Who Will Benefit From Unclaimed Insurance Property Audits: Beneficiaries? Really?

In a series of aggressive evidentiary hearings in Florida and California involving MetLife and Nationwide, and in settlements with other insurers, state insurance commissioners, state CFOs and attorneys general are pressing new theories of unclaimed property liability on life insurers that, in the words of Florida’s Insurance Commissioner McCarty, could bring in “north of $1 billion” to state coffers and to beneficiaries. But just how much of that $1 billion will ever land in the hands of beneficiaries is an open question.

State regulators are claiming that life insurers are not doing enough to find out whether the insureds named on life insurance policies have died or to locate beneficiaries and settle claims when the insurance company learns, through matches with the Social Security Master Death File database or otherwise, that insureds have died. Using aggressive timeframes and untested legal theories, states are threatening life insurers to quickly turn over unclaimed property to state unclaimed property funds. But states are ill-equipped to assume the insurer’s responsibilities to pay the death claims.

In certain recent settlements, for instance, the insurer will receive a list of between 11,000 and 15,000 accounts per month over five or more months from the states’ auditor that are accounts the auditor has identified as escheatable. The company will have 30 days to review and object before it must begin the due diligence processes associated with the remittance of the life insurance policies and annuity contract proceeds to the states. In some cases, the states are not requiring the insurer to send a notification letter to the beneficiary, but are requiring the insurer to escheat the property to the states within sixty days of the end of the condensed due diligence period.

For over 100 years, insurers have followed careful procedures when paying death claims and have designed their systems to ensure that claims are paid correctly and in a timely fashion. As stated in the typical life insurance policy, an insurer will pay the proceeds of a life insurance policy to the designated beneficiary when the beneficiary presents a claim and proof of loss, usually in the form of a certified death certificate. In some states, insurers must pay statutory interest that begins to run from the date the insurer receives the completed claims; in other states, statutory interest runs from the date of death. In all states, the claims process is governed by various state insurance laws and unfair claims acts and states have conducted market conduct exams that have examined every facet of the claims process.

The payment of some death claims may be delayed for years after the date of death for a variety of reasons, such as a dispute among heirs and questionable circumstances surrounding the death of the insured, such as the beneficiary’s contribution toward bringing about the death. Or death may occur during the contestability period in the policy.

In all, the death claims process has worked well. In 2009, alone, life insurers made total payments to beneficiaries of over $59 billion, with total payments under all life insurance and annuity contracts totaling $375 billion.

The current litigious posture of states, however, threatens to turn the claims system on its head. Insurers will face huge fines and interest penalties if they do not turn life insurance proceeds over to the states within aggressive timeframes negotiated in settlements – or at most within three to five years after death.

However, there is nothing in policy forms, on state insurance department websites or in popular literature that warns beneficiaries about these new time limitations for filing claims. Why, you may ask? Clearly the reason is that, until recently, states regulators and auditors have followed the general understanding, as embodied in section 7(f) of the Uniform Unclaimed Property Act of 1981, that the insurer has the duty to process claims and to pay the life insurance proceeds to the beneficiary, not the state.

And what duties do states have to find beneficiaries once the proceeds are escheated to them by the insurers? Very few. They may be required to publish notice and post information on a website. But good luck to the unsuspecting beneficiary who lives in a different state from the insured and who may have no clue where to look.

The concern of many is that this latest series of exams and audits will result in windfalls to the revenue-strapped states at the expense of beneficiaries. If the goal of the states is to find missing beneficiaries, then regulators should give insurers adequate time and tools to locate them. On a subject as emotion-laden as life insurance benefits, regulators would do better to spend their time developing best practices and engaging in thoughtful dialogue on how to locate beneficiaries, rather than rush to judgment.

Mary Jane Wilson-Bilik is an insurance and securities law partner in Sutherland Asbill & Brennan LLP with more than 20 years of experience advising financial service organizations on regulatory compliance. Marlys Bergstrom has more than 14 years of experience advising on unclaimed property law, compliance planning and audit defense. Both authors have clients in the unclaimed property sphere.

This article is for informational purposes and is not intended to constitute legal advice. The views expressed by the author(s) are the author(s)’(s) alone, and do not necessarily represent the views of Sutherland Asbill & Brennan LLP or its clients.