permanently disabled while insured before age 60 the life insurance will remain in force as long as he remains so disabled without payment of further premiums. The insurance companies, Executive Life Insurance Company of New York and the Trans World Life Insurance Company of New York are issuing ordinary non-participating whole life insurance on the lives of the members on a guaranteed

issue basis.

It is noted that the insured members did not make application for this coverage or give consent in writing therefor. Section 146 (3) of the New York Insurance Law requires such application and permission.

[There are no written formal agreements between the fund and the insurance carriers setting forth eligibility for coverage.]

There are no written formal agreements between the fund and the insurance carriers, whereby the carriers agree to provide the insurance coverage in accordance with the fund's plan.

However, the carrier has refused to pay claims if the member did not meet the fund's eligibility requirements even though the carrier issued a whole life contract on the member and accepted premium payments.

The aforesaid action by the carrier appears to violate Section 142 of the New York Insurance Law.

[Death benefits have been overpaid because of failure to carry out plan provisions.]

Section 3.12 of the plan states:

"In the event of the death of a Member prior to termination of employment, there shall be payable as a death benefit to his beneficiary, if designated, or to his estate if no beneficiary has been designated the proceeds of any Contracts issued upon his life plus the amount credited to such deceased Member's account as of the date of his death.

"For the purpose of this Section the 'amount credited to a Member's account' shall mean the amount the Employer has contributed for such Member plus increment or decrement credited to such amount as of the last evaluation date prior to the Member's death, less such Member's allocated share of charges against the Trust Fund and less insurance premiums paid for Contracts on the life of such Member."

In actual practice the trustees have paid to the beneficiaries of deceased members the total contributions made on their behalf in addition to the life insurance benefit received by the fund from the carrier.

[The trustees, contrary to the Plan and with questionable legality, withhold a part of the insurance proceeds upon death of a member.]

Section 3.17 of the plan states:

"***Payment of the proceeds of Contracts issued on his life as a death benefit shall be made in equal monthly, quarterly, semi-annual or annual installments, in the sole discretion of the Trustees, over a period of ten (10) years after the death of a Member who died on or prior to his fifty-fifth (55th) birthday, or over a period of five (5) years after the death of a Member who died after his fifty-fifth (55th) birthday, provided that the amount of each such payment is at least Twenty-Five ($25.00) Dollars."

A beneficiary electing to receive the death benefit in a single sum payment, receives the commuted value. The commuted value is calculated on a 6% interest factor and is 73.6% and 84.2% of the face amount for a ten and five year payout respectively.

The trustees, by paying an amount equal to the face value of the insurance to the fund beneficiary over a period of time without interest, and by retaining a part of such face value when paying the fund beneficiary a lump sum, have acted contrary to the plan.

Section 146 (1) of the New York Insurance Law provides in part as follows: "No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured."

Your examiner questions whether the above described fund actions are in accordance with the quoted law.

The proceeds of life insurance, retained by the fund on the death of members, should be paid to the members' designated fund beneficiaries.

Apparently, even the designated beneficiaries of those members who are terminated prior to death and have acknowledged ownership of their policies are denied the full proceeds of their policies. In the case of John Cerrito, who termi

nated on July 2, 1971 and who died on September 4, 1971, the fund paid his beneficiary the commuted value of the policy, $7,728.09 instead of the face amount, $10,500. Even though Mr. Cerrito had been advised on May 10, 1971 by Fringe Programs, Inc. that "coverage will be turned over to your ownership." [In other respects, the administration of the plan has been unsatisfactory.] Section 2.04 of the fund's plan reads as follows:

"In the event of termination of Membership hereunder of a Member for any reason whatsoever and his subsequent entry into this Severance Plan, he shall be considered a new Member and shall not be entitled to any additional benefits as a result of his previous membership in this Severance Plan. The purpose of this provision is to avoid duplication of benefits."

In one instance an inception member, Michael Quirk was permanently laid off by a participating employer and the member received severance benefits of $795.00. On May 31, 1972 the administrator, Fringe Programs, Inc. granted this member the option of returning his cash benefit and reentering the plan as an inception member when he was reemployed by a contributing employer.

It appears that the amount of insurance actually purchased for some members is not in accordance with the plan. Section 3.10 of the plan reads as follows: "Notwithstanding any other provision in this Severance Plan to the contrary, the purchase by the Trustees of a Contract or Contracts on the life of each Member shall be so limited that the aggregate of the premiums for ordinary life insurance in the case of each Member shall be not more than forty-nine and nine-tenths (49.9%) percent of the aggregate of the contributions allocated to such Member at the particular time or as may be required by the appropriate statute."

In reviewing the individual members' accounts, numerous cases were found where the premiums exceeded 49.9 percent of contributions. This results from the fact that the amount of insurance is purchased for each member on the basis that he will work a full 52 weeks during the year, when in certain instances this does not occur.

The plan and the trust agreement appear to be in conflict on the point of providing members with an annuity benefit. The trust agreement under Section 7.3 states:

"no pension or annuity benefit may be provided for or paid to any Employee under this Agreement.'

