A Tale of Two Standards: Unclaimed Property Upheaval in the Insurance Industry Prepared by: Jamshid Ebadi, Director; Michael Goldman, Director; and Sam Schaunaman, Senior Manager, Abandoned and Unclaimed Property, Ryan (Note: This article was originally published in the Journal of Multistate Taxation and Incentives (Thomson Reuters/Tax and Accounting) Volume 24, Number 7, October 2014, and is reprinted with permission.) All states, as well as an increasing number of foreign countries, have laws regulating the reporting and remitting of unclaimed property to the respective jurisdictions. Unclaimed property has become an increasingly significant source of revenue for the states. One article notes that a sum of over $40 Billion in unclaimed property is currently being held by the states. 1 One trend in the area of unclaimed property has been the increased use of contract auditors by the states over, particularly, the past ten years. In the insurance industry, audits of a large number of insurance companies over the past four or five years, led by a leading contract audit firm, have resulted in a number of settlements by insurers with most states. As a result of these settlements, and subsequent changes in many state laws, the traditional standard for when life insurance proceeds became due and payable upon the death of an insured or annuitant under many state unclaimed property laws has undergone tremendous change and is rapidly evolving into a different standard. In this article, the authors will examine the traditional standard for when life insurance proceeds became due and payable upon the death of an insured or annuitant, discuss some of the highlights of the multistate audits of insurance companies for compliance with unclaimed property laws, analyze litigation and legislative updates emanating in part from the aftermath of the multistate audit settlements, and provide concluding comments. Traditional Standard for Escheatment of Life Insurance Proceeds For many years, most states followed the traditional standard, whereby life insurance policies became due and payable upon death when either (i) the insurance company had knowledge of such death, or (ii) the insurance company received a claim furnishing proof of death. Our understanding is that many life insurance contracts, under the traditional standard, have had language indicating that, after receipt of proof of death while the policy was in force, would then generally pay the proceeds in force to the beneficiary under the contract, subject to the provisions of the policy. Indeed, this type of language was generally required under the insurance statutes of most states. For example, West Virginia s Insurance Code, provides in pertinent part that no policy of life insurance shall be delivered or issued for delivery in West Virginia unless it contains in substance all of the provisions required by sections three to fifteen, inclusive, of this article ; one such requirement in the West Virginia law provides that there shall be a provision that when a policy shall become a claim by the death of the insured settlement shall be made upon receipt of due proof of death, or not later than two months after receipt of such proof. 2 Similarly, the Ohio Insurance Code has a provision requiring all life insurance policies to be payable upon receipt of due proof of death. 3 In other words, the public policy found in these provisions of state insurance 1 See Douglas Lindholm and Ferdinand Hogroian, The Best and Worst of State Unclaimed Property Laws, COST Scorecard on State Unclaimed Property Statutes (October 2013). The document indicates that figure is nearly double the $22.8 Billion states held just a decade ago. 2 See West Virginia Insurance Code Sec. 33-12-2; see also W. Va. Ins. Code Sec. 33-13-14. 3 See Ohio Rev. Code Sec. 3915.05(K).
