unless

filed with and approved by the Commission in

accordance with procedures set forth in § 38.2-

89a

316. In the absence of more specific regulation

or rules promulgated by the Commission for

the business of viatical settlements, standards

and requirements of general application set

forth in § 38.2-316 and rules promulgated

thereunder shall be deemed applicable to viati-

cal settlement contracts and disclosure state-

ment forms, required by this chapter.

B. At the Commission’s discretion, the Com-

mission may require the submission of adver-

tising material used or intended for use in this

Commonwealth.

§ 38.2-6004. Reporting requirements.

A. Each licensee under this chapter shall file

with the Commission on or before March 1 of

each year the certification required by subsec-

tion E of § 38.2-6011 and an annual report con-

taining such information as the Commission

may prescribe by rule or regulation; however,

such information shall be limited to only those

transactions where the viator is a resident of

this Commonwealth.

B. A viatical settlement provider shall report

in writing to the Commission the following:

1. New or revised information about its offi-

cers, stockholders owning 10 percent or greater

interest in the licensee or an affiliate of the li-

censee, partners, directors, members, or desig-

nated employees within 30 calendar days of the

change;

2. Any change in business or residence address

or name within 30 calendar days of the change.

C. A licensed viatical settlement provider con-

victed of a felony shall report within 30 calen-

90a

dar days to the Commission the facts and cir-

cumstances regarding the criminal conviction.

§ 38.2-6005. Privacy.

Except as otherwise allowed or required by

law, a viatical settlement provider, viatical

settlement broker, insurance company, insur-

ance producer, information bureau, rating

agency or company, or any other person with

actual knowledge of an insured’s identity, shall

not disclose that identity as an insured, or the

insured’s financial or medical information to

any other person unless the disclosure:

1. Is necessary to effect a viatical settlement

between the viator and a viatical settlement

provider and the viator and insured have pro-

vided prior written consent to the disclosure;

2. Is provided in response to an investigation

or examination by the Commission or another

governmental agency or officer or pursuant to

the requirements of subsection C of § 38.2-

6011;

3. Is a term of or condition to the transfer of a

policy by one viatical settlement provider to

another viatical settlement provider;

4. Is necessary to permit a financing entity,

related provider trust, or special purpose en-

tity to finance the purchase of policies by a vi-

atical settlement provider and the viator and

insured have provided prior written consent to

the disclosure;

5. Is necessary to allow the viatical settlement

provider or viatical settlement broker or their

authorized representatives to make contacts

9la

for the purpose of determining health status;

6. Is required to purchase stop loss coverage.

§ 38.2-6006. Examinations; record retention;

investigations.

A. Viatical settlement providers, viatical set-

tlement brokers, and persons seeking a license

under this title to transact the business of vi-

atical settlements in this Commonwealth shall

be subject to examination by the Commission

pursuant to Article 4 (§ 38.2-1317 et seq.) of

Chapter 13 of this title. For purposes of com-

pleting such examination, the Commission may

examine or investigate any person, or the

business of any person, insofar as the examina-

tion or investigation is, in the sole discretion of

the Commission, necessary or material to the

examination of a licensee.

B. A person required to be licensed by this

chapter shall for five years retain copies of (i)

all proposed, offered or executed contracts,

purchase agreements, underwriting documents,

policy forms, and applications from the date of

the proposal, offer or execution of the contract

or purchase agreement, whichever is later; (ii)

all checks, drafts or other evidence and docu-

mentation related to the payment, transfer,

deposit, or release of funds from the date of the

transaction; and (iii) all other records and

documents related to the requirements of this

chapter or Article 6.1 (§ 38.2-1865.1 et seq.) of

Chapter 18 of this title. This section does not

relieve a person of the obligation to produce

these documents to the Commission after the

retention period has expired if the person has

92a

retained the documents. Records required to

be retained by this section must be legible and

complete and may be retained in paper, photo-

graph, microprocess, magnetic, mechanical, or

electronic media, or by any process that accu-

rately reproduces or forms a durable medium

for the reproduction of a record.

C. The Commission may investigate suspected

fraudulent viatical settlement acts and persons

engaged or alleged to be engaged in the busi-

ness of viatical settlements.

