As part of a coordinated national investigation, California state insurance regulators held a hearing on May 23, 2011 to probe one particular life insurer’s claims settlement practices.

Just as in the Florida hearing described in our May 20, 2011 advisory, at issue was the life insurer’s use of the Social Security Death Master File (DMF), a publically-available database containing information on deceased Americans. California’s efforts are part of a larger coordinated effort, organized by the National Association of Insurance Commissioners (NAIC), to determine life insurers’ compliance with state unclaimed property laws and state unfair insurance claim settlement practices acts.  

In attendance at Monday’s hearing were officials from the subpoenaed insurer, California insurance regulators, California’s State Controller, as well as insurance regulators from Florida and Minnesota, among others. The panel took aim at a number of practices that it considered “troubling.” Specifically, the subpoenaed insurer was accused of attempting to boost profits via selective review of the DMF.  

California Insurance Commissioner Dave Jones stated:  

We are troubled by the possibility that insurers may be using death information to boost their finances by stopping annuity payments on one side of the house but not using the same information on the other side of the house to pay policyholders’ beneficiaries who are owed money.  

Importantly, Commissioner Jones on Monday announced a California investigation into the market conduct of the 10 largest life insurance companies doing business in the state. The California Department of Insurance will investigate whether life insurers failed to pay life insurance policy benefits to named beneficiaries even after learning that the insured had died. Commissioner Jones is conducting the investigation jointly with State Controller John Chiang. According to Commissioner Jones’ announcement, the critical issue is whether some insurers use the DMF to cut off payments on annuities when an annuity owner dies but do not use that same source of information to identify life insurance policyholders who died in order to pay their beneficiaries.

Commissioner Jones further stated: The goal of these examinations is to determine whether the insurance industry has engaged in unfair practices in the payment of death benefits under life insurance policies and annuities. Insurance regulators and state controllers across the country are examining life insurance companies to understand whether they are using information they have that indicates a policyholder has died and whether they are paying out benefits appropriately. Initial information from publicly available sources suggests some troubling practices in this area, and we intend to get to the bottom of what appears to be a very troubling trend.

As noted in our prior advisory, a complementing goal of the coordinated national investigation is to determine whether life insurance companies have been complying with their obligations to report and remit to state coffers unclaimed death benefits, matured annuity contracts, and retained asset accounts as required by various states’ unclaimed property laws.  

In contrast to Florida’s unclaimed property laws, California requires only a 3 year statutory dormancy period. In Monday’s hearing, the California regulators directly questioned the subpoenaed life insurer as to when that insurer starts the clock on a state’s unclaimed property dormancy period.  

We expect these inquiries to continue with numerous insurers likely to receive subpoenas or otherwise be targeted for examination. While it appears that Florida and California are taking the lead in the investigation, it is possible that additional hearings will take place in other states. As noted in our prior advisory, it is likely that the NAIC, or individual states, may propose regulations to clarify this issue. However, the differing language among state unclaimed property laws will likely present a challenge in terms of regulatory jurisdiction and a uniform solution. We will continue to monitor developments in this ongoing investigation and provide updates as necessary.