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Lawsuit challenges Florida's unclaimed property law

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WASHINGTON — Four smaller insurance companies are challenging a new Florida law governing unclaimed property that requires them to search their files for potential unclaimed life insurance or annuity policies issued as far back as 1992.

Industry lawyers say it is the strongest law dealing with unclaimed property since the issue first arose in the 1970s as states struggled to pay bills during an economic downturn. For example, during that period, funds in most states were not required to be turned over unless they hadn’t been claimed for seven years.

Now, according to the American Council of Life Insurers, the new Florida law, signed by Gov. Rick Scott on April 12, seems to require payment of a death benefit unless the company can prove the insured person is still alive. The ACLI says the statute seems retroactive in a manner that may violate the contracts clause of the U.S. Constitution.

The lawsuit, filed by four affiliates of the Kemper Corp., which is based in St. Louis, also raises the issue of whether smaller insurers are being blamed for the sins of larger insurers with deeper pockets.

They are United Insurance Company of America, Reliable Life Insurance Company, Mutual Savings Life Insurance Company and Reserve National Insurance Company.

Muddying this issue in advance of the Florida lawsuit was a recent segment of “60 Minutes,” which aired on April 17. The segment was directed at unclaimed and unpaid death benefits, and also accused companies of systematically destroying the equity that many policyholders had built up in their policies.

Joseph M. Belth, professor emeritus of insurance at Indiana University, said that on the positive side, “the segment provided a public service by calling attention to the problems of lost policies and unclaimed and unpaid death benefits.”

On the negative side, Belth said, “the segment was slanted to shine an undeservedly harsh light on life insurance companies.”

Kemper said in the statement that it believes Florida officials are “overreacting” to the behaviors of other insurance companies that knowingly failed to pay claims after confirming the death of insureds.

“Kemper does not knowingly withhold payments to deceased insureds, so should not be punished along with those companies that did,” the statement said. ”We are a consumer-oriented company that provides our insureds and their beneficiaries full access to all their benefits for any product we sold to them.”

Kemper officials added that, ”The statute in question goes beyond what’s needed to address and punish the conduct in question … We believe that it is inappropriate to punish companies that did not engage in these behaviors. We also object to governmental overreach that occurs when the state enacts a statute that violates Florida law and the U.S. Constitution.”

Kemper said in the statement that, “We are very willing to use databases like the Social Security Death Master File on new policies to initiate the claims process,” adding that, “Unfortunately, Florida regulators and legislators have rebuffed our efforts to reach a compromise solution.

“With regard to the Florida lawsuit, we filed the complaint only after Florida enacted an unconstitutional law that would substantially rewrite the terms of our existing contracts with policyholders—policy terms that the Florida Office of Insurance Regulation repeatedly approved,” the statement said. “These policies comply with state laws and regulations in effect when the policies were sold.”

Ashley Carr, communications director and spokeswoman for Jeff Atwater, Florida’s chief financial officer, defended the new law.

“For years, the life insurance industry has built its business around practices that intentionally and drastically reduce the number of life insurance policies that are properly — and timely — paid out,” she said. 

She said the industry “appears willing to modify its practices only when changes suit them.

“By resisting pro-consumer changes across the country, the industry has earned millions in interest on unpaid policies,” Carr said. “It is outrageous to tell the policy-holding public that fulfilling the promises that were made to consumers is an undue financial burden.

“We fought, with the unanimous approval of the legislature, to ensure that all policies are paid out properly–not just the ones the industry sees fit,” Carr said, adding that ‘We’re prepared to defend what we believe is a common sense, consumer-friendly policy.”

The large insurers were first targeted by California starting in 2008, when the state  Comptroller  authorized an outside auditing firm to examine the claims payment and unclaimed property compliance of insurance companies doing business in the state.

Since then, state regulators have formed a task force to deal with the issue that focused on toughening the laws and rules governing unclaimed property, as well as imposing fines and settlements with the top 40 life insurance companies, who comprise 60 percent of the total market.

The suit filed by the Kemper affiliates argues that the companies should have to pay claims only when a policyholder or beneficiary provides proof of death, for example, through a death certificate or court order.

It is the latest in a saga dating back to the 1970s, when insurance regulators first began to crack down, during an economic recession, on insurance companies that hadn’t paid out the funds on life insurance policies because no beneficiary sought the money. The issue deals with state so-called “escheat laws,” which require companies to turn over to the states funds that go unclaimed, mostly through bank accounts and insurance policies, but, in some cases from checks that were not cashed by their recipients.

Based on what the audit ordered by the California comptroller found, state regulators have formed a task force to deal with the issue that focused on toughening the laws and rules governing unclaimed property. The probe is now extending into smaller insurance companies, for example, the four affiliates of Kemper that are suing Florida. 

And, the National Association of Insurance Commissioners (NAIC) and the National Council of Insurance Legislators (NCOIL) are developing and refining model laws to deal with the issue.

The California audit found that insurers had an “asymmetric” policy regarding its products, moving quickly to stop payments on variable annuities with lifetime guaranty payment provisions, but not acting quickly to determine whether life insurance policyholders had died and move to find the beneficiaries or turn the money over to the statement through so-called escheat laws.

The audits checked the records of insurance companies by matching them with the Social Security Administration’s Death Master File.

The suit by the Kemper affiliates allege that the new Florida law violates the state constitution by saying it applies retroactively to policies issued as far back as 1992. The suit argues that the companies should have to pay claims only when a policyholder or beneficiary provides proof of death, for example, through a death certificate or court order.

Only 150,000 of the policies remain in effect, the lawsuit said. “The act affects all insurance contracts issued by plaintiffs in force at any time after January 1, 1992, regardless of whether an insurance contract has been terminated, surrendered, expired, lapsed, already paid, or already escheated to the state,” the lawsuit said.    

The law will cause plaintiffs “to incur significant monetary loss from increased administrative costs expended to adhere to the act’s requirements and reduced cash flow resulting from the earlier escheat of funds to the state,” the suit says.

And, failure to comply would subject insurers, including plaintiffs, to penalties that include civil fines of up to $2,000 per violation, the suit says.

An industry lawyer who declined to be named because he counsels a number of companies on the issue, said the lawsuit contends that insurers shouldn’t be forced to use the Social Security DMF files to audit the earlier policies because the cost of doing so has not been priced into the policies. “Having to do the additional work on policies already in existence requires work that has not been priced into the policies,” the lawyer said.

The lawyer noted that Kemper won a lawsuit several years ago involving 16 states that adopted a law first enacted in Kentucky that required insurers to examine their files for policies retroactively. But, even the Kentucky law did not require searching records dating back to 1992, the lawyer said. “The Florida law is the strongest on DMF searches enacted by any state,” he said.

See also:

Change in policy on unclaimed property

ING settles in 7 states on unclaimed property

Unclaimed property class action suit dismissed

Aviva and Midland in unclaimed property deals

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