Insurance regulators and state attorneys general, alike, have been investigating life carriers’ alleged failure to identify dormant policies where death benefits might be owing and, to the extent beneficiaries cannot be located, timely escheat policy benefits to the state. Concern has been expressed that policy stakeholders can get “lost” over time, resulting in the cannibalization of policy values when death benefits should have allegedly been paid instead. Of particular concern is life insurers’ apparent use of public information to identify deceased annuitants (i.e., to cut off payments) but ignoring such information to identify deceased insureds (i.e., giving rise to policy payment obligations).
The issue is receiving ever increasing national attention as regulators investigate whether life insurers’ alleged actions violate unclaimed property and unfair claims settlement practices laws which can provide for punitive damages. Insurance regulators have characterized the issue as “serious” and the issue is sure to land at the door of most, if not all, life carriers eventually. Life companies are well counseled to investigate their internal policies and get their houses in order before the government – or private plaintiffs – come knocking. As this article is going to print, at least four such private plaintiff class action lawsuits have already been filed.
Empty State Coffers
In 2008, a little known Connecticut auditing firm, Verus Financial, LLC pitched a number of cash strapped states on the idea of identifying unclaimed life insurance benefits that could be seized by the states. According to the NAIC, unpaid life insurance benefits potentially exceed $1 billion nationwide. Eventually, 35 states signed up with Verus, which allegedly gets a 10.5% cut of the states’ take. Verus is now reportedly auditing as many as 24 of the nation’s largest life carriers.
During the audits, it was uncovered that some insurers were using publically available death roll information to cut off annuity obligations but were not using that same data to identify unclaimed death benefits. As a result, insurance regulators began to question life insurers’ obligations to affirmatively identify deceased insureds. In late April 2011, John Hancock became the first to announce a settlement with 23 states on the issue. Hancock, which has denied any wrongdoing, reportedly has agreed to restore the value of 6,400 policies dating to 1992 and to develop a better method of identifying deceased insureds and policy beneficiaries.
The NAIC Task Force
The NAIC has also formed a task force to help coordinate a formal examination of the issue. The task force includes insurance commissioners from California, Florida (chair), Illinois, Iowa, Louisiana, New Hampshire, New Jersey, North Dakota, Pennsylvania and West Virginia. “State regulators are committed to reviewing the full extent of these practices,” said Susan E. Voss, NAIC President and Iowa Insurance Commissioner. “We intend to coordinate multi-state examinations to effectively utilize our state resources in achieving resolution of these issues.”
Florida Insurance Commissioner Kevin McCarty has stated that multi-state examinations will be ongoing, and will initially focus on the top 40 life insurance underwriters, comprising 92 percent of the U.S. life insurance market. Commissioner McCarty is president-elect of the NAIC.
The Public Hearings
In coordination with the Florida Office of Insurance Regulation (FLOIR) and the California Department of Insurance (CDOI), the NAIC task force conducted two joint public hearings designed to review industry claim settlement practices and compliance with unclaimed property laws. Much of the inquiry at both hearings related to life insurers’ use of the Social Security Administration’s Death Master File (DMF), which is a publically-available database containing information on deceased Americans.
The Regulatory Investigations Continue
In conjunction with the State Controller, the CDOI is investigating the 10 largest life insurance companies doing business in California. According to CDOI Commissioner Dave Jones, the critical issue is whether some insurers use the DMF to cut off payments on annuities, but do not use the DMF to identify life insurance policyholders who died. Commissioner Jones characterized this as “a very troubling trend.”
The FLOIR also stated that it intends to determine whether these or other similar industry practices violate Florida’s unfair claims settlement practices law. Florida regulators have further noted that life insurers “cannot fail to identify deceased insureds and settle claims for death benefits due under their policies based on information in their records,. . .or otherwise available to them. They also cannot lawfully terminate policies or continue to pay themselves premiums where they know or have reason to know that the insureds have died.”
The New York Attorney General Subpoenas
In late June 2011, the New York Attorney General began issuing subpoenas to life insurers concerning their use of the DMF and compliance with, inter alia, New York’s abandoned property laws. The subpoena was issued to ten insurers and broadly seeks documentation and information concerning: the insurers’ policies and procedures for locating, notifying, or otherwise contacting policyholders, insureds, or beneficiaries of matured life insurance policies. It further seeks information concerning the insurers’ access to, or use of, any death records database.
The New York Insurance Department Steps into the Fray
In July 2011, the New York Insurance Department (the Department) issued a letter mandating that all life insurers in the state check available DMF data to ensure that they are paying death benefits owed. The Department reportedly issued letters to 172 life carriers seeking reports on how effectively the insurers use the DMF and other information to identify deceased insureds. The insurers must report on the results of their review beginning in September 2011 and continuing for six months.