§ 38.2-6007. Disclosure.

A. Before asking a viator or insured to sign

any document, a licensee under this chapter

shall provide the respective viator or insured,

or both, with a copy of the disclosure document

described in this subsection. The viatical set-

tlement provider or viatical settlement broker

shall provide the viator with an additional copy

of the disclosures, with the application, no

later than the time the appiication for the viat-

ical settlement contract is signed by all par-

ties. The disclosures shall be provided in a

separate document that is signed by the viator

and the viatical settlement provider or viatical

settlement broker, and shall provide the fol-

lowing information:

1. There are possible alternatives to viatical

settlement contracts including any accelerated

death benefits or policy loans offered under the

viator’s life insurance policy.

2. Some or all of the proceeds of the viatical

settlement may be taxable under federal in-

come tax and state franchise and income taxes,

93a

and assistance should be sought from a profes-

sional tax advisor.

3. Proceeds of the viatical settlement could be

subject to the claims of creditors.

4. Receipt of the proceeds of a viatical settle-

ment may adversely affect the viator’s eligibil-

ity for Medicaid or other government benefits

or entitlements, and advice should be obtained

from the appropriate government agencies.

5. The viator has the right to rescind a viatical

settlement contract for 15 calendar days after

the receipt of the viatical settlement proceeds

by the viator, as provided in subsection C of

§ 38.2-6008. If the insured dies during the re-

scission period, the settlement contract shall

be deemed to have been rescinded, subject to

repayment of all viatical settlement proceeds

and any premiums, loans, and loan interest to

the viatical settlement provider or viatical set-

tlement purchaser.

6. Funds will be sent to the viator within

three business days after the viatical settle-

ment provider has received the insurer’s or

group administrator’s acknowledgment that

ownership of the policy or interest in the cer-

tificate has been transferred and the benefici-

ary has been designated.

7. Entering into a viatical settlement contract

may cause other rights or benefits, including

conversion rights and waiver of premium bene-

fits that may exist under the policy or certifi-

cate, to be forfeited by the viator. Assistance

should be sought from a financial adviser.

8. Disclosure to a viator shall include distribu-

tion of a brochure describing the process of vi-

94a

atical settlements. The NAIC’s form for the

brochure shall be used unless one is developed

by the Commission.

9. The disclosure document shall contain the

following language: “All medical, financial, or

personal information solicited or obtained by a

viatical settlement provider or viatical settle-

ment broker about an insured, including the

insured’s identity or the identity of family

members, a spouse, or a significant other may

be disclosed as necessary to effect the viatical

settlement between the viator and the viatical

settlement provider. If you are asked to pro-

vide this information, you will be asked to con-

sent to the disclosure. The information may be

provided to someone who buys the policy or

provides funds for the purchase. You may be

asked to renew your permission to share in-

formation every two years.”

10. The insured may be contacted by either

the viatical settlement provider or broker or its

authorized representative for the purpose of

determining the insured’s health status. This

contact is limited to once every three months if

the insured has a life expectancy of more than

one year, and no more than once per month if

the insured has a life expectancy of one year or

less.

B. A viatical settlement provider shall provide

the viator with at least the following disclo-

sures no later than the date the viatical set-

tlement contract is signed by all parties. The

disclosures shall be conspicuously displayed in

the viatical settlement contract or in a sepa-

rate document signed by the viator and the vi-

95a

atical settlement provider or viatical settle-

ment broker, and provide the following infor-

mation:

1. The affiliation, if any, between the viatical

settlement provider and the issuer of the in-

surance policy to be viaticated;

2. The name, address, and telephone number

of the viatical settlement provider;

3. The dollar amount of the current death

benefit payable to the viatical settlement pro-

vider under the policy or certificate. If known,

the viatical settlement provider shall also dis-

close the availability of any additional guaran-

teed insurance benefits, the dollar amount of

any accidental death and dismemberment

benefits under the policy or certificate, and the

viatical settlement provider’s interest in those

benefits;

4. State the name, business address, and tele-

phone number of the independent third party

escrow agent, and the fact that the viator or

owner may inspect or receive copies of the

relevant escrow or trust agreements or docu-

ments; and

5. If an insurance policy to be viaticated has

been issued as a joint policy or involves family

riders or any coverage of a life other than the

insured under the policy to be viaticated, the

viator shall be informed of the possible loss of

coverage on the other lives under the policy

and shall be advised to consult with his insur-

ance producer or the insurer issuing the policy

for advice on the proposed viatical settlement.

