Life Insurance Unclaimed Property Litigation in 2014: Will Regulator Positions Withstand Judicial Scrutiny

by Eversheds Sutherland (US) LLP
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Winter 2014

American Bar Association Tort, Trial & Insurance Practice Newsletter for the Health and Disability & Life insurance Law Committees

Amidst ongoing multistate unclaimed property audits of many life insurers, and despite many regulatory settlements, the insurance industry and state regulators continue to disagree over the application of unclaimed property laws governing life insurance. These disagreements have been percolating in the lower courts and have now advanced to state and federal appellate proceedings.

A number of cases may soon be decided by appellate courts—while other cases continue to be litigated in lower courts—and any trends resulting from these decisions could have national implications. Some key questions expected to be addressed include:

  1. When do life insurance policy proceeds become unclaimed property?
  2. Do life insurers have a legal duty to use the Social Security Death Master File (DMF) to search for information about their insureds’ deaths?
  3. Are there any limits on the scope of information a state auditor may request from a life insurer during an unclaimed property audit?

1. When do life insurance policy proceeds become unclaimed property?

This is perhaps the key issue in dispute between regulators and the industry, because it defines when the dormancy period is triggered for life insurance policy proceeds and therefore when (or if) the proceeds are presumed abandoned. Unclaimed property and insurance regulators generally take the position that the dormancy period begins at the date of the insured’s death, regardless of whether the beneficiary has filed a claim or whether the insurer is even aware of a death. Insurers generally contend that the dormancy period begins to run upon the insurer’s receipt of proof of death or, in some states, knowledge of death. Two state appellate courts could decide this issue in 2014.

First, the Florida Court of Appeals will review a declaratory administrative statement issued by the Florida Department of Financial Services (DFS). The case arose when Thrivent Financial for Lutherans filed a petition in an administrative proceeding with DFS, seeking a declaration that insurance contracts become “due and payable” only after Thrivent has received due proof of death. In its On October 4, 2013 Declaratory Statement in response, the DFS stated that, under Florida law, the dormancy trigger begins to run on the date of the insured’s death, regardless of the insurer’s receipt of proof of death. In re: Petition for Declaratory Statement of Thrivent Financial for Lutherans, Case No. 137963-13-DS.

DFS takes the position that a life insurance policy “becomes a claim” upon the death of the insured, without more, and that the claim is “due and payable” under the unclaimed property statute—thus triggering the dormancy period—regardless of whether a beneficiary has filed an actual claim with the company. Therefore, according to DFS, the proceeds are presumed abandoned five years after the date of death and must be reported to the state. The insurer appealed the administrative ruling to the Florida Court of Appeals and filed its opening appellate brief on February 7. The Thrivent case could result in the first appellate decision to directly address the issue of when life insurance proceeds are reportable as unclaimed property.

Second, the West Virginia State Treasurer is appealing the dismissal of 63 separate but virtually identical cases filed against life insurers alleging violation of the 1995 Uniform Unclaimed Property Act as adopted in West Virginia. State of West Virginia ex rel. John D. Perdue, Nos. 12-C-287 et al. (W. Va. Cir. Ct. Dec. 27, 2013). Among other issues, the court rejected the Treasurer’s claim that the dormancy period for life insurance began running upon the date of the insured’s death, as opposed to the date of proof of death. Reading the UPA together with the state’s insurance code, the court noted that “the Insurance Code conditions an insurer’s liability upon the presentation of a claim, which requires that a claimant provide an insurer with notice giving rise to liability under a policy.” In the court’s view, “the provisions of the UPA and the Insurance Code are unambiguous and consistent with one another . . . Defendants have no obligation to surrender the life insurance proceeds under the UPA ‘until the obligation to pay arises - either upon receipt of due proof of death or once the insured reaches the statutorily imposed limiting age.’” Observing that the “due proof of death” requirement is “an essential ingredient for creating the obligation (i.e., the ‘property’) in the first place,” the court concluded that, “for life insurance proceeds, there is no ‘property’ subject to or reportable under the UPA until the beneficiary has made a valid claim and submitted proof of death or the insured obtains the limiting age.” These cases are now pending before the West Virginia Supreme Court of Appeals, the state’s only appellate court.

2. Do life insurers have a legal duty to use the DMF to search for information about their insured’s deaths?

Several appellate courts will be given the opportunity to consider this issue in 2014.

This issue may be wrapped into the Florida appeal of the DFS ruling and the West Virginia cases, discussed above. In Florida, the DFS administrative ruling stated that Florida’s unclaimed property statute requires life insurers to use the DMF to seek out information on potential deaths of insureds. According to the DFS, requiring insurers to search the DMF “is consistent with the manifest purpose of [the unclaimed property statute]” and mandated by a statutory due diligence obligation. Thrivent argues on appeal to the Florida Court of Appeals that the plain reading of Florida’s unclaimed property and insurance law do not support this position.

Also in Florida but in a separate case, the same Florida Court of Appeals will review a lower court decision contrary to the DFS administrative decision. The lower court held that the Florida unclaimed property statute does not impose on insurers a duty to search the DMF. See Total Asset Recovery Servs. LLC, v. Metlife, Inc., Case No. 2010-CA-3719 (Fla. Cir. Ct. Aug. 20, 2013).