The Department also advised that it is proceeding with efforts to amend New York’s unfair claims practices regulations to require life insurers to perform regular DMF cross-checks and to require life insurers to request more detailed policyholder and beneficiary information to facilitate identifying deceased policyholders.
Statutory Schemes in Play
The NAIC and Attorney General investigations, as well as private plaintiff actions, represent potential exposure to both unclaimed property and unfair claims settlement laws. Both are often based on model language. However, the requirements of each statutory scheme can vary, as can the interplay between unclaimed property laws and state unfair claims settlement laws. A detailed analysis of a particular state’s laws is necessary to accurately evaluate an insurer’s potential exposure.
The Unclaimed Property Angle
A primary component of the NAIC task force investigation is to determine whether life insurance companies are complying with their “fiduciary” obligations to report and escheat to state coffers unclaimed death benefits, matured annuity contracts, and retained asset accounts. For example, Florida’s unclaimed property law provides that matured or terminated life policies are presumed unclaimed if they are unclaimed for more than 5 years after the funds became due and payable. Florida Statutes, §717.107(1). This law further requires life insurers to conduct a “reasonable search” for a lost policyholder. Ultimately, insurers are required to report and remit benefits based on information in their possession (i.e. if they “know” of a death), regardless of whether a claim has been filed, perfected or a death certificate is on file. Florida Statutes, §717.107(3)(a).
In contrast, California requires only a 3 year statutory dormancy period. In the California public hearing, regulators directly questioned as to when the subpoenaed life insurer started the clock on a state’s unclaimed property dormancy period.
What constitutes a “reasonable search” or “knowledge” of an insured or annuitant’s death remains unclear. Similarly unclear is whether a life insurer has an obligation to seek out a beneficiary if the insurer has not been formally presented with a claim. The majority of state unclaimed property laws include different criteria for dormancy periods and the required level of diligence.
Unfair Claims Settlement Practices
State unfair claims settlement practices acts also vary, as can the applicable standards and available damages. For example, punitive damages can be recovered in some states for a violation of unfair claims settlement laws, although again the standards for such awards differ.
In Florida, an insurance company engages in unfair claims settlement practices by: “[f]ailing to adopt and implement standards for the proper investigation of claims,” and “[d]enying claims without conducting reasonable investigations based upon available information.” Florida Statutes 626.9541(i)(3)(a),(d). Furthermore, punitive damages can be awarded in Florida for violation of unfair claims settlement practices laws in certain specific situations.
California similarly provides that an insurance company engages in unfair claims settlement practices by “[f]ailing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies” and “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” Cal. Ins. Code § 790.03(h)(3), (5). In California, punitive damages may be awarded for an insurer’s tortious bad faith only if the insurer is proven, by clear and convincing evidence, to have acted with malice, oppression, or fraudulent intent. Cal. Civ. Code § 3294 (a) & (c).
The Legislative Reaction
In late July, the National Conference of Insurance Legislators announced that it is revising the 2010 Beneficiaries’ Bill of Rights Model to require insurers to periodically check the DMF and to use the same review procedures for both annuities and life insurance. It is likely that the NAIC, or individual states, may also propose new regulations. However, the differing language among state unclaimed property laws and unfair claim settlement laws may present a challenge to a uniform solution.
The impact of this investigation will be wide ranging and will include most, if not eventually all, states and all carriers. Life insurers should consider conducting detailed internal investigations, across all product lines, to determine and identify:
- Company wide policies and procedures for determining when to cease making payment of benefits where such benefits may be
- affected by the death of a measuring life;
- Documents and communications concerning the insurers’ policies and procedures for locating, notifying, or contacting the policyholders, insureds, or beneficiaries of matured life insurance policies;
- Documents and communications concerning the insurers’ access to, purchasing or licensing of any death records database;
- Documents and communications concerning company practices in relation to the escheat of unclaimed property pursuant to state law.
These will continue to be areas of interest for the ongoing NAIC and multi-state investigations, which will eventually touch most, if not all, life carriers. Further, as we are seeing, private party class action lawsuits alleging bad faith and vio¬lations of unfair claims practices are beginning to be filed. Depending upon jurisdiction, such actions will present issues including: the adequa¬cy or standing of purported class representatives, the availability of bad faith or unfair claims prac¬tice causes of action, and the availability of vari¬ous categories of damages.
Conducting internal investigations will put insurers in the best possible position to understand their exposure to a state investigation or market conduct examination. A thorough investigation will also help an insurer effectively field unfair claims practices allegations in potential private party class action lawsuits.