Unclaimed Property Debate

Unclaimed Property Debate ACLI Annual Conference New Orleans October 28, 2013 Unclaimed Property Litigation Intensifies By Steuart H. Thomsen, Phillip E. Stano, Wilson G. Barmeyer, and David W. Arrojo Steuart H. Thomsen and Phillip E. Stano are Partners and Wilson G. Barmeyer and David W. Arrojo are Associates in the Litigation Group in the Washington Office of Sutherland Asbill & Brennan LLP. Their practices focus on financial services litigation and include representing clients on unclaimed property issues. The opinions expressed within do not necessarily reflect the views of Sutherland Asbill & Brennan LLP or its clients. Unclaimed property issues impacting insurance companies continue to evolve on legislative, judicial, and regulatory fronts. Approximately nine states have enacted legislation mandating a duty for companies to search the Social Security Administration s Death Master File (DMF), and more than a dozen companies have entered into multistate settlement agreements with auditors. States are now auditing small to mid-sized life insurance companies, and multiple auditors are conducting these audits on a multi-state basis. This paper discusses the litigation on these issues, including actions filed by private plaintiffs, state treasurers, and insurance companies. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient. 1

What Information Must be Provided in an Audit? In early October 2013, in the first litigation arising directly out of the ongoing unclaimed property audits, a Superior Court in California issued a preliminary injunction ordering an insurance company to turn over to state auditors all data and documents requested by the State in the course of an unclaimed property audit. Chiang v. American National Insurance Company, Case No. 34-2013-00144517 (Sup. Ct. Sacramento Cal. Oct. 9, 2013). In his complaint (filed in May 2013), the Controller alleged that the insurer refused to turn over records relating to its currently in-force policies, thereby preventing the Controller from having access to records allegedly necessary to complete the unclaimed property audit. Specifically, the Complaint alleged that life insurance companies have failed to take reasonable steps to determine whether the insureds under their life insurance and annuity products are deceased, and alleged that these practices have resulted in both substantial delays in the escheatment of amounts due from the life insurance industry... and the failure to escheat such amounts at all. After filing suit, the Controller filed a motion for preliminary injunction seeking to enjoin the insurer s alleged refusal to allow a full, complete and accurate examination of all its books and records in response to data requests from the Controller and his auditor. Characterizing the company s refusal to produce certain information as dilatory tactics, the Controller claimed that it does not, and need not, accept the insurer s word that it has, on its own, correctly identified and segregated its own in-force policies. In response, the insurer argued that the information at issue data on in-force policies could not constitute reportable unclaimed property under any circumstance and was therefore entirely irrelevant to the audit. The insurer also filed a four-count cross-complaint seeking a declaratory judgment that (1) the Controller is not entitled to obtain information about the company s inforce policies, (2) the Controller does not have the authority to enforce any obligation to search the DMF, (3) the Controller has no authority to challenge or change the company s contractual relationships with its insureds as part of the audit, and (4) that death is not the dormancy trigger under the California unclaimed property statute. In its rulings, the court granted the preliminary injunction requested by the Controller and ordered the insurer to produce information on in-force policies. The court stated that the insurer is depriving the State of the ability to review the company s records to identify escheatable property, because California s auditor does not, and need not, accept [the insurer s] word that it has, on its own, correctly identified and segregated its own in-force policies. The Court also dismissed, without leave to amend, counts 2 4 of the insurer s cross-complaint for declaratory judgment, which sought to present substantive legal issues regarding the DMF and applicable dormancy trigger. The court held that these issues were not ripe for review and stated that the court would not speculate as to what the Controller s audit will reveal or express an opinion on the validity and scope of such hypothetical exactions. 2