In the West Virginia appeals, the appellate court is expected to consider the trial court’s holding that “there is no general good faith requirement in the UPA [West Virginia Unclaimed Property Act] that requires insurance companies to search the DMF or other third-party database to determine when an insured has died.” State of West Virginia ex rel. John D. Perdue, Nos. 12-C-287 et al. (W. Va. Cir. Ct. Dec. 27, 2013). The lower court rejected several of the Treasurer’s positions as policy arguments more properly considered by the legislature, noting that the recent adoption of DMF legislation in several other states suggested that no such duty existed until such legislation was enacted.

Meanwhile, the DMF question also looms in a private plaintiff’s pending appeal before the U.S. Court of Appeals for the First Circuit. In the case below, a federal district court in Massachusetts, in Feingold v. John Hancock Life Insurance Co., No. 1:13-cv-10185-JLT, 2013 WL 4495126 (D. Mass. Aug. 19, 2013), rejected claims that an insurer must affirmatively search the DMF. The putative class action complaint accused the insurer of using the DMF asymmetrically, by routinely searching the database to end payments to annuity clients but not using it to promptly notify beneficiaries of life policies when a policy-holding relative dies, and thus “avoiding payment of life insurance policy death benefits that are owed to beneficiaries.” The complaint alleged that the insurer was liable for damages to policy holders and beneficiaries because of these alleged asymmetric practices, even though the company had entered into a Global Resolution Agreement and settlement with various states.

The district court granted the insurer’s motion to dismiss, which argued that the complaint sought to discard settled law by requiring payment or reporting of life insurance proceeds absent a claim on the policy by beneficiaries. Noting the case depended on “established principles of insurance law,” the court observed that “an insurance policy may require a beneficiary to furnish ‘due proof of loss,’ in this case proof of death, before paying policy proceeds.” The court held that the insurer’s practice of requiring the beneficiary to submit proof of death before payment of any policy proceeds “comports with both Massachusetts and Illinois law.” The appeal is pending before the First Circuit.

3. What information must be provided in an audit?

Several insurers have resisted providing information requested by unclaimed property auditors, and at least one case is now before an appellate court in California. In the court below, in the first litigation stemming from ongoing insurer unclaimed property audits, a California Superior Court issued a preliminary injunction in October 2013 ordering an insurer to furnish state auditors with all data and documents requested by the State in the course of an audit. Chiang v. American National Insurance Company, Case No. 34-2013-00144517 (Sup. Ct. Sacramento Cal. Oct. 9, 2013).

The state’s Controller initially challenged the insurer’s alleged refusal to produce records on its “currently in-force” policies, thereby preventing the Controller from having access to records allegedly necessary to complete the unclaimed property audit. Specifically, the Controller’s complaint alleged that the company had “failed to take reasonable steps to determine whether the insureds under their life insurance and annuity products are deceased,” and alleged that “these practices have resulted in both substantial delays in the escheatment of amounts due from the life insurance industry . . . and the failure to escheat such amounts at all.” Nearly simultaneously, the Controller moved for a preliminary injunction seeking to enjoin the insurer’s alleged refusal to allow “a full, complete and accurate examination of all its books and records” in response to data requests from the Controller and his auditor. Characterizing the refusal to produce certain information as “dilatory tactics,” the Controller claimed that it “does not, and need not, accept the insurer’s word that it has, on its own, correctly identified and segregated its own in-force policies.”

In response, the insurer argued that the information at issue—data on in-force policies—could not constitute reportable unclaimed property and was therefore entirely irrelevant to the audit. The insurer also filed a four-count cross-complaint seeking a declaratory judgment that (1) the Controller is not entitled to obtain in-force policy data, (2) the Controller lacks the authority to enforce any DMF-searching obligation, (3) the Controller lacks authority to challenge or change the company’s contractual relationships with its insureds as part of the audit, and (4) that death is not the dormancy trigger under California law.

In its rulings, the trial court granted the preliminary injunction and ordered the insurer to produce information on in-force policies. The court stated that the insurer “is depriving the State of the ability to review the company’s records to identify escheatable property,” because “California’s auditor does not, and need not, accept [the insurer’s] word that it has, on its own, correctly identified and segregated its own ‘in-force policies.’” The Court also dismissed, without leave to amend, counts 2 – 4 of the insurer’s cross-complaint for declaratory judgment, which sought to present substantive legal issues regarding the DMF and applicable dormancy trigger. The court held that these issues were unripe for review and stated that the court would not “speculate as to what the Controller’s audit will reveal” or “express an opinion on the validity and scope of such hypothetical exactions.”

The insurer has appealed the trial court’s rulings to the California Court of Appeals. An appellate court ruling in 2014 may provide guidance on the scope of information that an auditor may request in an unclaimed property audit. Meanwhile, the California Controller is also litigating against several other companies; those cases are currently pending in other trial courts.

Conclusion

2014 may be the year when appellate court rulings provide some clarity in the interpretation of key unclaimed property and insurance statutes. Any court decisions in the industry’s favor may provide companies under audit with ammunition to resist state unclaimed property administrators. While state insurance regulators continue to scrutinize insurance industry practices regarding DMF use, the outcome of these pending suits may also affect whether these issues spill over into further litigation.

 

 

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