codes was that an insurer s liability was conditioned upon the presentation of a claim (i.e., a claimant was required to provide an insurer with notice of death which would give rise to a liability under a particular policy). Discussion of Recent Insurance Company Unclaimed Property Audits Emergence of a New Standard As reported by various states, multistate audits of many of the larger insurance companies, conducted in many instances by a third-party audit firm, were undertaken to determine compliance with state unclaimed property laws. In some instances, these audits combined insurance market conduct examination standards with unclaimed property compliance standards. As the audits progressed and settlement negotiations ensued with respect to a large number of the audits, the audits presented a challenge to commonplace industry practices related to how companies complied with the unclaimed property laws of the various states. One of the perceptions by some of the states was that companies were not being diligent enough, or perhaps were not taking advantage of newer technological changes, in conducting periodic examinations of life insurance policy holders to determine if they were either deceased, or in excess of the applicable limiting age, that would make the policy payable for purposes of the unclaimed property laws. For example, it was asserted on some of the audits that this information was readily available by searching the Social Security Administration s Death Master File (DMF), or other third-party database, to determine if any of their policy holders had died. In other instances, there were allegations that asymmetric conduct had been used by insurers with regard to the DMF. 4 As reported by a wire service, one of the earlier audit settlements reported was a release by the Florida Department of Financial Services (DFS), indicating that a multi-million dollar settlement with Prudential Insurance Company and its affiliates had been reached with DFS. As indicated in the article reporting the settlement, Prudential agreed in part to [o]verhaul its computer system and revise its business practices to better utilize the Death Master File to identify life insurance beneficiaries. 5 California issued several releases, as well from time to time announcing it too had reached agreement with various life insurance companies over alleged unpaid life insurance benefits. 6 A number of the larger insurance companies reached global settlements of these audits by settling with a number of states. In many instances, several key points were agreed to in the global settlements. First, it was agreed that periodic searches would be used by the settling insurance companies, utilizing the DMF or similar third-party database. Second, it was agreed that whether a policy was due and payable would be based on a new standard (i.e., the actual death of the insured, as determined by periodic searches of the DMF or other third-party databases). Finally, new system changes were agreed to be made to accommodate these changes, with periodic reporting by the insurance company to applicable state authorities. For example, as reported by one wire service company, the Florida Office of Insurance Regulation said it is one of 23 states to have reached a settlement with John Hancock Life Insurance Co. over the company s beneficiary payment practices. As part of the $3 million settlement, John Hancock has agreed to pay millions in restitution to revise its business practices related to unclaimed property for life insurance products and to revise its use of the U.S. Social Security Administration s Death Master File. 7 4 As defined in one state s law, the term asymmetric conduct is said to mean an insurer s use of the DMF prior to July 1, 2015, in connection with searching for information regarding whether annuitants under the insured s annuities might be deceased, but not in connection with whether the insureds under its policies might be deceased. See Tenn. S.B. 2516, Sec. 1, effective July 1, 2015. 5 See Prudential Agrees to $17M Unclaimed Property Settlement, by Arthur Postal and Elizabeth Festa, States News Service, February 3, 2012. Other details of the settlement were delineated in the article, one of which was to [p]rovide quarterly reports for the next three years to the Florida Office of Insurance Regulation, DFS and the Florida Office of the Attorney General with updates on information specific to Prudential s implementation of the agreement. 6 See, e.g., California State Controller s Office release dated June 7, 2013, titled Controller Reaches Settlement with Transamerica, New York Life, and 9 Others. The release is available on the Controller s website see www.controller.ca.gov. 7 See Jeff Jeffrey, Florida Settles with John Hancock for $3 Million as National Unclaimed Property Probe Expands, BestWire, May 18, 2011.
