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Key Florida court decision on unclaimed property

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A Florida Appeals Court ruling last week gives life insurers new leverage in their ongoing battle with states regarding their unclaimed property policies.

However, the Florida Office of Insurance Regulation said the decision will have only limited impact because it does not roll back settlements with insurers made in 2012 and 2013 related to the issue. That will mean that smaller insurers who decided to litigate the issue will get a much better deal than large insurers who settled with a multi-stake task force in 2012 and 2013.

“This is a huge decision for those insurers who are still litigating the issue or haven’t settled with regulators, and there are several hundred of those,” said a lawyer who has dealt with the issue extensively. However, the larger insurers who have already revised their systems to reflect the earlier settlements are unlikely to want to go to the time and expense of revisiting the issue,” the lawyer said.

Insurance companies have been dealing with the issue since 2008, when California Comptroller John Chiang authorized an outside auditing firm to examine whether John Hancock was complying with state unclaimed property laws, which require financial institutions to turn over funds not claimed by beneficiaries after a specific period of time.

The ruling by a three-judge panel in Florida’s First District Court of Appeal held that Florida’s unclaimed property law does not make life insurance proceeds due and payable at the time of the insured’s death, according to a legal alert by lawyers at Sutherland, Asbill and Brennan.

However, the Florida OIR discounted the impact  because the “national life claim settlement agreements that Florida has participated in have not been rendered null and void as a result of this court decision. Those settlements remain in full force and effect,” the OIR said.

But, a lawyer who specializes in the issue, who asked not to be identified, said the Florida ruling “lessens the burden on insurers, and exposes the regulators’ position as without legal basis.” He also said it could have an impact on all pending litigation, including California, because the pertinent California law is similar to the law in Florida.

And, the lawyer said, some of the settlements included a clause that permits the insurance companies to appeal to the regulators to conform the settlements to the law. “That was aimed at ensuring the settlements were uniform, and certain companies did not get better terms,” the lawyer said.

The settlements by the Florida OIR were reached with American International Group (AIG) and 10 other companies in October 2012, with American International Group as the lead defendant.

Under the agreement, AIG paid an $11 million fine to be divided amongst the states that join the settlement. AIG officials also said they added $55 million during the 2012 third quarter to an existing reserve of $200 million related to the audits for interest and expected acceleration of benefit payments under the settlement.

The agreement was with 10 life insurance companies collectively referred to as AIG, according to Kevin McCarty, Florida insurance commissioner and then-president of the National Association of Insurance Commissioners (NAIC). The probe related to use of the Social Security Administration’s Death Master File (DMF) to identify deaths of policyholder claims that have not been submitted to the company in the normal course of business.

Through this and other settlements, Prudential Financial, MetLife, TIAA-CREFF, John Hancock, Nationwide Mutual and most other large life insurers doing business in the U.S. have agreed to settlements based on the task force’s interpretation of unclaimed property laws.

According to the industry lawyer, even though the Florida decision limits the power of the state to require the use of the DMF and to specify frequency, the insurers will not be able to get back the fines paid through the settlements. “The money is gone; it will never come back,” the lawyer said. “That is one of the consequences of entering into a settlement not required by law.”

The states of Florida, California, Illinois, North Dakota, New Hampshire and Pennsylvania are serving as lead states for examinations of the largest insurance companies, although Texas joined the AIG investigation because it is the domiciliary state for some of the AIG companies, McCarty said.

It is the second court decision favorable to insurers. In late December, a West Virginia Circuit Court judge held that insurers have no duty to search the DMF under the 1995 Uniform Unclaimed Property Act as adopted in West Virginia. The case was brought by the state Treasurer. That decision has been appealed to the West Virginia Court of Appeals. Insurer briefs in the case are due Wednesday.

Moreover, the decision rejected the DFS’s opinion that current law required life insurers to search the government’s DMF for insureds that might have died, according to lawyers at Carlton Fields Jorden Burt.

The suit was brought by Thrivent Financial for Lutherans. Thrivent Financial sued in challenging the scope of information Florida can ask for in regard to whether Thrivent Financial is complying with state unclaimed property laws.

A similar case is pending in California. American National Insurance Company of Galveston, Texas is also suing California Comptroller John Chiang in challenging California’s opinion of what data it must provide in dealing with unclaimed property.

David Westmark, Lutheran Thrivent’s senior counsel said the reason Lutheran Thrivent sued in Florida was the state’s statutory interpretation of when unclaimed property must be paid to the state. In California, the reason Thrivent Lutheran sued was that the Controller “is seeking information which cannot possibly lead to the discovery of property which is escheatable to the State of California,” Westmark said. “The Controller’s request/demand for information goes significantly beyond information which he is constitutionally entitled to receive.”

Westmark added that Thrivent Financial does not object to being audited and has complied with the laws as written. “We respect and protect the privacy of our members from inappropriate disclosure,” he said, adding that, “We expect to be audited in accordance with the provisions and within the boundaries of the law.”  

He noted that, while Thrivent Lutheran is “encouraged” by the ruling in Florida, “these are two different cases and we do not tie them together.”

It likely does not impact the approximately 16 states that have adopted the model law crafted by the National Council of Insurance Legislators. These are Alabama, Indiana, Iowa, Kentucky, Massachusetts, Maryland, Mississippi, Montana, New Mexico, Nevada, North Dakota, Oklahoma, Rhode Island, Tennessee, Vermont and Georgia. New York has a similar statute.

See also:

West Virginia files 69 unclaimed property suits

Clock ticking on access to Death Master File

GAO says Death Master File needs improvement


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