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Monday, January 23, 2006

A Question of Foreseeability

Happy_seniors A rather grim case from New Jersey, reported in the Philadelphia Inquirer, raises an interesting question of foreseeability:  Was it foreseeable in 1992 that a person diagnosed with AIDS and given two years to live would still be alive in 2006?

The question is important because a number of companies, including Life Partners Holdings, Inc. (NASDAQ: LPHI), are in the "transferable insurance policies" business.  They buy life insurance policies from individuals, making monthly payments to them while they're alive and then cashing in the policies when they die.  The business sounds ghoulish, but it actually provides a useful service to people who have paid insurance premiums throughout their lives and need the money now more than they need to leave it to their heirs.  The payments can often be much higher than the cash value the insurance company would give.  (Picture: Happy seniors who've sold their policies, from the LPHI web site.)

But calculations in such cases can go badly awry.  Back in 1992, only a year after it was formed, LPHI bought the life insurance policy of a suddenly destitute single woman who had been diagnosed with AIDS and given two years to live, but who had a $150,000 life insurance policy.  LPHI paid $90,000 up front to the woman (known only anonymously as "M. Smith"), and expected to cash in the $150,000 policy two years later.  The company also apparently agreed as part of the deal -- though this isn't entirely clear -- to pay Smith's life insurance and health insurance premiums until her death.

With new AIDS treatments, however, Smith didn't die, and is very much alive today at age 50, feeling fine.  Not only did LPHI not cash in the policy as it expected, it may be in the hook for maintaining her insurance payments, which have now risen to $26,000 a year.  The company is now in state court in New Jersey, arguing that it is not obligated to continue paying for Smith.  Without seeing the actual contract, it's hard to evaluate the claim, but Smith's own lawyer seems to agree that the company didn't anticipate that new AIDS drugs would significantly change the economics of its deals.

[Frank Snyder -- hat tip to Ben Templin for the link]

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