Another wire story reported on a John Hancock statement discussing its settlement agreement with Florida, in which it was stated that [t]he new standards established by the Agreement are well beyond those required by law or regulation, and that [u]nder the terms of the Agreement, John Hancock is taking additional steps to ensure that policyholders beneficiaries are located, and if not, the funds are paid over as abandoned property to the states 8 In addition, such wire story reported that John Hancock had signed a Global Resolution Agreement ( GRA ) with Verus, a contract auditor helping states find beneficiaries and abandoned property. The John Hancock statement, as reported by the wire story, stated that [t]he GRA includes an extensive plan and timetable to identify abandoned property, conduct due diligence, and report and remit the property to states in those instances where the owner cannot be located. Further, the GRA includes a set of prospective business practices, applicable to all states, which are beyond what current law requires related to abandoned property. 9 In summary, the new standard that seemed to emerge from many of the settlements was that whether a policy was due and payable would be based on the death of the insured. Also, an insurer would make affirmative efforts to periodically utilize third-party databases, such as the DMF, to search for information as to whether any policyholders or annuitants had died. However, at the time many of the larger insurers were entering into these global settlements with a number of states, many smaller insurance companies either had not yet been audited, were in the early stages of an audit, or weren t particularly interested in agreeing to exactly the same kinds of conditions delineated in the earlier settlements. Discussion of Litigation Surrounding the Two Standards As a result of the increased audit activity in this area, and, in some cases, perhaps because of a perception that states and/or their contract auditors were seeking to impose additional regulatory requirements without a statutory basis to do so (e.g., the requirement that a life insurance company conduct periodic searches of the DMF), it has been left to the judiciary to decide some of the more important emerging issues in this area. In a case out of West Virginia, State Treasurer John Perdue ( Plaintiff ) filed approximately 69 individual lawsuits against life insurance companies doing business in the state of West Virginia ( Defendants ). Plaintiff alleged that the Defendants had failed to comply with certain provisions of the West Virginia Unclaimed Property Act (UPA) and had failed to conduct annual examinations of life insurance policies to determine if the policy holders were deceased or three years past the applicable limiting age that would render a policy payable under the UPA. The Complaints sought to assess fines, penalties, interest, and attorneys fees against the Defendants for their alleged failure to comply with the UPA and sought injunctive relief to require the Defendants to immediately adopt policies and procedures utilizing the DMF or other similar databases. In a detailed Order dated December 27, 2013, the West Virginia Circuit Court, Putnam County (the Court ) granted the Defendants Motions to Dismiss the case and ordered the Complaints filed by Plaintiff dismissed with prejudice. 10 Highlights of the Circuit Court s Order are summarized as follows. The Court essentially stated the key legal issue in the case was whether or not the UPA created a statutory duty obligating life insurance companies to periodically search the DMF or other similar databases to determine if any of their policy holders have died. The Order concluded the UPA did not create any statutory duty to do so for several reasons. First, it noted that Article 13 of the West Virginia Insurance Code ( Insurance Code ) governs life insurance in the state and that the UPA and the Insurance Code should be read in conjunction with 8 See John Hancock Statement on Settlement with State of Florida Regarding Abandoned Property, PRNewswire, May 18, 2011. 9 Id. 10 See Circuit Court of Putnam County, West Virginia, Civil Action No. 12-C-288 (with each of the 60 some suits bearing a different Docket number), Order of Chief Judge Joseph K. Reeder, December 27, 2013. Note: Our understanding is that an appeal has been filed by the State in this case.
one another to the extent they are consistent and capable of being applied in a uniform manner. In analyzing the Insurance Code, it seemed clear to the Court that there could be no claim for payment of a life insurance policy until the insurance company is provided receipt of due proof of death. Thus, the Order noted that the Insurance Code conditions an insurer s liability upon the presentation of a claim. In turn, for there to be a claim, it stated that a claimant must provide an insurer with notice giving rise to liability under a policy. In other words, the furnishing of a proof of claim was viewed by the Court as a condition precedent to recovery. As such, the Court indicated that under the UPA, there are only two statutory triggers for the unclaimed property dormancy period: (i) receipt of due proof of death, and (ii) the limiting age. Second, the Court found it significant that other court cases it discussed interpreted provisions very similar to the UPA and agreed with the Court s conclusion that insurers lack any obligation to search the DMF. 11 Third, the Court noted that life insurance death benefits are an inherently different property type from