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Life Health > Life Insurance

Insurers lose unclaimed property case in Kentucky

By Arthur D. Postal

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A Kentucky state court Monday rejected a challenge to the state’s new unclaimed property law by three so-called “debit insurance companies” now controlled by Kemper Insurance Companies.

The companies immediately filed a notice of appeal.

The decision upholds a law enacted by Kentucky last year that requires life insurance companies to check their lists of insureds against the Social Security Administration’s Death Master File.

“The traditional industry practice allows insurance companies to stick their heads in the sand and ignore publicly available data regarding the death of their insureds, to the detriment of the beneficiaries and the public,” Judge Philip J. Shepherd in Franklin County Circuit, Frankfort, Ken., said in his decision.

“This statute remedies the problem by requiring insurance companies to check publicly available data bases and to take ‘good faith’ steps to notify beneficiaries,” he said.

See also: Unclaimed property issue escalates

Later, in his opinion, Shepherd said, “In effect, the plantiffs’ expectation was that the legislature would not disturb the traditional industry practice of ignoring publicly available data about the death of insureds, and that the legislature would not impose any regulatory requirement to find or notify beneficiaries.”

Shepherd then noted that the Supreme Court “has decided similarly” that a taxpayer had no vested right in the Internal Revenue Code as written, he said.

“In a highly regulated industry such as insurance, companies should be aware that their rights are always subject to the regulatory power of the state to enact consumer protections such as the one at issue here,” Shepherd added. “Such changes in statute do not violate vested rights, or due process.”

Carol Lynn Thompson, counsel for the insurance companies, said in reaction to the decision that, “We strongly disagree with the Court’s decision to uphold the recently enacted Unclaimed Life Benefits Act and plan to vigorously appeal the decision.”

Thompson explained that, “By effectively requiring the retroactive matching of life insurance policies to the Social Security Administration’s Death Master File—in a manner contrary to the clear and expressed language of the policies – the Act violates Kentucky law  and the Kentucky and U.S. Constitutions.”

Thompson added that, “Contrary to the Court’s ruling, the retroactive nature of the Act would have a significant impact on insurers and would undermine business confidence among insurers and policyholders and could ultimately negatively impact pricing and product availability for consumers.

She also said that, “While the companies “are disappointed with the Court’s ruling, we remain committed to paying all valid claims in a timely and efficient manner in accordance with the policy’s terms–as we have for nearly a century.”

The decision upholds for the first time a model law drafted by the National Conference of Insurance Legislators last year, according to lawyers at Sutherland, Asbill & Brennan in an alert issued by its Washington, D.C., office today.

Kentucky is among six states that have enacted the law. Montana became the latest last week. The others are New York, Alabama, Maryland, and New Mexico. The Sutherland bulletin said “several” other states are considering such legislation.

However, the new New Mexico law does not require that the DMF be used for retroactive purposes, only prospectively.

Under the law, if an insurer identifies a match, it must make a good faith effort to determine whether benefits are due to beneficiaries.

If benefits are in fact due, the insurer must then locate the beneficiaries and inform them of proper claim procedures. If the insurer cannot locate the beneficiaries, the benefits should then be turned over to the state where the insured lives. The funds are escheatable to the state effective as of the date of death, the laws say.

See also: Escheatment: Why It Matters

The decision said that all but 42 of the policies that were subject to the case were sold door-to-door to people in lower socio-economic classes.

On average, the life policies are for burial amounts of $4,800 with monthly premiums of $16, the decision said.

The companies that challenged certain aspects of the law are United Insurance Company of America; Reliable Life Insurance Co. and Reserve National Insurance Co., all subsidiaries of Kemper Cos. of Chicago. 

Shepherd’s decision was handed down in Franklin County Circuit, Frankfurt, Ken., the state capital. It rejected the insurers’ contention that the law should be applied only prospectively, and not on existing policies.

Amicus briefs supporting the insurers’ lawsuit were filed by the National Alliance of Life Companies, the American Fraternal Alliance and the Life Insurers Council.

The decision turned aside the insurers’ contention in their complaint that the law “effects a significant change in the manner in which life insurers acquire proof of an insured’s death and settle and pay the resulting claims” and that it “impos[es] for the first time [an] affirmative duty to seek out evidence that insureds have died where no claim has been received from a beneficiary or the insured’s estate.”

The decision also rejected a contention by the insurers that a beneficiary “has a contractual duty” to provide the notice of death under the insurers’ contracts.

The court reiterated, however, Sutherland lawyers said in the alert, that the statute “leaves intact the contractual burden of proving proof of death,” a burden which remains on the beneficiary or other claimant.

“[T]he claimants must still file a proof of death … [and] the Court interprets the statute to require insurance companies to take reasonable steps to provide notice to potential beneficiaries; it does not require contractual rights regarding proof of death to be disturbed,” the decision said.

As noted by Sutherland lawyers in the alert, the decision comes at a time when unclaimed property issues facing insurance companies are continuing to play out in ongoing audits and litigation.

Insurance industry practices regarding the use of the DMF are under scrutiny by state officials in multistate market conduct examinations and unclaimed property audits.

Verus Inc., an auditing firm based in Waterbury, Conn., has contracted with more than 46 states to use its software to check the files of insurance companies for compliance with escheat statutes.

“Numerous insurance companies are subject to unclaimed property audits by multiple states, and a number of state insurance regulators are investigating insurers’ practices with respect to DMF searches and payment of death benefits under life insurance policies,” Sutherland lawyers noted.

Mark William Bracken, assistant treasurer of Massachusetts and director of the Unclaimed Property Division within the Office of State Treasurer, said that “The opinion recognized that the statute merely imposes a regulatory obligation on insurance companies to take steps to try and contact beneficiaries who are entitled to proceeds that their loved ones paid for them to receive, and that this did not alter any substantive contractual rights. The court also observed that the people who are most likely to be impacted by this statute are less affluent consumers who are not aware of the proceeds to which they are entitled. This opinion is correct both as a matter of law and fairness.”

In an article in the April edition of National Underwriter, Verus officials estimated that 50 percent of the funds contained in insurance policies of people who have died, but the proceeds were unclaimed, ultimately go to beneficiaries because of their audits.

In an article in the April edition of National Underwriter, Verus officials estimated that states give over half of the funds they receive on any given year back (although some states give more and some states give less). Ultimately, Verus officials say, perhaps 75 to 80 percent of the escheated funds are returned to beneficiaries.

However, the law upheld by Kentucky gives states immediate access to the funds if beneficiaries don’t come forward; according to several long-time industry observers, states over the past 40 years have gradually reduced the time period allotted before escheatment, that is the money turned over to the state, from the average seven years in the 1970s.

And, the Montana law, enacted last week, was requested by Insurance Commissioner Monica Lindeen, who also serves as the state auditor.

She acknowledged at an industry conference sponsored by Indiana University several weeks ago that states “are strapped for cash.”

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