Both state insurance regulators and corporate treasurers “are moving away” from enforcement actions against insurers, i.e., imposing huge fines and dictates on use of the Social Security Death Master File (DMF), on unclaimed property issues, a lawyer and former insurance commissioner says.

Instead, “most of the focus is on legislation at this time,” said Mary Jo Hudson, a former Ohio insurance director and a partner at Bailey Cavalieri LLC, in Columbus. Hudson made her comments at a panel discussion Sunday on unclaimed property that was part of the annual conference of the American Council of Life Insurers. It is being held at the JW Marriott Hotel in downtown Washington, D.C.

Hudson said that there “are a couple of cases going on and the active cases involve larger companies,” but, in general, “most of the insurance departments have pulled back from enforcement.”

“Likewise, the unclaimed property regulators, the treasurers, have pulled back as well,” she said. But, Hudson said, that pullback does not disguise the fact that the wholesale enforcement actions constitute “a dark period for insurance regulation, a very, very rough time.”

That period, dating from 2009, saw enforcement actions by state insurance regulators based on allegations that use of the DMF “asymmetrically,” that is, its use by insurers only to determine if someone has died in order to end payments under guaranty riders in variable annuity contracts constitutes a deceptive practices and mandates that insurers use the DMF frequently to determine whether a policyholder has died.

At no time, said Hudson directly and in a paper she co-authored from the American Council of Life Insurers has “the insured’s date of death been used or even considered as an alternative dormancy trigger,” that is, a mandate for the insurer to turn over the proceeds to a state under unclaimed property laws.

Likewise, she said, “no insurance code provision has required life insurers to affirmatively seek to determine whether or not their insureds were deceased for unclaimed property due diligence or reporting purposes.”

“The background,” explained George Keiser, a Republican state legislator from North Dakota and another panelist, is that in 2008 and 2009, “most states were in financial difficulty, there were proprietary programs and all, and the companies that developers those programs went to the state treasurers and said, ‘we can generate a lot of money for your state’,” Keiser said.

He added that, “And those state treasurers ran to the governors, and the governors said, ‘my goodness, there is a gold mine out there you need to mine it; go after it’. That is what really started the process.”

As a key player in the National Conference of Insurance Legislators (NCOIL), Keiser is playing a role in the current NCOIL effort to revise the Unclaimed Property Benefits Act model law NCOIL developed several years and which has been acted fully or in revised form in 16 states.

One key issue is whether these laws can be made retroactive or must be prospective. A recent Appeals Court decision in Kentucky reversed a lower court ruling and held that state law requires them to be only prospective.

Hudson said that the National Association of Insurance Commission’s A Committee is recommending that the NAIC begin working on its own model law in 2015.

The probes started in 2009, when the California state comptroller, John Chiang, retained an outside auditor, Verus Financial, Inc., of Waterbury, Conn., to examine the files of John Hancock, Inc., to determine if John Hancock was only using the DMF to determine if a VA owner had died. John Hancock later fined, and the probe soon involved 44 states and most of the nation’s largest insurance companies, both domestic and foreign.

State insurance regulators soon initiated their own probes, creating task forces consisting of a number of states that used outside vendors such as Verus to examine the files of insurance companies.

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.

The probes in 2012 spread to smaller companies. One of them, Thrivent Financial for Lutherans, won a case in Florida in August. 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.

“As a former regulator, I continue to find  troubling that these exams started with full-file data requests, and also many times ended with a very descriptive demand for using the DMF and a very keen interest in what the fine is going to be and how much is going to be paid,” Hudson said. At the same time, “there were no findings in the case, only settlements,” Hudson said.

She said courts “have refuted” treasurers’ assertion that date of death is a dormancy trigger and insurance departments’ assertions that asymmetric use of the DMF is a deceptive practice or a violation of state insurance codes.

Hudson also said that the entire episode required some insurers to institute significant operations changes, significant changes in how they manage their claims process, and “for many, many companies very large investments in infrastructure they were really not planning to make even a couple of years ago.”