other types of unclaimed property. Since the West Virginia Insurance Code conditions payment upon receipt of due proof of death, the Court stated, for life insurance proceeds, there is no property subject to or reportable under the UPA until the beneficiary has made a valid claim and submitted proof of death or the insured obtains the limiting age. Significantly, the Court stated the due proof of death requirement is not a mere administrative requirement for collecting an obligation that is already fixed and certain. Rather, it is an essential ingredient for creating the obligation (i.e. the property ) in the first place. Finally, the Court noted that both Plaintiff and Defendant are in agreement that there is no provision in the UPA which specifically requires life insurance companies to use the DMF or other thirdparty database to search for information about the death of insureds. However, the State Treasurer argued there was a good faith duty under the UPA which would require life insurance companies to search the DMF. The Court rejected the State Treasurer s argument, stating that [e]very court that has considered this issue has ruled that no implied duty arising from a life insurance policy imposes any obligation on a life insurance company to proactively search the DMF or any other third-party database to determine whether an insured under an outstanding life insurance policy has died. In another significant court decision in this area, a federal court decision ruled that John Hancock Life Insurance Company and John Hancock Life & Health Insurance Company had not violated any fiduciary or other duty by failing to utilize the DMF. It held that John Hancock s practice of requiring the life insurance policy beneficiary to submit proof of death before payment comports with both Massachusetts and Illinois law. 12 In addition, Plaintiff in that case sought to argue that John Hancock, by entering into a Global Resolution Agreement (GRA) with 30 states and the District of Columbia, had caused its obligations under established law to be altered, and Plaintiff was thus a third-party beneficiary under the GRA. The Opinion of the U.S. District Court rejected that argument and stated [t]he GRA is between John Hancock and the States, and nothing suggests that they intended Feingold as a third party beneficiary. Feingold s reliance on the GRA does not pass muster. 13 Thus, the U.S. District Court granted John Hancock s Motion to Dismiss. In another recent development in this area, the Florida Department of Financial Services (DFS), in response to a request for a Declaratory Statement from Thrivent Financial for Lutherans for a statement that life insurance funds become due and payable when the insurer receives proof of the insured s death and surrenders the policy, declined to make such a statement. Rather, DFS rendered a Declaratory Statement which essentially ruled, as summarized by a recent court decision, that DFS issued a declaratory statement finding that life insurance funds are due and payable upon the death of an insured, at which time the dormancy period is automatically triggered. DFS further found that section 11 See Andrews v. Nationwide Mutual Ins. Co., 2012 WL 5289946 (Ohio Ct. App. October 25, 2012), further appeal denied 986 N.E. 2d 31 (April 24, 2013), and Total Asset Recovery Services LLC v. MetLife Inc., Case No. 2010-CA-3719 (Fla. Cir. Ct. August 20, 2013). 12 See Feingold v. John Hancock Life Ins. Co., 2013 U.S. Dist. LEXIS 117070 (D. Mass. August 20, 2013). Note: Due to the limited scope of this article, some of the other cases in this area are not discussed herein. 13 Id.
717.107 created an affirmative duty on insurers to use due diligence in searching databases, such as the SSA s Death Master File, to determine if any of its insureds has died. 14 The decision of the DFS was appealed to the Florida Court of Appeal, First District, which rendered an important recent decision in this area. The decision essentially overturns the result reached in the DFS Declaratory Statement. In a unanimous decision, the Florida Court of Appeal stated: We find DFS interpretation is clearly erroneous because it ignores the plain language of the statute. Accordingly, we reverse. 15 DFS argued that either the law required the insurers to search the SSA Death Master File, or the court should impose an affirmative duty on insurers to do so. The Court of Appeal ruled that nothing in the law imposes an affirmative duty on insurers to search these death records, and it declined to impose a duty based on policy considerations contrary to the plain language of the statute. 16 In effect, the Florida Court of Appeal ruled that the traditional standard was still the law in Florida, ruling that [l]ife insurance funds become due and payable under subsection 717.107(1) at the time the insurer receives proof of death and surrender of the policy as contemplated by section 627.461; or, funds become due and payable when the insurer knows that the insurer has died, or when the insured attained or would have attained the limiting age. 17 Interestingly, the Opinion of the Court of Appeal noted that the Florida Disposition of Unclaimed Property Act, Sec. 717.107, referenced the time at which life insurance proceeds become due and payable as established from the records of the insurance company, and that the parties also rely on section 627.461, Florida Statutes, which sets forth requirements for insurance contracts. The Court then noted that such section of law states: Every contract shall provide that, when a policy becomes a claim by the death of the insured, settlement shall be made upon receipt of due proof of death and surrender of the policy. 