The plan under Section 3.01 states:

"Any member who has reached his sixty-fifth (65) birthday shall be eligible for an annuity type benefit established by the Trustees. ***"*

[The insurance arrangement was in actual fact solicited by Louis Ostrer, who had lost his New York agent's license for misconduct.]

Louis C. Ostrer solicited the insurance arrangement although he is not licensed as an agent by the New York State Insurance Department, nor is he registered with this Department as an insurance consultant. Attached to this report is a release issued by the New York State Insurance Department dated December 22, 1967, which indicates Mr. Ostrer's licenses had been revoked for improperly diverting more than $700,000 from a Canadian life insurance company.

It is noted that copies of this release were presented to the trustees at a meeting held at the Department's office on August 24, 1971. Representing the fund at the meeting were trustees Steiner and Hunt and fund counsel Herbert Simon. The minutes of the trustees' meeting of November 17, 1971 indicate that this information was circulated to all the trustees.

Mr. Ostrer attended all the trustees' meetings and attended the membership meeting held on December 6, 1970 at which the members ratified the plan. Mr. Ostrer's sister, Dina Gelman, a licensed insurance agent has been designated as both general and soliciting agent to receive commissions. Dina Gelman has not once attended a trustees' meeting.

Dina Gelman is also the sole stockholder of Fringe Programs, Inc., the administrator of the plan. For the first two years of the plan's operation which will end at December 1, 1972, Dina Gelman will have received approximately $762,500.00 in commissions and $160,000 in administration fees for a total of approximately $922,500.00. This figure represents approximately 30% of the total contributions which will have been made by all employers on behalf of all covered employees for the two year period.

[Presentation by Louis C. Ostrer to the trustees was misleading.]

At the July 15, 1971 meeting of the trustees Mr. Ostrer presented the following memorandum comparing term insurance to ordinary life:

FRINGE PROGRAMS INC.,

New York, N.Y.

The following is a twenty (20) year comparison at age 33, between level group term and ordinary life:

To continue the policy at age 53, the premium would be $1,015.68 to convert to ordinary life. However, this would not create equity in the converted policy until the end of the year two.

Attached herewith is a census as to the ages and amounts of insurance establishing the term cost of $258,662.76.

Under the ordinary life contract, it is safe to assume that we would recover approximately 85 to 90% of all premiums via cash value build-up so that we would recover approximately 81⁄2 to 9 million in equity against no equity in term. Notwithstanding the fact that we would arrive at a net cost of approximately 1 to 11⁄2 million in lieu of $5,100,000 in cost for term and an anticipated conversion rate that would, in effect, make it impossible for any rank-and-file to be able to continue his policy at severance.

Mr. Ostrer's presentation was misleading. In the case of term insurance the trustees themselves maintain the savings account for the difference of the whole life premium less the term premium, whereas, under whole life insurance, the insurance company maintains the savings (the "cash value"). If the trustees were to deposit the difference between the whole life premium and the term premium in a 5% interest bearing account, they would accumulate savings comparable to the cash values under the whole life contracts, at the end of a twenty year period.

[For Local 295 membership, the use of ordinary whole life insurance contracts is seriously questionable in certain respects.]

The high insurance costs involved in early terminations under whole life policies are highly significant for this plan because the annual turnover rate in the Local 295 plan membership appears to be approximately 15%. Under the fund's insurance policies there is very little cash value during the early years, in fact for those members under 25 there is no cash value until the fourth year. If a member joins the plan at age twenty four and terminates after three years, the fund will have expended approximately $2,270.00 in premiums and the policy will have no cash value.

Another serious deficiency in the present plan is the following:

An eligible member who joins the plan at age 33 should have $48,000 of insurance. Should the member after two years of coverage be laid off due to a temporary period of unemployment for a period in excess of three months the insurance on his life would be cancelled. When he returns to work and he is subsequently eligible for insurance, new policies would be purchased and since the member is three years older the new coverage would be reduced to $43,500. Naturally if the member had been in the plan for a longer period before the layoff the insurance would be reduced to a larger extent. The policies which after the two years in force would have started accruing cash values would have been cancelled and the new policies would have to be in effect for two years before any cash values would

accrue.

Since the initial cost of life insurance policies are charged against the cash value increases in the earlier policy years, the replacement of an old policy by a new one results in the policyholder sustaining the burden of these costs twice.

It is quite clear that the fund and the member will lose when new policies are issued. The only party that gains from the new policy transaction is the agent who again is paid 90% of the first year premium in commission and allowance.

[The scale of payments to the insurance agent is unconscionably high and in gross contravention of the Code of Ethical Practices; the fund trustees, in failing to demand adherence to the commission scales in the Code, have demonstrated serious lack of fiduciary responsibility.]

The Code of Ethical Practices was adopted by the National Association of Insurance Commissioners in 1957 to deal with commission and other insurance abuses found during a comprehensive investigation by the New York Insurance Department in 1954–1956. It has immeasurably improved the administration of welfare funds subject to registration under Article 3A of the Insurance Law.