C. If the provider transfers ownership or

changes the beneficiary of the insurance policy,

96a

the provider shall communicate the change in

ownership or beneficiary to the insured within

20 days after the change.

§ 38.2-6008. General rules.

A. A viatical settlement provider entering into

a viatical settlement contract shall:

1. First obtain:

a. If the viator is the insured, a written state-

ment from a licensed attending physician that

the viator is of sound mind and under no con-

straint or undue influence to enter into a viati-

cal settlement contract; and

b. A document in which the insured consents

to the release of his medical records to a viati-

cal settlement provider, viatical settlement

broker, and the insurance company that issued

the life insurance policy covering the life of the

insured. The consent for the release of medical

records shall only be obtained for the insur-

ance company if the life insurance policy cover-

ing the insured was issued within 48 months of

the date of the viator’s application for the viat-

ical settlement contract.

2. Within 20 days after a viator executes docu-

ments necessary to transfer any rights under

an insurance policy or within 20 days of enter-

ing any agreement, option, promise or any

other form of understanding, expressed or im-

plied, to viaticate the policy, the viatical set-

tlement provider shall give written notice to

the insurer that issued that insurance policy

that the policy has or will become a viaticated

policy. The notice shall be accompanied by the

documents required by subdivision 3.

97a

3. The viatical settlement provider shall de-

liver a copy of the medical release required un-

der subdivision 1 b of this subsection, a copy of

the viator’s application for the viatical settle-

ment contract, the notice required under sub-

division 2, and a request for verification of cov-

erage to the insurer that issued the life policy

that is the subject of the viatical transaction.

The verification form adopted by the NAIC

shall be used unless standards for verification

are developed by the Commission.

4. The insurer shall respond to a request for

verification of coverage submitted on an ap-

proved form by a viatical settlement provider

not later than 30 calendar days after the date

the request is received. The insurer shall com-

plete and issue the verification of coverage to

the viatical settlement provider or, in its re-

sponse, the insurer shall indicate whether,

based on the medical evidence and documents

provided, the insurer intends to pursue an in-

vestigation regarding possible fraud or the va-

lidity of the insurance contract.

5. Prior to or at the time of execution of the

viatical settlement contract, the viatical set-

tlement provider shall obtain a witnessed docu-

ment in which the viator consents to the viati-

cal settlement contract, represents that the

viator has a full and complete understanding of

the viatical settlement contract, that he has a

full and complete understanding of the benefits

of the life insurance policy, acknowledges that

he is entering into the viatical settlement con-

tract freely and voluntarily and, for persons

who are chronically or terminally ill, acknowl-

edges that the insured has a terminal or

98a

chronic illness and that the terminal or chronic

illness or condition was diagnosed after the life

insurance policy was issued.

6. If a viatical settlement broker performs any

of these activities required of the viatical set-

tlement provider, the provider is deemed to

have fulfilled the requirements of this section.

B. All medical information solicited or ob-

tained by any licensee shall be subject to the

applicable provisions of state law relating to

privacy or confidentiality of medical informa-

tion.

C. All viatical settlement contracts entered

into in this Commonwealth shall provide the

viator with an unconditional right to rescind

the contract for at least 15 calendar days from

the receipt of the viatical settlement proceeds.

If the insured dies during the rescission period,

the viatical settlement contract shall be

deemed to have been rescinded, subject to re-

payment to the viatical settlement provider or

purchaser of all viatical settlement proceeds,

and any premiums, loans, and loan interest

that have been paid by the viatical settlement

provider or purchaser.

