A recent state court decision in Florida raises questions as to how insurance companies and agents should interpret “state’s rights.” That is, should insurers and agents see “state’s rights” as the authority to oversee the insurance industry from a local perspective? Or, should they view it as a means of using a state’s regulatory power to generate hidden revenues, ultimately resulting in lesser income for the industry, as well as higher distribution costs for insurance products?
The decision held that Florida’s unclaimed property law does not make life insurance proceeds due and payable at the time of the insured’s death, as the Florida Office of Insurance Regulation (OIR) originally interpreted the state’s unclaimed property law to mandate. Moreover, industry lawyers say the decision limits the power of Florida to require the use of the Social Security Death Master File (DMF) by insurers to check their records to ensure unclaimed property — that is the proceeds of life insurance policies that beneficiaries have not claimed — goes promptly to the states. And, according to some lawyers, it limits Florida from specifying the frequency of those checks.
The impact of this decision, which also affects other states, will be limited. Large insurance companies constituting more than 90 percent of industry revenues were cowed into settling the issue over the last several years on regulators’ terms. Without settling, they risked reputational damage, or the crap-shoot known as the courts. The National Association of Insurance Commissioners estimates the settlements have added more than $1 billion to state coffers over the last several years.
These settlements involved fines, disgorgement of money from unclaimed life insurance policy proceeds, and commitments to check their records frequently (an expensive process).
The issue has been around since at least the 1970s. At the time, most states required insurers to turn over the proceeds of unclaimed insurance policies after seven years.
But, it appears that every economic downturn generated decisions by states to telescope the time period before the funds were handed back to the states. Insurance companies have been dealing with the latest eruption 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.
As time has gone on, this latest severe downturn has prompted at least 16 states to adopt a National Conference of Insurance Legislators’ model law requiring immediate disbursement of unclaimed property.
The other states have not done this, and have relied on state regulators, state comptrollers and state unclaimed property agencies to interpret the state’s laws.
As the Florida decision shows, those interpretations may have been self-serving. However, that won’t help the larger firms. Only smaller insurers, less concerned about reputational risks, have had the courage to challenge these interpretations in court, and they will be getting a much better deal than large insurers who settled with a multi-state task force in 2012 and 2013.
The Florida OIR has made this clear. A statement said that, despite the court decision, 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. Lawyers say many other states are likely to have laws similar to the Florida statute, but only smaller insurers will benefit from favorable court rulings.
“The money is gone; it will never come back,” one lawyer said. “That is one of the consequences of entering into a settlement not required by law.”
All of this raises the ethical issue of whether state regulators placed their need for hidden revenues above their mission of ensuring a viable and competitive insurance industry in a ruthless economic environment. My answer is that they did not.