Office of Statewide Prosecution

Statewide Grand Jury Report

Report on Fraud in the Viatical Industry
February 4, 2000
(This document has been re-formatted for the Internet)


We, the members of the Fifteenth Statewide Grand Jury, are continuing the work of prior Statewide Grand Juries investigating insurance fraud committed within the State of Florida.

In the initial part of our work, we turn our focus to a new area by examining the viatical industry and the fraud occurring therein. We have heard the testimony of regulators from the Department of Insurance (DOI), investigators from DOI's Division of Insurance Fraud (DIF), representatives from the life insurance industry, and finally from witnesses who work or have worked directly in the viatical industry.

To date we have returned three Indictments charging seven individuals and one corporation with 155 felony counts relating to criminal fraud in the viatication of life insurance policies belonging to the terminally ill. The face value of these policies is approximately $12.7 million.

Our investigation revealed what law enforcement officials, insurance regulators, and industry observers have been saying for some time. Fraud in the viatical settlement industry is rampant; as much as 40-50% of the life insurance policies viaticated by viatical settlement providers may have been procured by fraud.

We, the members of the Statewide Grand Jury, condemn in the strongest possible terms the rampant fraud in the viatical industry. If this fraud continues unchallenged, the industry will likely disappear. As a result, one of the most vulnerable groups in society, the terminally ill, will lose a vital option to mitigate their financial burdens. The victims of this fraud are not just insurance companies and their legitimate customers who end up paying as a result of this fraud through reduced profits and higher premiums. Victims also include investors, who stand to lose their investment when policies are canceled or lapse.

In this report we address the fraud known as "cleansheeting" (see Appendix 1). Our investigation will not end with this report nor do we guarantee there will not be further indictments. We hope that this report will be helpful to the Florida Legislature, the Department of Insurance, the life insurance industry, and the viatical industry in trying to fashion remedies to the problems identified. We hope this report generates attention to this complex and extremely serious financial crime.


Historically, some insurance companies have offered an accelerated death benefits option on their life insurance policies. Usually, this option allows the insured an opportunity to receive up to 80% of the death benefit at any time within the last year of the insured's projected life. The remaining 20% is then paid to the insured's estate.

On the other hand, the business of viatical settlements involves the selling of a life insurance policy death benefit at less than face value by a terminally ill person (viator or seller) to a third party (purchaser). This is accomplished through negotiations between viators and viatical settlement companies, with the assistance of a viatical settlement broker. The viatical settlement broker offers the policies to viatical settlement provider companies for bid, with the highest bidder obtaining the policy for subsequent resale to investors. The viatical settlement broker receives a percentage commission based on the sale price. The viatical settlement providers seek investors to buy the viaticated life insurance policies. Investors may elect to be sole or partial owners of a policy or may choose to invest in a pool of policies. Upon the death of the insured, the investor(s) receive the face value of the life insurance policy.

All states, including Florida, have statutes mandating contestability clauses in life insurance contracts. The contestability period lasts for two (2) years after the date of policy issuance. During this period of time, the policy may be rescinded by the insurer for a variety of reasons including fraud in the application. After the two year period ends, the insurer is obligated to pay the death benefit, regardless of any fraudulent conduct by the insured in the application. Because policies viaticated during the contestability period may be rescinded, they bring a much lower price in the viatical market.

The dollar amount of viaticated policies has skyrocketed in recent years. In 1990, approximately $80 million worth of life insurance was viaticated. Last year, it is estimated that $1 billion was viaticated. There are eight viatical settlement providers licensed in the state of Florida. In 1998, those eight companies viaticated $548 million worth of life insurance according to figures provided by the Florida Department of Insurance.

In 1996, in response to the rapid growth of the industry, the Florida Legislature enacted the Viatical Settlement Code. The code is contained within F.S. §626.991 through and inclusive of F.S. §626.993. The statute has been amended every year since then. Initially the purpose of the statute was to protect viators from fraud or abuse. It has since been expanded to cover other fraudulent acts and protect other parties as well. Last year the legislature enacted F.S. §626.99275 specifically prohibiting viatication of fraudulently procured life insurance policies. It also specifically prohibited fraudulent conduct in the sale of viaticated policies.