D. The viatical settlement provider shall in-

struct the viator to send the executed docu-

ments required to effect the change in owner-

ship, assignment or change in beneficiary di-

rectly to the independent escrow agent. Within

three business days after the date the escrow

agent receives the documents, or from the date

the viatical settlement provider receives the

documents, if the viator erroneously provides

the documents directly to the provider, the

99a

provider shall pay or transfer the proceeds of

the viatical settlement into an escrow or trust

account maintained in a state or federally-

chartered financial institution whose deposits

are insured by the Federal Deposit Insurance

Corporation. Upon payment of the settlement

proceeds into the escrow account, the escrow

agent shall deliver the original change in own-

ership, assignment, or change in beneficiary

forms to the viatical settlement provider or re-

lated provider trust. Upon the escrow agent’s

receipt of the acknowledgment of the properly

completed transfer of ownership, assignment,

or designation of beneficiary from the insur-

ance company, the escrow agent shall pay the

settlement proceeds to the viator.

E. Failure to tender consideration to the via-

tor for the viatical settlement contract within

the time disclosed pursuant to subdivision A 6

of § 38.2-6007 renders the viatical settlement

contract voidable by the viator for lack of con-

sideration until the time consideration is ten-

dered to and accepted by the viator.

F. Contacts with the insured for the purpose of

determining the health status of the insured by

the viatical settlement provider or viatical set-

tlement broker after the viatical settlement

has occurred shall only be made by the viatical

settlement provider or broker licensed in this

Commonwealth or its authorized representa-

tives and shall be limited to once every three

months for insureds with a life expectancy of

more than one year, and to no more than once

per month for insureds with a life expectancy

of one year or less. The provider or broker

shall explain the procedure for these contacts

100a

at the time the viatical settlement contract is

entered into. The limitations set forth in this

subsection shall not apply to any contacts with

an insured for reasons other than determining

the insured’s health status. Viatical settle-

ment providers and viatical settlement brokers

shall be responsible for the actions of their au-

thorized representatives.

§ 38.2-6009. Prohibited practices.

A. It is a violation of this chapter for any per-

son to enter into a viatical settlement contract

within a two-year period commencing with the

date of issuance of the insurance policy or cer-

tificate unless the viator certifies to the viati-

cal settlement provider that one or more of the

following conditions have been met within the

two-year period:

1. The policy was issued upon the viator’s ex-

ercise of conversion rights arising out of a

group or individual policy, provided the total of

the time covered under the conversion policy

plus the time covered under the prior policy is

at least 24 months. The time covered under a

group policy shall be calculated without regard

to any change in insurance carriers, provided

the coverage has been continuous and under

the same group sponsorship;

2. The viator submits independent evidence to

the viatical settlement provider that one or

more of the following conditions have been met

within the two-year period:

a. The insured is terminally or chronically ill,

b. The viator or insured disposes of his owner-

ship interests in a closely held corporation

10l1la

pursuant to terms of a buyout or other similar

agreement in effect at the time the insurance

policy was initially issued.

B. Copies of the certifications and independent

evidence required by this subsection and

documents required by subsection A of § 38.2-

6008 shall be submitted to the insurer when

the viatical settlement provider submits a re-

quest to the insurer for verification of cover-

age. The copies shall be accompanied by a let-

ter of attestation from the viatical settlement

provider that the copies are true and correct

copies of the documents received by the viatical

settlement provider.

§ 38.2-6010. Advertising for viatical settle-

ments.

A. This section shall apply to any advertising

of viatical settlement contracts, or related

products or services intended for dissemination

in this Commonwealth, including Internet ad-

vertising viewed by persons located in this

Commonwealth. Where disclosure require-

ments are established pursuant to federal

regulation, this section shall be interpreted so

as to minimize or eliminate conflict with fed-

eral regulation wherever possible.

B. Each licensee under this chapter shall es-

tablish and at all times maintain a system of

control over the content, form and method of

dissemination of all advertisements of its con-

tracts, products, and services. All advertise-

ments, regardless of by whom written, created,

designed, or presented, shall be the responsi-

bility of the licensee, as well as the individual

who created or presented the advertisement. A

102a

system of control shall include regular routine

notification, at least once a year, to agents and

others authorized by the licensee who dissemi-

nates advertisements of the requirements and

procedures for approval prior to the use of any

advertisements not furnished by the licensee.

