Unclaimed property enforcement actions against life insurance companies continue in a variety of states, where the focus is turning from the largest to mid-size insurance companies.

Background. This controversy started in 2008, when the California Comptroller retained a Connecticut based outside auditing firm, Verus Financial LLC, based in Waterbury, Connecticut, to examine the payment practices of the 21 largest life insurance companies as they pertained to the California unclaimed property reports filed by these companies. The audit expanded to include a variety of states, with Florida, Illinois, North Dakota, New Hampshire and Pennsylvania serving as lead states in the examinations of the largest life insurance companies. A National Association of Insurance Commissioners (?NAIC?) Task Force was established to oversee the examinations.

The auditors alleged that life insurance companies must utilize the Social Security Administration’s Death Master File (“DMF”) to determine the death of individuals receiving annuities for the propose of terminating those annuities.   They allege that when, because of a death, the policyholders stopped paying premiums, insurance companies improperly drew down policy cash reserves to pay premiums until the cash reserves were exhausted, and then cancelled the policy.  According to the auditors, this resulted in a failure to properly report to state unclaimed property authorities amounts that may have otherwise been due under policies if the insurance companies had ascertained the date of death of policyholders.

But, under most state laws, there is no requirement that insurers check the DMF to determine whether any insured had died. Moreover, most state laws also require the submission of a death certificate to trigger payout on a life policy. Thus the authority for the position of the taxing authorities, except in a few states, not really supported by the law.

Multistate Settlement Agreements and New Focus on Mid-Sized Life Insurance Companies. A number of large insurance companies have recently entered multi-million dollar settlement agreements with the NAIC task force regarding their unclaimed property liabilities. States are now turning the focus of their investigation from the largest insurance companies, on which they have previously focused their audits, to mid-size life insurance companies.

Commentary.  Even though settlement agreements have been reached in unclaimed property enforcement actions against the largest life insurance companies, it is clear that with the expansion of enforcement actions to include mid-size insurance companies, the legal controversy in this area will continue for some time to come. As such, it is advisable that life insurance companies, which have not already recently done so, examine state law and their unclaimed property reporting policies, and determine whether these policies are up-to-date.