Since January 1, 2013, legislators in seven states have introduced bills and/or enacted laws addressing unclaimed life insurance benefits and the procedures to be implemented by life insurers in order to locate beneficiaries of deceased insureds. The laws and bills generally follow the NCOIL (National Conference of Insurance Legislators) Unclaimed Life Insurance Benefits Model Act (the “NCOIL Model”), which was adopted by NCOIL in July 2012. Thus far in 2013, laws in Montana, Nevada, New Mexico, North Dakota and Vermont have been enacted and there also were bills introduced in Massachusetts and Rhode Island.1 While the state legislation varies on certain provisions and effective dates, each is based upon the NCOIL Model. The NCOIL Model was also used as the base for laws adopted in Alabama, Kentucky and Maryland in 2012.
New York adopted a law in 2012 regarding unclaimed life insurance benefits, but the New York law was not based on the NCOIL Model. New York amended and clarified its law in 2013.2 In May 2012, the New York Department of Financial Services promulgated regulations interpreting the New York law.3 In addition, Alabama amended its law in 2013 to clarify several important points, including the scope of the law and a change in the date by which an insurer’s first comparisons of its internal records with the U.S. Social Security Administration’s Death Master File (“DMF”) or a similar database are to be completed.
The foregoing legislative activity follows a National Association of Insurance Commissioners’ Task Force’s investigations into (i) insurer efforts to identify deceased life insureds and to locate beneficiaries and (ii) how such efforts compare to insurers’ searches in the context of annuity payments which terminate at the death of the annuitant. As a result of such investigations, six life insurers to date have made payments on previously unpaid life insurance benefits on policies and agreed to conduct searches in the future and implement procedures to locate beneficiaries.4 This process is now memorialized in the laws and bills. However, if these eleven states are representative, the variations in laws may create a tangled web for life insurers to manage. It may be challenging for multi-state insurers to create and implement a unified compliance regime in this emerging area of the law.
The most significant issue raised by the NCOIL Model and the state laws that follow its approach is the imposition of a new extra-contractual obligation on life insurers to compare in-force life policies to the DMF. This arguably constitutes a “retroactive” change to existing contracts and has resulted in a recent constitutional challenge to the Kentucky law, which has the earliest effective date (January 1, 2013).5 The retroactivity of such provisions has also caused the sponsor of the Alabama law to propose a change to the law’s original “retroactive” approach to provide for comparisons on a “prospective” basis only; the change was enacted in Alabama in May 2013. Similar constitutional challenges could occur in other states as their Acts become effective. Such activity might prompt other legislators revisit the use of the existing NCOIL Model’s retroactive approach.
Insured and Beneficiary SearchesLike the NCOIL Model, the eleven states’ laws and bills require insurers to conduct searches of life insurance policies. In particular, the insurers are required to compare the information in their internal records to the DMF or a similar database in order to identify deceased insureds where no claim for death benefits has been made. Then, if it appears that an insured may be deceased, the insurer is to verify the death and attempt to locate beneficiaries.
There are a number of provisions in these laws and bills that differ from the NCOIL Model.
Frequency of SearchesWhile the NCOIL Model requires an insurer to compare its records with the DMF or a similar database on a semiannual basis, some states have a search frequency of quarterly or have designated a specific date by which the first comparison must be completed. In North Dakota, the initial comparison must be completed by November 1, 2014. Alabama requires the first search to be completed by January 1, 2019, with updated searches every three years thereafter. In contrast, Kentucky requires quarterly searches and New York requires at least an annual search of the full DMF, with at least quarterly searches of the DMF update files (however, the latter searches may be performed semiannually instead, upon the approval of the Superintendent upon a demonstration of hardship).
Scope of the LawsSeveral states address application of the law in the case of life insurers that issue products on a multi-state basis. The Alabama law, as recently amended, applies to policies delivered in Alabama and that are issued on or after January 1, 2016; i.e., on a “prospective” basis versus the NCOIL Model that applies retroactively to in-force life policies. The Maryland law applies to insurers that issue, deliver, or renew a policy of life insurance in Maryland. The New York law applies to (i) New York-domiciled insurers and (ii) insurers issuing or delivering policies into New York. With respect to policies delivered into another state, an insurer can be in compliance by complying with the laws of the state of issuance or delivery (if the New York Superintendent finds the other state’s law is no less favorable to policyholders than the New York law). Laws and bills in the remaining states, like the NCOIL Model, are unclear as to which of a multi-state insurer’s policies the law will apply. Furthermore, some of the laws and bills apply only to in-force policies and contracts, while others include those that have terminated and lapsed. The Nevada law expressly defines what constitutes a policy that is “in force.”
In a hybrid approach, the New Mexico law states that it applies, with respect to insurers that have not used the DMF in the past, only to policies issued and delivered in New Mexico on or after July 1, 2013. In addition, insurers that have not used the DMF prior to July 1, 2013 are to provide to the Superintendent of Insurance, by July 1, 2016, a list of all policies issued in New Mexico and in force, which would include policies that were issued before the July 1, 2013 effective date of the New Mexico law. The lists of policies are for the use of the Superintendent in assisting consumers to identify lost policies.