Meanwhile, on July 17, 2013, the California Controller filed an identical complaint against the Kemper Corporation and its affiliates, alleging that the insurer failed to turn over data needed for the Controller to conduct audits of potentially escheatable property. Other Litigation With State Governments Regarding Use of the Death Master File Additional cases are also pending in West Virginia, Florida, Pennsylvania, and Illinois. The State of West Virginia, which has largely stayed on the sidelines for the multistate audits, entered the fray in late 2012 by filing 69 separate actions against life insurance companies. The complaints are identical except for the name of the defendant and its purported market share. The suits allege that insurers have an affirmative duty under West Virginia s unclaimed property statute to search the DMF to determine deaths of life insurance policyholders and to escheat policy proceeds if those proceeds cannot be paid to a beneficiary. The Treasurer asserts that this duty arises from an alleged obligation of good faith under the West Virginia Unclaimed Property Act or other sources. The Treasurer alleges that, as a result of the insurers failure to use readily available information such as the DMF to search for proof of death, the insurers have willfully failed to report potentially unclaimed property identified through such searches. The Treasurer seeks escheatment of unclaimed policy proceeds and civil penalties, as well as injunctive relief requiring the insurers to implement policies and procedures for using the DMF or other similar databases annually to identify unclaimed proceeds. Most of the defendant insurers filed motions to dismiss the Treasurer s complaints, arguing that no such duty to search exists. The court held oral argument jointly in all of the cases on September 6, 2013, and a decision is expected this fall. In several other states, insurers have filed declaratory judgment actions against various regulators. In Illinois, affiliates of the Kemper Corporation have recently brought declaratory judgment actions against the Illinois Insurance Commissioner. The suit, filed September 4, 2013, arises out of a multi-state market conduct examination being conducted by Verus Financial and for which Illinois is the lead state. In the complaint, the insurers seek (1) a declaration that life insurers have no obligation to search the DMF under Illinois insurance laws, (2) a declaration that Verus and the states cannot obtain policy records for the purpose of comparing them against the DMF to identify deceased insureds and thereby necessitate further action by the insurers, and (3) a declaration that a insurers have no obligation to investigate, settle, and pay claims until receipt of a claim and due proof of death, and not based on a DMF match. Affiliates of Kemper have filed similar actions in Pennsylvania and Florida. 3

Also in Florida, Thrivent Financial for Lutherans filed a petition seeking declaratory relief in an administrative proceeding with the Florida Department of Financial Services (DFS), asking for a declaration that insurance contracts become due and payable only after Thrivent has received due proof of death. On October 4, 2013, the DFS issued a Declaratory Statement in response to the petition determining that Florida s unclaimed property statute requires life insurers to use the DMF to seek out information on potential deaths of insureds. In re: Petition for Declaratory Statement of Thrivent Financial for Lutherans, Case No. 137963-13-DS. According to the DFS, requiring insurers to search the DMF is consistent with the manifest purpose of chapter 717, Florida Statutes requiring an insurer to take reasonable steps to pay the beneficiary once an insurer learns of the death. The DFS also expressed its policy views on this issue: In an age when an unprecedented volume of information is readily available in digital form, the Department sees no reason why an insurance company should balk at making reference to a publicly accessible digital database that would entirely reveal whether any of its insureds had died. A simple exercise of due diligence reference to the DMF maintained by the Social Security Administration or comparable national databases would reveal whether there was any potential for benefits to be due under an existing life insurance contract. The DFS also ruled that, for the purposes of triggering a company s unclaimed property reporting obligations, the dormancy period begins to run at the insured s date of death. Three Insurer Victories in Litigation Brought by Private Parties Private litigation has also been initiated against insurers on issues related to unclaimed property and the DMF, and the insurers have prevailed in three such cases. First, in late 2012, the Ohio Court of Appeals held that life insurance companies in Ohio have no affirmative duty to search the DMF or otherwise seek out information on possible deaths. Andrews v. Nationwide Mutual Insurance Company, No. 97891 (Ohio Ct. App. Oct 25, 2012). Affirming the dismissal of a putative class action filed by private plaintiffs, the Ohio Court of Appeals held that the life insurance contracts at issue do not impose a duty on [the insurer] to search the DMF to determine whether their insureds are deceased, and therefore obligating [the insurer] to solicit or gather information pertaining to an insured s death would be contrary to the terms contained in the insurance policy. The court found no validity to appellants allegations that [the insurer] has breached the implied covenant of good faith and fair dealing by failing to utilize the DMF for the benefit of its life insureds. The court found that the life insurance contracts instead expressly require[d] receipt of proof of death and observed that [t]he terms receipt and receiving demonstrate [the insurer s] passive role in establishing an insured 4