18 Legislative Trends Involving the New Standard The discussions over which standard will apply in the insurance arena have shifted, in many instances, to the state legislatures. As indicated in a footnote in the above-mentioned West Virginia case, as of December 27, 2013, nine states had already enacted DMF requirements into their state unclaimed property laws 19, and legislation continues to be enacted in state legislatures in 2014 to enact similar requirements. In a number of cases, state legislatures enacted a form or version of the Model Unclaimed Life Insurance Benefits Act, as that Model Act was adopted by the National Conference of Insurance Legislators (NCOIL). 20 In general terms, such Act requires an insurer to perform a comparison of its 14 See Thrivent Financial for Lutherans v. State of Florida, Dept. of Fin. Services (Fla. Crt. App., 1 st Dist.), 2014 Fla. App. LEXIS 11923, August 5, 2014. 15 Id. 16 Id. 17 Id. 18 Id. 19 Footnote 10 to such Order, which was dated December 27, 2013, lists the following states as having statutory requirements for life insurance companies to periodically compare their insureds under their in-force life insurance policies against the DMF: Alabama, Kentucky, Maryland, Montana, Nevada, New Mexico, New York, North Dakota, and Vermont. In addition, the authors note that a number of other states have enacted legislation in 2014 requiring use of the DMF, including, but not limited to, Georgia (H.B. 920, effective January 1, 2015), Indiana (S.B. 220, effective July 1, 2014), Iowa (S.B. 2342, effective July 1, 2015), Mississippi (S.B. 2796, effective July 1, 2015), Tennessee (S.B. 256, effective July 1, 2014), and Rhode Island see FN 26. 20 As a Model Act, such Act is normative in nature and does not become the law in any one jurisdiction unless and until adopted by a particular state legislature. We reviewed an NCOIL Release dated March 9, 2014, which indicated it has set up an Unclaimed Property Task Force which is soliciting proposed amendments to the Model Act. The Release stated NCOIL is an organization of state legislators whose main area of public policy interest is insurance legislation and regulation. Most legislators active in NCOIL either chair or are members of the committees responsible for insurance legislation in their respective state houses across the country. Additional information about NCOIL can be found at its website www.ncoil.org. An NCOIL Release we reviewed dated July 14, 2014, indicated that, as of that date, 15 states have adopted a version of the Model Unclaimed Life Insurance Benefits Act. In addition, such Release, titled NCOIL Task Force Enhances Unclaimed Property Model, Plans Final Action at Next Meeting,
insureds in-force life insurance policies and retained asset accounts against a Death Master File, on at least a semi-annual basis, to identify potential matches of its insureds. For potential matches identified as a result of the DMF match, such Act then states that an insurer, within 90 days of such match, must complete good faith efforts to confirm the death of the insured or retained asset account holder against other available records and information and, if it is determined that benefits are due in accordance with the policy or contract, delineates additional steps to ensure that such benefits are paid or, if the beneficiaries or owners cannot be found, to see that the funds escheat to the state. 21 In addition, our understanding is that the National Association of Insurance Commissioners has created an Unclaimed Life Insurance Benefits Working Group to study issues in this area and to determine if recommendations should be made to address unclaimed death benefits. 22 In reviewing several of the pieces of legislation implementing the new DMF standard usually a version of the NCOIL Unclaimed Life Insurance Benefits Act several comments are in order. First, a number of states have enacted legislation requiring use of the DMF with a deferred effective date, presumably to give insurers an opportunity to alter their processes and procedures in order to accommodate the new changes. 23 Second, the legislation generally requires an insurer to perform a comparison of its in-force policies, annuities, and retained asset accounts issued in the state against the DMF on a periodic basis usually a semi-annual basis to identify potential DMF matches. Third, a window period is identified in the legislation for an insurer who has obtained knowledge of the death of a person via usage of DMF to take reasonable steps to confirm the death, determine whether benefits are payable, and to locate the beneficiary or other authorized representative on the policy. 