Innovator or fraudster?

In Jake Bernstein’s recent article, “Death Takes a Policy,” he writes about Joseph Caramadre, a Rhode Island financial planner and attorney whose close reading of the law has instead gotten him in deep trouble with it. Caramadre determined that when it came to variable annuities, Rhode Island had no insurable interest requirement statue, and so he devised a scheme whereby he could get elderly and dying people to take out variable annuities that he would then sell to investors or simply keep himself. The typical enticement for this was a check for $2,000, and the transaction was typically done under the guise of Caramadre acting as a self-styled “charitable organization” coming to give people in need a few much-needed dollars.

As you might imagine, insurers cried foul and Caramadre and his associates were investigated on a range of criminal charges. Based on my own personal reading of things, I can’t imagine Caramadre going down for much of anything. One of the folks who worked with him, however, and appears to have forged signatures for annuitants in at least one occasion, might be looking at a conviction. But this is all speculative; we won’t know what happens to Caramadre until his case goes to trial.

The Caramadre case touches multiple nerves for me. My first reaction to it is distaste. What Caramadre is doing strikes me as deeply creepy and even predatory, something Caramadre himself would probably not deny. To him, he is clearly making money off of the dead. But he figures, funeral homes and cemeteries do as well, so why not him? That is not a sufficient explanation for me, but I can see how it might be for him. Basing one’s business off of the death of others does come off as cruel and callous on one hand, but if you extrapolate that out, isn’t that what life insurance really is? And who in their right mind would demonize that business as creepy? Or predatory? Just the opposite; there is a nobility in selling products to people that maintain families and businesses after a passing.

My second reaction to Caramadre is one of grudging respect. I still don’t particularly care for the fact that his business model is based entirely on fitting through a little loophole in the law. My gut tells me there is no real insurable interest with his clients, and that there should be. He is clearly using variable annuities in a way contrary to how they were intended to be used. That may not make it right. But does that make it illegal? According to him, no; the law lets him do this. And this is an important distinction to make, since Caramadre is not openly flouting the law here. He is openly being coy with it, but still operating within what he thinks is legal. There is something a little frustrating and off-putting about one who is taking advantage of shortcomings in the law for personal gain when a strong moral code would prevent doing otherwise. Caramadre strikes me as a shady guy. But he also strikes me as somebody whose greatest crime is embarrassing the insurance industry by figuring out how to turn its rules against itself. I am reminded of the life settlements industry, and how it basically got rolling by doing the same kind of thing. Maybe not quite as openly self-serving, but it still was based on a close reading of the law and an inventive use of insurability rules that eventually, the industry had to accept. Caramadre might be the guy on the hot seat now for it, but I can also see him being the guy who kickstarts an entirely new alternative insurance market, especially if the criminal charges against him don’t stick.