The Code applies to permanent forms of life insurance sold on a group basis. The purpose of the Code is clearly evident in the following quotations from the Code:

"The basic purpose of this Code is to prevent a recurrence of insurance abuses." "The Code of Ethical Practices, adopted by the National Association of Insurance Commissioners, is intended to serve as a declaration of applicable principles in the proper conduct of insuring welfare and pension funds.'

"Excessive commissions, fees and other allowances tend to reduce the level of benefits paid to beneficiaries of welfare and pension funds. Consequently, it is in the best interest of the public and the beneficiaries of such funds that the commissions, fees and other allowances be reasonable and not excessive."

The permissible commission rates are introduced in the Code as follows: "The table following illustrates on the basis of the effective rate for the indicated premium volume a generally accepted range of commission rates, first-year and renewal averaged over a ten-year commission-paying period, to insurance agents and brokers, derived from schedules currently in use on group life and group accident and sickness policies, which are considered to be reasonable and not excessive."

After the display of commission rates, the Code provides as follows:

"Any commission rate schedule used by an insurer for welfare funds is considered unreasonable and excessive if it provides for the payment of commission in excess of the range shown in the preceding table."

At the August 24, 1971 meeting held at this Department with representatives of the Fund, the Department voiced criticism of the plan; an analysis was presented indicating rates of commission, payable under the insurance arrangement, that are unconscionably high, in contravention of the Code of Ethical Practices, and detrimental to the interests of the trust fund.

The commission payable in accordance with the Code of Ethical Practices for the first two policy years would be approximately $27,600, calculated as follows:

In contrast, the commissions payable by the carriers to Dina Gelman for the first two policy years will be approximately $762,500 or 27 times the commissions payable under the code, calculated as follows:

If commission had been made payable not at the unbelieveably high rates currently in effect but at the range of rates contemplated in the Code of Ethical Practices, the savings in commissions could have been of great financial benefit to the trust fund. Such savings could have been passed on the fund in the form of lower premiums or, the contracts could have been rewritten on a participating basis so the fund could receive the savings as dividends.

The trustees, having full knowledge that the 50% first year commissions and the high renewal commissions payable by Executive Life Insurance Company were excessive and in contravention of the Code of Ethical Practices, took no firm action to bring about reduction of the commission rates.

When the insurance amount was doubled in conjunction with the contribution rate increase from $15 per week per man to $30 effective December 1, 1971, the new policies representing the additional amount were placed with the Trans World Insurance Company under an aggregated 90% first year commission and allowances. The trustees at the time of the placement of the additional insurance once again took no action to effectuate reasonable commission rates.

CONCLUSIONS REGARDING MEMBER BENEFITS

As indicated in this section, the plan, its administration, and its acceptance by the trustees are subject to serious criticism.

(1) Plan provisions have been applied erroneously resulting in overpayments to terminated members in substantial amounts (Page 3-5).

(2) Members have not consented in writing to insurance coverage on their lives (Page 5-6).

(3) There are no written formal agreements between the fund and the insurance carriers setting forth eligibility for coverage (Page 6).

(4) Death benefits have been overpaid because of failure to carry out plan provisions (Page 6-7).

(5a) The trustees contrary to the Plan and with questionable legality withhold a part of the insurance proceeds upon death of a member (Page 7-8).

(5b) Apparently even the designated beneficiaries of those members who terminated prior to death and have acknowledged ownership of their policies are denied the full proceeds of their policies (Page 8).

(6a) The trustees allow terminated members the option of returning their cash benefits and reentering the plan as inception members, which is contrary to the plan (Page 9).

(6b) The amount of insurance actually purchased for some members is not in accordance with the plan (Page 9).

(6c) The plan and the trust agreement are in conflict on the point of providing members with an annuity benefit (Page 10).

(7) The insurance contract was in actual fact solicited by Louis Ostrer who had lost his New York agent's license for misconduct (Page 10).

(8) Presentation by Louis C. Ostrer to the trustees was misleading (Page 11-14). (9) For Local 295 members, the use of ordinary whole life insurance contracts is seriously questionable in certain respects (Page 14).

(10) The scale of payments to the insurance agent is unconscionably bigh and in gross contravention of the Code of Ethical Practices; the fund trustees, in failing to demand adherence to the commission scales in the Code, have demonstrated serious lack of fiduciary responsibility (Page 16).

It is recommended that appropriate action be taken by this Department and the trustees for the protection of fund members.

INFORMATION TO MEMBERS

Fund records and procedures indicate that the following distributions were made:

(1) Annual Reports to members and contributing employers in accordance with Department Regulation 36.

(2) Descriptive booklets to members.

(3) Certificates of insurance to members.

(4) Individual reports to members indicating the amount of contributions credited to the member's account.

The descriptive booklet distributed to the members was found to be inadequate in that it failed to notify the member of his rights in the event of total and permanent disability.