A. Cleansheeting

Unscrupulous individuals in the viatical industry apparently are not satisfied in dealing with legitimate policies and actively seek out, encourage, or turn a blind eye to policies procured by a practice referred to as "cleansheeting", a form of fraud. "Cleansheeting" is the act of applying for life insurance and intentionally failing to disclose the applicant's status as terminally ill. The applicant, or viator, falsely answers some or all of the medical questions in the negative resulting in a "cleansheeted" application. Most insurance companies have a policy coverage amount below which they do not require an applicant to submit to a medical exam or blood test. Those policy coverage amounts are well known to many insurance agents and brokers who assist and often encourage viators in committing the fraud. Cleansheeting is an attractive option for dishonest operators in the viatical business. It not only provides a much larger number of insurance policies to viaticate, many more than would be available though legitimate means, it also provides a much higher rate of return because they can be bought from viators so cheaply. We have learned through testimony that in a legitimate viatical transaction, the viator usually receives 50%-70% of the face value of the policy. However, a "cleansheeted" policy viaticated during the contestable period may offer the viator as little as 10% of the face value because it carries a risk of rescission due to fraud.

After the policy is issued, the viator will sell his policy, sometimes within weeks, to a viatical settlement provider, often using the services of a broker. This is referred to as a "wet ink policy" because the ink on the contract is still "wet" when the policy is sold. The odds against an individual finding out that he is terminally ill within weeks of buying a policy are exceedingly high. To see that happen repeatedly within a short period of time with the same viatical settlement broker or provider is strong evidence that the broker or provider is well aware that the policies have been "cleansheeted". Moreover, some viators will take out multiple policies in a short period of time. Invariably, each policy is from a different insurance company and each is below the monetary threshold for a blood test or medical exam.

Because viaticating a life insurance policy shortly after issuance should raise a red flag to the insurance companies, con artists take great pains to hide the fact that the policy has been viaticated. One way to obscure viatication is to simply change the beneficiary to an employee or officer of the broker or settlement provider who has no legitimate interest in the policy. A second way to hide viatication is to employ a collateral assignment. In legitimate cases, collateral assignments are used where the insured seeks a loan from a third party and secures the loan by pledging the death benefits of the policy. In fraudulent transactions, viators are instructed by providers and brokers to pledge death benefits but do not receive a loan. Finally, some settlement providers merely delay reporting that the policy has been viaticated until the contestability period is over.

We have learned that many parties in the viatical industry wait until the contestable period is over before dealing in cleansheeted policies because they believe that knowingly trafficking in these fraudulently procured policies is not a crime after the contestable period. Some have also gone so far as to claim that it is not a crime to traffic in these fraudulently acquired policies even during the contestable period. However, we find that virtually all parties attempt to hide viatication of fraudulently obtained policies from the insurance company for as long as possible. This practice is strong evidence that the parties involved know the policies are tainted and that their actions are illegal.

The impact on the life insurance industry cannot be overstated. Premiums are based on actuarial tables which are worthless in the face of fraudulent applications. A company cannot continue to pay out death benefits after collecting premiums for only a few years, especially when those premiums are based on a grossly erroneous life expectancy. One small insurer recently discovered that 52 policies it had issued, each with a face value of $100,000.00, were in fact "cleansheeted". Had those policies not been rescinded within the contestable period, the losses would have wiped out over five years of income for that insurer.

Even if the individual insurers can withstand the losses, ultimately the costs are necessarily passed on to the other policyholders. As always, it is the law-abiding citizens that ultimately carry the weight of this fraud on their shoulders.

We have learned that many insurers do not require medical exams, background checks, or even blood tests. They instead essentially rely on an honor system, at least below a certain policy face value. The rationale is that the medical exams and checks would add hundreds of dollars to the policy's premiums and blood tests are an invasive procedure that many people find objectionable.