party s proof of death; they do not connote an obligation to procure such information. The court also held that both insurance contracts and Ohio law placed the burden on the claimant or the beneficiary to produce the proof of death. The court stated that we will not import additional unspoken duties and obligations onto [the insurer] that will conflict with the parties contracted term, holding that the insurer had not breached its duty of good faith and fair dealing by failing to search the DMF when it is not contractually or legally obligated to do so. The plaintiffs petition for review by the Ohio Supreme Court was denied on April 24, 2013. Second, on August 19, 2013, a federal district court in Massachusetts, in Feingold v. John Hancock Life Insurance Co., No. 1:13-cv-10185-JLT, 2013 WL 4495126 (D. Mass. Aug. 19, 2013), rejected claims that an insurer has an affirmative duty to search the DMF. This case was brought as a putative class action by a beneficiary alleging that the insurer had a pattern and practice of avoiding payment of life insurance policy death benefits that are owed to beneficiaries. The complaint accused the insurer of using the DMF asymmetrically, by routinely searching the database to end payments to annuity clients but not using it to promptly notify beneficiaries of life insurance policies when a policy-holding relative dies. The complaint alleged that the insurer was liable for damages caused to policy holders and beneficiaries as a result of its asymmetric death benefit payment practices, even though the company had entered into a Global Resolution Agreement and settlement with States, because the company is not shielded from liability from those who were neither parties to the Agreement nor recipients of compensation from the settlement. The court granted the insurer s motion to dismiss, which had argued that the complaint sought to discard settled law by requiring payment or escheatment of life insurance proceeds where a beneficiary had made no claim on the policy. The court agreed. Noting the case depended on established principles of insurance law, the court observed that [a]n insurance policy may require a beneficiary to furnish due proof of loss, in this case proof of death, before paying policy proceeds. Id. at *2. The Court held that the insurer's practice of requiring the life insurance policy beneficiary to submit proof of death before payment of any amounts under the policy comports with both Massachusetts and Illinois law. Id. Third, and most recently, a Florida Circuit Court has stated that insurers have no obligation to search the DMF to comply with Florida's unclaimed property statute. Order Granting Prudential's Mot. to Dismiss, Total Asset Recovery Servs. v. MetLife, Inc. et al., Case No. 2010-CA-3719 (Fla. Cir. Ct. Aug. 20, 2013). This case was brought by a relator under the Florida False Claims Act, alleging that insurer s had failed to report unclaimed property to the state. The case was dismissed partly on procedural grounds, but the court also rejected the plaintiff s argument that there was a duty to search the DMF. The court stated: Florida has not adopted a law requiring [the insurer] to consult the Death Master File... in connection with payment or escheatment of life insurance benefits. Likewise, Florida 5

has adopted no law imposing an obligation on [the insurer] to engage in elaborate data mining of external databases... in connection with payment or escheatment of life insurance benefits. Plaintiff has appealed the dismissal of its complaint. This decision appears to be in direct conflict with the Florida DFS ruling in Thrivent that states that insurers have an affirmative duty under the Florida unclaimed property statute to search the DMF. Constitutional Challenges to DMF Statutes in Kentucky and Maryland In other litigation against states, insurers have challenged the constitutionality of certain aspects of recently enacted legislation imposing a duty to search the DMF in some states. In April, a Kentucky state trial court rejected a challenge to a new state statute requiring insurers to search the DMF and attempt to locate potential beneficiaries, holding that the law is a valid exercise of the legislature s powers to regulate the insurance industry. In its April 1, 2013 decision, the trial court held that the statute neither violated rules against retroactive application nor impaired any vested contractual rights. United Ins. Co. of Am. v. Kentucky (Ky. Cir. Ct. April 1, 2013). The Kentucky statute at issue mandates that insurers search the DMF on a quarterly basis for potential deaths of their insureds, and further requires insurers to follow up on matches by making good faith efforts to confirm deaths, determine whether benefits are due, locate the beneficiaries, and facilitate claims submissions. In rejecting the constitutional challenge to retroactive application, the court held that, because the statute merely confirms beneficiaries rights to proceeds based on premiums already paid by insureds, the statute must be construed as a remedial or procedural requirement not subject to the prohibition against retroactive legislation. And although insurance companies have a reasonable expectation that the state will not alter its contractual obligations, the court further stated that a company has no reasonable expectation that the state will not impose reasonable regulatory requirements designed to enforce the pre-existing contract rights of insureds and beneficiaries. The court stated: [T]he legislature has sought to remedy the problem of insurance companies holding on to funds that should be paid to beneficiaries upon the death of an insured. The traditional industry practice allows insurance companies to stick their heads in the sand and ignore publicly available data regarding the deaths of their insureds, to the detriment of the beneficiaries (and the public). This statute remedies the problem by requiring insurance companies to check publicly available databases and to take good faith steps to notify beneficiaries. 6

The court also held that the law does not impair vested contractual rights because, under the statute, [n]o insurer will be required to pay more than it is already contractually obligated to pay, and no beneficiary will receive more than the insured paid premiums to obtain. On this basis, the court concluded that the statute was well within the scope of the legislature s police powers to regulate the business of insurance, regardless of whether the statute was the best or most efficient way to do so. The insurers have appealed the decision to the Kentucky Court of Appeals. The same insurers who brought the Kentucky litigation have also recently filed a similar suit challenging the constitutionality of the recently-enacted Maryland statute imposing a duty to search the DMF. Conclusion These litigation developments come at a time when unclaimed property issues facing insurance companies are continuing to play out in ongoing audits. Insurance industry practices regarding the use of the DMF are under scrutiny by state officials in multistate market conduct examinations and unclaimed property audits. The outcome of these pending suits may affect whether these issues continue to spill over into litigation. 7