Escheat Probe Continues to Widen

The investigation by multiple states in the claims settlement practices of life insurers appears to be widening and deepening–with no end in sight.

Besides the recently-announced settlements by California and Florida with John Hancock, Metropolitan Life recently announced it is negotiating a settlement of its unclaimed property practices with Florida and Illinois.

As an example of the growing probe, in the settlement with Florida announced May 18, John Hancock agreed to pay $2.4 million for “investigative costs and attorneys fees,” and establish a $10 million fund to pay back beneficiaries of life insurance policies.

In a statement, John Hancock said that in addition to its agreement with Florida, it has agreed to a global resolution agreement with 29 states dealing with the same issue that went into effect June 1.

The $10 million fund will be used to return monies to beneficiaries as they are located, including interest payments owed since the date of death. And, if the beneficiary cannot be identified, the amount owed will be reported to the unclaimed property division of the Department of Financial Services.

In its statement, John Hancock said the agreement “represents a landmark for consumers–one that helps John Hancock maintain its place in the forefront of caring for our insureds and their beneficiaries.”

And, California announced that it has opened market conduct examinations of the unclaimed property practices of seven insurers based throughout the country in addition to John Hancock, MetLife and Nationwide.

“We are troubled about the possibility that insurers may be using death information to boost their finances by stopping annuity payments on one side of their house but not using that same information on the other side of their house to pay policyholders beneficiaries the benefits they are due,” California insurance commissioner David Jones said at a recent hearing on the issue involving MetLife and Nationwide.

More generally, Jones later added, “We want to understand what insurers do to investigate the deaths of their policyholders and pay beneficiaries who are owed money.”

At that same hearing, Florida insurance commissioner Kevin McCarty said he expects that the audits and examinations of the 40 largest insurance groups may go on for another 18 to 24 months.

Beneficiaries and state unclaimed property laws will likely recoup funds “north of $1 billion” from the multi-pronged probe of an apparent industry-wide practice of companies failing to pay some death benefits from insurance policies, McCarty estimated.

He also said that the ultimate result of the multi-pronged investigation will be a “template” that results in guidance and perhaps model laws that ensure that either beneficiaries of life insurance policies or state unclaimed property funds receive the funds.

“At the end of the day, we fully intend to … make sure that promises made (by insurance companies) are promises kept,” McCarty said.

He said the probe was prompted by a determination through audits and other means since 2009 that insurance companies use different policies when determining whether to terminate annuity benefits and life insurance policies because the owners have died.

Besides the issue of whether insurers are more aggressive in determining that an annuity owner has died compared with the owner of a life insurance policy, the issue of retained asset accounts is also creeping into the picture.

In a note to clients regarding retained asset accounts, Sutherland, Asbill & Brennan said that states are also addressing retained asset accounts in their audits, “seeking information that appears to go far beyond the legitimate unclaimed property issues that such accounts may raise.”

Florida Comptroller Jeff Atwater honed in on the retained asset issue during his questioning of MetLife and Nationwide during a Florida hearing last week on the issue.

His questions revealed that MetLife has $12 billion in retained asset accounts. This practice, revealed last year, involves insurance companies placing the proceeds of paid-off life insurance policies into accounts that beneficiaries can access by writing checks.

Nationwide, by contrast, said it did not use the controversial retained asset accounts, but instead puts funds beneficiaries wanted Nationwide to retain in accounts insured by the Federal Deposit Insurance Corporation through its thrift subsidiary.

The RAA issue is coming up at the same time an audit by the Texas Insurance Department showed that insurance companies in Texas that provide RAAs had $2.3 billion in those accounts as of Dec. 31, 2010; that more than 20 percent of those accounts had no activity for more than three years; and 76 percent of those accounts paid interest of less than 1.5 percent.

The Texas audit also showed that 37 insurance companies doing business in Texas, or 49 percent, did not report accounts exceeding three years without account holder contact to the state as unclaimed property.

Moreover, in a May 11 legal alert, Sutherland lawyers contend that “While some of the above positions taken by the states or their auditors do not appear to have current support in insurance law or unclaimed property law, it is possible that insurance regulators, other state officials, and/or plaintiffs’ class action attorneys will seek to press such positions in administrative proceedings or in court.”

The alert also said that Sutherland lawyers have identified at least five plaintiffs’ law firms that are seeking information on insurers that have received press coverage on this issue.

The alert said that “plaintiffs’ firms often follow up on such developments by actively soliciting putative class representatives for class actions.”

The alert said that insurers should be prepared to respond to these regulatory inquiries and the heightened litigation exposure from the plaintiffs’ bar.

“The issues raised will involve the areas of unclaimed property compliance and audit, state regulation, federal securities regulation (in the context of variable products), ERISA, and complex/putative class action litigation,” the alert said.

The intense interest in the investigations, currently involving more than 35 states, is occurring despite the fact that even without the use of the Social Security Death master list to locate policy owners, the normal process works in 99 percent of cases and that the SSDI is an additional safety net, according to testimony at the Florida hearing by Todd Katz, MetLife executive vice president.

Another issue that vexes the industry is that the idea to conduct the audits was brought to state insurance regulators by Verus, Inc., a Waterbury Conn., contingent fee audit firm founded by former class action plaintiff attorneys.