Some have said that this problem is one of the insurance industry's own making because of their refusal to protect themselves from fraud by requiring these tests in all cases. While we agree that the insurance industry could do more, we do not believe that the solution is to find fault with the victimized insurance companies. We disagree with the notion that honest, law-abiding citizens, who represent the great majority of the insureds, should be saddled with extra costs and burdensome procedures because of a small minority that refuse to follow the same laws we all live by. We believe the burden, to the greatest extent possible, should fall squarely on the shoulders of the ones responsible for the crimes. Cleansheeting results in life insurance consumers facing higher premiums, potentially less coverage, and invasive medical procedures.

B. Investor Fraud

The projected life span of the viator is probably the single most important piece of information for an investor. Yet, there is very little federal or state regulation concerning disclosures to investors regarding the life span of a viator. Unfortunately, wherever there are loopholes in the law, the unscrupulous are tempted to take advantage of them; so it is in the viatical industry.

Viatical settlement proposals contain an estimate of how long a viator is expected to live. The viatical industry refers to the viator's death as the "maturation of the policy". This estimate is derived from the Mortality Profile Report (MPR). Despite their importance, there is no rule or statute regarding the content or format of these documents. Moreover, there are no minimum requirements as to who may generate these reports or projections. We have heard testimony that one viatical settlement provider employed a nurse to write the Mortality Profile Report. This same settlement provider also used a physician, but his training was as a plastic surgeon. Finally, we know of no specific requirement that the qualifications of these putative experts be disclosed, leaving investors with no way of judging the ability of the person who derived the mortality figure.

C. Legislative Response

As we previously stated, the Florida Legislature amended the Viatical Settlement Code last year by enacting F.S. §626.99275 specifically prohibiting viatication of fraudulently procured life insurance policies. It also specifically prohibited fraudulent conduct in the sale of viatical policies. While this new statute was well intended, we are gravely concerned the statute does not carry sufficient penalties to be effective. Because the legislature did not specify the offense level for these new crimes, by operation of F.S. §624.15 these offenses are designated as second degree misdemeanors. We do not believe this penalty will be sufficient to discourage the fraud, given the amount of money involved.

A defendant charged with viaticating a fraudulently procured insurance policy worth $100,000 face value, who stands to gain tens of thousands of dollars, faces the same penalty as a shoplifter who purloins a pack of cigarettes. A mere sixty days in jail is an encouragement, not a deterrent.

An estimate of the effectiveness of this statute may be drawn from the experience with F.S. §626.989(b) which requires all insurance licensees to report suspected fraud to DIF. The penalty for failing to do so is a second degree misdemeanor. Despite the thousands of obviously fraudulently procured life insurance policies that have passed through the hands of multiple viatical settlement brokers, providers and sales agents, DIF has never received a single referral from the viatical industry reporting such fraud.

D. Investigative Concerns

Pursuant to DOI's investigations, several search warrants have been executed around the state at the business offices of viatical settlement providers, viatical settlement brokers, and viatical sales agents. Most of the warrants have been executed without controversy. One particular search, however, was held up for some time because of a disagreement as to the applicability of seemingly conflicting state laws. It has been disclosed to us and reported in the press that one search had been twice postponed by the courts after the search warrant was issued. The delays were prompted when the targets of the search asserted the privacy rights of viators in the medical records held by the viatical settlement providers. The controversy eventually proceeded to the Fourth District Court of Appeal. Meanwhile, the investigation was stalled for months.

We do not presume to pass on the legality of the search nor do we seek to comment on any part of the trial or appellate courts' opinions. However, we do find that a review of the medical records of viators held by the settlement providers, brokers, and sales agents is essential in discovering the fraud and prosecuting the responsible individuals. It is only by comparing a viator's medical records to the information provided on the insurance application that knowledge and intent to defraud can be shown.

In the investigations where search warrants have been successfully executed, it is precisely those records that showed the fraud by the viators and the knowing complicity of the viatical settlement brokers, providers, and sales agents.