24 Fourth, at least in Mississippi, the law, upon the effective date of S.B. 2796, provides that the Commissioner of Insurance has exclusive authority to examine the records of insurers to determine if they have complied with the Mississippi escheat and unclaimed property laws. 25 Fifth, several states provide that the Commissioner of Insurance may make an Order exempting an insurer from the DMF requirements upon a demonstration of financial hardship by the insurer. For example, recent Rhode Island legislation, which adopted the Unclaimed Life Insurance Benefits Act, expressly authorized the state s Insurance Commissioner, in his or her reasonable discretion, to enter an Order exempting an insurer from the DMF comparisons, or otherwise permitting an insurer to perform such comparisons less frequently than semi-annually upon a demonstration of financial hardship by the insurer. 26 Sixth, some states provide that if an insurer has identified a person as deceased through a DMF search or other source, has confirmed such information through a secondary information source, and is then unable to locate a beneficiary after conducting reasonable search efforts during the period of up to one year after the insurer s validation of the DMF match, then the insurer is authorized to report and remit the proceeds of such policy, annuity, or retained stated that significant progress was made on amendments to such Model Act at the NCOIL 2014 Summer Meeting in Boston, and that a final vote on such amendments would be made at the November 2014 National Meeting in San Francisco. The Release stated that Members of the Task Force also voted in favor of an amendment that allows life insurers to make use of DMF updates as they conduct searches. New provisions require use of the full DMF once a year and allow for searches via the update files thereafter. Previously, the model required all searches to be conducted using the full DMF. 21 See NCOIL Model Unclaimed Life Insurance Benefits Act, Section 4. 22 See the NAIC website www.naic.org for additional information on this issue. 23 See, e.g., Mississippi S.B. 2796, effective July 1, 2015; Georgia H.B. 920, effective January 1, 2015; Iowa S.B. 2342, effective July 1, 2015; and Rhode Island S.B. 2308, effective January 1, 2016. 24 Tennessee and Mississippi, for example, each provide for a 90-day window period. 25 See Mississippi S.B. 2796, Sec. 4(7). 26 See Rhode Island S.B. 2308 and H.B. 7031, approved by the Governor on June 30, 2014, effective January 1, 2016; see also Mississippi S.B. 2796, Sec. 4(8).
asset account to the state as unclaimed property on an early reporting basis, without consent by the state. 27 Conclusion The rules pertinent to unclaimed property reporting of life insurance proceeds have become more complex over the past few years. For companies hoping to find a one size fits all style of unclaimed property reporting, that scenario is gone. Insurers will be forced to carefully examine each state s law to ascertain if it follows the traditional standard, the new standard, or some combination thereof. 28 In addition, for a number of states, there will likely be one set of rules for reporting for prior periods and new rules for reporting after the effective date of new legislation for states that have adopted a version of the Unclaimed Life Insurance Benefits Act. 29 In addition, for those companies who can make a demonstration of financial hardship, opportunities exist to seek administrative relief from insurance commissioners. Also, life insurers should realize that, in some states, part of the state s unclaimed property law will be enforced by audits conducted by the Commissioner of Insurance and part by the traditional agencies that administer the unclaimed property laws. Contacts Jamshid Ebadi Director Abandoned and Unclaimed Property 720.524.0022 jamshid.ebadi@ryan.com Michael Goldman Director Abandoned and Unclaimed Property 212.847.0109 michael.goldman@ryan.com Sam Schaunaman, J.D. Senior Manager Abandoned and Unclaimed Property 918.518.5179 sam.schaunaman@ryan.com Note: Ryan LLC is neither a CPA firm nor a law firm. 27 See Mississippi S.B. 2796, Sec. 5; see Tennessee S.B. 2516, Sec. 1 the latter implies there may be some discretion concerning whether the early reporting is required. 28 In addition, federal law will need to be considered. In reviewing an NCOIL Release dated March 9, 2014, it stated that In a March 7 letter to federal regulators, NCOIL President Rep. Greg Wren (AL) reiterated the critical need for continued commercial access to the DMF. The letter was sent in a response to a directive to restrict access to the DMF from the OMB to the Dept. of Commerce, stemming from the Bipartisan Budget Act of 2013.Rep. Wren wrote that he was encouraged to learn that OMB is supportive of an interim certification process for commercial users of the DMF while a final certification process is developed. 29 See recent court decision of United Insurance Company of America et al. v. Commonwealth of Kentucky et al. 2014 Ky. App. LEXIS 139 (August 15, 2014), ruling that Kentucky s adoption of the Unclaimed Life Insurance Benefits Act could only be applied to policies executed after January 1, 2013, the effective date of the Act, and could not be applied retroactively.