Exemptions from Laws The exemptions in the laws and bills also vary from the NCOIL Model, which includes exemptions for life insurance providing a death benefit under employee benefit plans subject to ERISA, federal employee benefit programs, credit life insurance, accidental death insurance, and pre-need funeral arrangements. The NCOIL Model provides that an insurer is to use the DMF to confirm possible deaths of insureds under group life insurance only if the insurer maintains the types of information in its records that are listed in the Model (such as names, dates of birth, and Social Security numbers). The New York law includes only the group life insurance exception of the NCOIL Model, but provides that the Superintendent may exempt by regulation “any other circumstance as determined to be appropriate.”6 The Alabama law employs the exemption list from the NCOIL Model, but also exempts government or church plans and “industrial life” insurance (defined as a policy with a face amount of $2500 or less where premiums are payable monthly or more often).
Non-Model Act ProvisionsThe Nevada and North Dakota laws provide that, either in rules or after notice and a hearing, the Commissioner may (i) authorize an insurer to limit the comparison of the DMF to its files that are electronically searchable; (ii) approve a timeline for the insurer to convert its files into a form that is electronically searchable; (iii) approve a plan of an insurer to comply with the law during a time period and in a manner set forth in the plan; or (iv) (in Nevada only) exempt the insurer from the law (including authorizing less frequent searches than semiannually), upon a demonstration of financial hardship by the insurer. The Nevada, North Dakota and New York laws require each insurer to implement reasonable procedures to account for common variations in data that may otherwise preclude an exact match with the DMF. A number of the laws and bills require insurers to ask for specific information on beneficiary change forms regarding the identification of individual beneficiaries (such as name and contact information). The Nevada law requires the life insurer to ascertain whether a deceased insured purchased other products from that insurer. New York law additionally requires insurers to search in their affiliated insurers’ files for multiple policies on the same person. Under New York law, insurers also must cross-check their files against requests for information from consumers in a new state online “Lost Policy Finder” and must file annual reports with the New York Comptroller’s office concerning policies for which beneficiaries could not be located. While other states have created “lost policy finder” services, New York is the only one of the eleven states to include the implementation of such a service within a bill or statute relating to insurers’ use of the DMF.
Additionally, the Alabama law requires an insurer to use commercially reasonable efforts to locate beneficiaries, in accordance with a plan prepared by the insurer and submitted to and approved by the Department of Insurance, “it being the intent that insurers fashion a program that best fits their business systems while at the same time protecting consumers by assuring reasonable checks are being performed to identify unreported deaths.” As a result of this provision, insurers delivering policies in Alabama will presumably have more input into and control over their internal processes to search for beneficiaries of Alabama insureds than will insurers issuing and delivering products in some other states. Notably, this approach is prospective only.
ConclusionStates likely will continue to introduce bills requiring insurers to increase their efforts to search for deceased insureds and to locate beneficiaries. It remains to be seen whether the states will follow the NCOIL Model with variations and amendments or whether another approach will gain favor. It will then be up to insurers to create the internal processes and procedures to comply with these varied laws. Depending on such internal processes, some insurers may find it necessary to approach one or more of these states for clarifications, exemptions, determinations, or to seek approval of a plan as referenced in some of the states’ laws. One possible alternative for dealing with variations of state laws would be for a multi-state life insurer to comply using the “lowest common denominator” from the most onerous state law and then applying it across all the affected states or even on a nationwide basis.
1 See Massachusetts HB 20; Montana SB 34, Nevada AB 226, New Mexico SB 312, North Dakota HB 1171, Rhode Island H 5452, and Vermont HB 95. 2 See New York AB 9845/SB 6943, adopted on December 17, 2012, as amended by New York AB 1831, adopted on March 15, 2013. 3 See New York Regulation 200, published at http://www.dfs.ny.gov/insurance/r_emergy/re200t.pdf. The implementing New York regulations were promulgated on an emergency basis and as such, expired 90 days after the date of filing with the New York Secretary of State. The regulations were re-promulgated several times, most recently in May 2013. 4 To date, eighteen life insurers have entered into settlements with state unclaimed property agencies. It is important to note that settlements with unclaimed property agencies are separate from and different than settlements with insurance regulators. While eighteen life insurers have entered into settlements with unclaimed property agencies, to date, only six have entered into settlements with insurance regulators. 5 United Life Ins. Co. of America et al. v. Commonwealth of Kentucky et al., Civ. Action No. 12-CI-1441 (Ky. Cir. Ct. Franklin County 2012).6 The New York regulation has over a dozen exemptions from the requirement for an insurer to locate insureds and beneficiaries; many of the exemptions relate to policies under which the full benefits have already been paid, whether due to surrender, maturity, rescission, or other circumstances.
Sidley is one of only a few internationally recognized law firms to have a substantial, multidisciplinary practice devoted to the insurance and financial services industry. We have approximately 85 lawyers devoted exclusively to providing both transactional and dispute resolution services to the industry, throughout the world. Our Insurance and Financial Services Group has an intimate knowledge of and appreciation for the industry and its unique issues and challenges. Regular clients include many of the largest insurance and reinsurance companies, brokers, banks, investment banking firms and regulatory agencies, for which we provide regulatory, corporate, securities, mergers and acquisitions, securitization, derivatives, tax, reinsurance dispute, class action defense and other transactional and litigation services.
To receive Sidley updates via email, please click here.
This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South Dearborn, Chicago, IL 60603, 312.853.7000. Prior results do not guarantee a similar outcome.