It should also be noted that DOI already has the authority, pursuant to F.S. §626.9922, to examine all records of licensees to determine whether there has been a violation of law. That would seem to include medical records.

While the state has prevailed in the courts so far, we cannot be assured that litigation on this point will not continue. In cases where records have been turned over to a third party for the purpose of engaging in a commercial transaction, it would seem prudent to clarify the law in this area. Statutes on confidentiality should not prohibit the discovery of medical records, through subpoenas or search warrant, nor their subsequent use in a criminal investigation or prosecution.


The viatical industry as a whole must take steps to better police itself. If it does not, it risks ceasing to exist as an industry either by being legislated out of existence or being pushed out of the market by destroying investor confidence in its product.

At least one industry trade group has created a code of ethics for its members. Unfortunately, that code speaks in only general terms regarding criminal conduct. We are disappointed that several of the unscrupulous practices we have come to learn are common in the industry are not specifically condemned by the code.

The insurance industry must act by taking a greater role in protecting itself against fraud. The legislature cannot be expected to do it all, nor can law enforcement or regulators. If this fraud is to be stopped, it will require the total commitment of the insurance industry. Insurance companies can and do aggressively root out fraud. We have seen it done in this and other areas. The first step, however, is for the industry to wake up to the existence and scope of the problem. Only recently have some insurance companies come to realize the extent of their victimization and responded accordingly. We applaud their aggressive fight against this fraud and encourage their continued efforts. We hope the rest of the industry will follow the example set by these companies.

We also encourage the Florida Legislature and DOI to continue their vigilance, for despite their best efforts the fraud continues at an alarming rate. Herewith, then, are our recommendations.


To the Legislature:
1. Amend F.S. §626.99275(1) to specifically include brokering a viatical settlement contract under the circumstances described in that statute.
2. Amend F.S. §626.99275(1) to read that a violation of the statute in regard to a policy with a face value of more than $300 but less than $20,000 be a third degree felony; $20,000 or more, but less than $100,000 be a second degree felony; and $100,000 or more be a first degree felony, to comport with the Grand Theft statutes.
3. Amend F.S. §626.99275(2) adding subsection (d) making a violation of any part of that section a third degree felony.
4. Amend F.S. §626.99235 to require the name, address and qualifications of the person issuing the Mortality Profile Report and of the person making the estimate of the viator's projected life span, as well as the relationship of that person to the provider and/or broker, on a form prescribed by the Department of Insurance.
5. Amend F.S. Ch. 626 to require licensees that viaticate an insurance policy, broker a viatication settlement or sell a viaticated policy, perform due diligence and certify that they have examined and compared the viator's medical records and life insurance application before engaging in any transaction.
6. Amend §626.9922(2) (regarding the keeping by a licensee of all records relating to a viatical settlement contract or purchase agreement) to increase the penalty for a first offense to a first degree misdemeanor and a subsequent offense to a third degree felony.
7. Amend F.S. Ch. 626 to require viatical settlement providers to notify insurance carriers within thirty (30) days of when a life insurance policy has been viaticated, or when any agreement, contract or promise to viaticate has been made between viator and provider. F.S. Ch. 626 should also require providers to submit to the insurance carrier along with notification a copy of the viator's complete file used by the provider in the viatical transaction.
8. Amend F.S. §627.455 to allow insurers to contest viaticated life insurance policies within six months of being notified of such viatication. This provision would apply to all life insurance policies viaticated within five years of issuance.
9. Amend F.S. §455.667 and F.S. §395.3025 and F.S. §381.004 to allow the seizure and use of medical records pursuant to subpoena or search warrant while preserving the integrity of the criminal investigation.
10. Amend §626.989(6) to increase the penalty for failure to report suspected fraud by a licensee to a first degree misdemeanor.