C. Advertisements shall be truthful and not

misleading in fact or by implication. The form

and content of an advertisement of a viatical

settlement contract shall be sufficiently com-

plete and clear so as to avoid deception. It

shall not have the capacity or tendency to mis-

lead or deceive. Whether an advertisement has

the capacity or tendency to mislead or deceive

shall be determined by the Commission from

the overall impression that the advertisement

may be reasonably expected to create upon a

person of average education or intelligence

within the segment of the public to which it is

directed.

D. The information required to be disclosed

under this section shall not be minimized, ren-

dered obscure, or presented in an ambiguous

fashion or intermingled with the text of the

advertisement so as to be confusing or mislead-

ing.

1. An advertisement shall not omit material

information or use words, phrases, statements,

references, or illustrations if the omission or

use has the capacity, tendency, or effect of mis-

leading or deceiving viators, as to the nature or

extent of any benefit, loss covered, premium

payable, or state or federal tax consequence.

The fact that the viatical settlement contract

offered is made available for inspection prior to

103a

consummation of the sale, or an offer is made

to refund the payment if the viator is not satis-

fied or that the viatical settlement contract in-

cludes a “free look” period that satisfies or ex-

ceeds legal requirements, does not remedy mis-

leading statements.

2. An advertisement shall not use the name or

title of a life insurance company or a life in-

surance policy unless the advertisement has

been approved by the insurer.

3. An advertisement shall not state or imply

that interest charged on an accelerated death

benefit or a policy loan is unfair, inequitable,

Or in any manner an incorrect or improper

practice.

4. The words “free,” “no cost,” “without cost,”

“no additional cost,” “at no extra cost,” or

words of similar import shall not be used with

respect to any benefit or service unless true.

An advertisement may specify the charge for a

benefit or a service or may state that a charge

is included in the payment or use other appro-

priate language.

5. Testimonials, appraisals, or analysis used

in advertisements must be genuine; represent

the current opinion of the author; be applicable

to the viatical settlement contract, product, or

service advertised, if any; and be accurately

reproduced with sufficient completeness to

avoid misleading or deceiving prospective via-

tors as to the nature or scope of the testimoni-

als, appraisal, analysis, or endorsement. In

using testimonials, appraisals, or analysis, the

viatical settlement licensee makes as its own

all the statements contained therein, and the

104a

statements are subject to all the provisions of

this section.

a. If the individual making a testimonial, ap-

praisal, analysis, or an endorsement has a fi-

nancial interest in the viatical settlement pro-

vider, viatical settlement broker, or related en-

tity as a stockholder, director, officer, em-

ployee, or otherwise, or receives any benefit di-

rectly or indirectly other than required union

scale wages, that fact shall be prominently dis-

closed in the advertisement.

b. An advertisement shall not state or imply

that a viatical settlement contract benefit or

service has been approved or endorsed by a

group of individuals, society, association, or

other organization unless that is the fact and

unless any relationship between an organiza-

tion and the viatical settlement licensee is dis-

closed. If the entity making the endorsement

or testimonial is owned, controlled, or managed

by the viatical settlement licensee, or receives

any payment or other consideration from the

viatical settlement licensee for making an en-

dorsement or testimonial, that fact shall be

disclosed in the advertisement.

c. When an endorsement refers to benefits re-

ceived under a viatical settlement contract all

pertinent information shall be retained for a

period of five years after its use.

E. An advertisement shall not contain statisti-

cal information unless it accurately reflects re-

cent and relevant facts. The source of all sta-

tistics used in an advertisement shall be iden-

tified.

105a

F. An advertisement shall not disparage in-

surers, viatical settlement providers, viatical

settlement brokers, viatical settlement invest-

ment agents, insurance producers, policies,

services, or methods of marketing.

G. The name of the viatical settlement licen-

see shall be clearly identified in all advertise-

ments about the licensee or its viatical settle-

ment contracts, products, or services, and if

any specific viatical settlement contract is ad-

vertised, the viatical settlement contract shall

be identifie

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