To the Insurance Industry:
1. Consider the greater use of medical exams and blood tests before issuing life insurance policies.
2. Require notice of viatication to the insurance carrier within thirty days of said viatication in all life insurance contracts.
3. Offer an accelerated death benefits option on all existing and future policies, and submit proposed enabling legislation if necessary.
4. Make greater use of industry databases, such as the Medical Information Bureau, to check for suspicious patterns and follow up with investigations where indicated.
5. Provide more training and education to underwriters and security personnel concerning the detection and investigation of viatical fraud.

To Department of Insurance
1. Standardize forms typically used by the industry including the Mortality Profile Report, Viatical Settlement Proposal and Viatical Settlement Purchase Agreement.
2. Promulgate rules regarding record keeping required by F.S. §626.9922, specifying precisely where records must be maintained for inspection.
3. Establish minimum educational requirements for viatical settlement broker licensees and viatical settlement provider licensees.

THIS REPORT IS RESPECTFULLY SUBMITTED to the Honorable Belvin Perry Jr., Presiding Judge of the Fifteenth Statewide Grand Jury, this ______day of ________, ____.

Fifteenth Statewide Grand Jury of Florida

I, MELANIE ANN HINES, Statewide Prosecutor and Legal Advisor, Fifteenth Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this report on this _____ day of _______, ____.

Statewide Prosecutor
Legal Advisor
Fifteenth Statewide Grand Jury of Florida

I, OSCAR GELPI, Special Counsel and Assistant Legal Advisor, Fifteenth Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this report on this _____ day of ______, ____.

Special Counsel
Assistant Legal Advisor
Fifteenth Statewide Grand Jury of Florida

THE foregoing Report on Fraud in the Viatical Industry was returned before me this _____ day of __________, ____, and is hereby sealed until further order of this court, upon proper motion of the Legal Advisor.

Further, upon the Legal Advisor's oral motion for the disclosure for the purposes of furthering justice of the Report on Fraud in the Viatical Industry, the Legal Advisor is ordered to disclose the testimony and proceedings recounted in the foregoing document in furtherance of the criminal investigative and civil administrative responsibilities of the Fifteenth Statewide Grand Jury.

Belvin Perry, Jr.
Presiding Judge
Fifteenth Statewide Grand Jury of Florida


Cleansheeting: An industry term referring to a fraudulent criminal act committed by a proposed life insurance applicant, and by life insurance agents who knowingly assist or conspire with the insurance applicants, by failing to disclose a pre-existing medical condition in response to a question on a life insurance application. Such question would have been material to the issuance of the policy. Cleansheeting is done in an effort to obtain a life insurance policy the insured would not have otherwise been entitled to obtain because of his or her medical condition.

Contestability: Policies may be contestable or incontestable (also referred to as non-contestable or non-conforming). Policies are generally contestable for two years from the date of issue and are subject to being rescinded by the insurer for cause, such as application fraud and suicide. Incontestable policies have passed the two-year period of contestability and in most states, including Florida, benefits are paid even if the insurer learns that the policy was obtained fraudulently.

Mortality Profile Report: A report based on a review of a viator's medical history, which gives a prognosis of a viators life expectancy. Usually done by a health-care professional and generally at the behest of the viatical settlement provider. Used in calculating the value of a viatical contract.

Viatical Investment Broker: A term coined by the Division to define a person or entity other than a licensed viatical settlement provider who solicits investors to fund the purchase of viatical settlements from a viatical settlement provider.

Viatical Settlement: The life insurance policy of a terminally ill person, sold or offered for sale, generally at less than face value, through a viatical settlement company. Also referred to as a "Viatical."

Viatical Settlement Broker: A person who, for profit, offers or attempts to negotiate a settlement contract between a viator and one or more viatical settlement providers.

Viatical Settlement Provider: A person who enters into a viatical settlement contract with a viator. Often referred to as a settlement company or funder.

Viatical Settlement Sales Agent: A person other than a licensed viatical settlement provider who arranges for the purchase of a viatical settlement or an interest in a viatical settlement from a viatical settlement provider.

Viator: A person who has a life threatening or terminal illness who sells or assigns their life insurance policy.