West Virginia Trial Court: No Duty to Search the Death Master File

by Eversheds Sutherland (US) LLP

In a substantial victory for the life insurance industry on the unclaimed property issue, a West Virginia Circuit Court has held that insurers have no duty to search the Social Security Administration’s Death Master File (“DMF”) under the 1995 Uniform Unclaimed Property Act as adopted in West Virginia.  The court also held that the dormancy period for life insurance proceeds is triggered either by the insured reaching the limiting age or by the insurer’s receipt of due proof of the death, and not by the mere fact of the insured’s death as argued by the West Virginia State Treasurer.  In so holding, the court granted motions to dismiss with prejudice filed by insurers in 63 separate individual actions brought against the industry by the Treasurer.  This is a sweeping ruling that rejects the positions taken by a number of state treasurers and insurance departments in ongoing unclaimed property audits, regulatory examinations, and related litigation.

The State of West Virginia, which had largely stayed on the sidelines during multistate audits of many companies, entered the fray in late 2012 by filing 69 separate actions against life insurers.  The complaints were identical except for the name of the defendant insurer and its purported West Virginia market share. The suits alleged that insurers have an affirmative duty under West Virginia’s unclaimed property statute to search the DMF to determine deaths of life insurance policyholders and to escheat policy proceeds if those proceeds cannot be paid to a beneficiary.  The Treasurer also asserted that the dormancy trigger for life insurance proceeds begins to run upon the death of the insured, regardless of whether the insurer has received a claim or proof of death from a beneficiary or other claimant.  On these theories, the Treasurer alleged that the defendant insurers had willfully failed to report potentially unclaimed property identifiable through DMF searches.

Most of the defendant insurers filed motions to dismiss the Treasurer’s complaints, arguing that there is no statutory duty to search the DMF.  The circuit court agreed in an order dated December 27, 2013, and dismissed the cases with prejudice.  (Click here for a copy of the opinion.) (Note that Sutherland represents a number of the defendants in these cases and was one of two firms that argued before the trial court.)

First, the court held 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.”  The court rejected the Treasurer’s argument that the reference to “good faith” in the UPA created such a duty; instead, the court found that the UPA created a standard of good faith only for “a very specific purpose - namely relieving a holder from liability when they make a good faith effort to comply with the UPA.” 

Second, the court rejected the Treasurer’s argument that the dormancy period for life insurance begins to run upon the date of the insured’s death, as opposed to the date of proof of death.  The court based its holding on an analysis of the West Virginia UPA—which mirrors the 1995 Uniform Unclaimed Property Act—and the West Virginia Insurance Code.  Under the West Virginia UPA, the term “property” is defined specifically as “[a]n amount due and payable under the terms of an annuity or insurance policy, including policies providing life insurance.”1 As applied to life insurance proceeds, “property” is presumed abandoned “three years after the obligation to pay arose or, in the case of a policy or annuity payable upon proof of death, three years after the insured has attained, or would have attained if living, the limiting age under the mortality table on which the reserve is based.”2 The West Virginia Insurance Code requires that “[t]here shall be a provision [in every life insurance policy] that when a policy shall become a claim by the death of the insured settlement shall be made upon receipt of due proof of death.”3  As the court noted, “this provision in 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.”

The court reasoned that the UPA and the Insurance Code must be read together.  Therefore, the court concluded that “[i]n the absence of due proof of death, life insurance proceeds are not presumed abandoned under the UPA until three years after the insured reaches the applicable limiting age.”  Stated differently, “the only two statutory triggers for the unclaimed property dormancy period are receipt of due proof of death and the limiting age.”  The dormancy period does not begin to run solely as a result of the insured’s death.  For the Treasurer to argue otherwise constituted an “attempt to rewrite the statute by creating a new category of presumed unclaimed property.”

According to the court:  “The provisions of the UPA and the Insurance Code are unambiguous and consistent with one another. Based upon the plain meaning of those statutes, the Court finds that the 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.”

The court specifically rejected the arguments made by the Treasurer, stating that they were policy arguments that should be considered by the West Virginia legislature.  Indeed, the Court noted that the recent adoption of DMF legislation in several other states was a compelling argument that no such duty existed until such legislation was enacted.  The court did not find persuasive the Treasurer’s reliance on the U.S. Supreme Court’s decision in Connecticut Mutual Life Ins. Co. v. Moore, 333 U.S. 541 (1948), for the proposition that insurance proceeds are presumed abandoned even if the insurer has not received due proof of death.  The court distinguished Moore on several grounds and found that it was neither analogous nor controlling.  The court also rejected the Treasurer’s argument that the proof of death requirement was nullified by the UPA provision that “property is payable or distributable for purposes of this article notwithstanding the owner's failure to make demand or present an instrument or document otherwise required to obtain payment.”4 The court held that this provision did not apply because the “due proof of death” requirement “is not a mere administrative requirement for collecting an obligation that is already fixed and certain [but rather] an essential ingredient for creating the obligation (i.e. the ‘property’) in the first place.”  Therefore, the court stated 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.”

The Treasurer has 30 days to appeal the decision to the West Virginia Supreme Court, which is the state’s only appellate court.  The Treasurer is expected to appeal.

The West Virginia decision is one of several cases that could result in appellate court rulings in 2014.  The Florida Court of Appeals is also set to address the issue of the dormancy trigger for life insurance proceeds in an appeal of an administrative ruling by the Florida Department of Financial Services, in In re: Petition for Declaratory Statement of Thrivent Financial for Lutherans, Case No. 137963-13-DS. (Click here for Sutherland’s Legal Alert on the Thrivent case.)  Also on appeal to the Florida Court of Appeals is a trial court decision 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).  Elsewhere, the U.S. Court of Appeals for the First Circuit will consider whether insurers have a duty to search the DMF under Massachusetts and Illinois law in an appeal brought by private plaintiffs in Feingold v. John Hancock Life Insurance Co., No. 1:13-cv-10185-JLT, 2013 WL 4495126 (D. Mass. Aug. 19, 2013) (Click here for Sutherland’s Legal Alert).  Next, litigation in Kentucky regarding the constitutionality of recent legislation imposing a DMF search requirement is now on appeal to the Kentucky Court of Appeals.  United Ins. Co. of Am. v. Kentucky (Ky. Cir. Ct. April 1, 2013) (Click here for Sutherland’s Legal Alert).  And, in the first litigation arising directly out of the ongoing unclaimed property audits, an insurer is appealing a preliminary injunction issued by a California Superior Court ordering the company to turn over to state auditors all data and documents requested by the State in the course of an unclaimed property audit.  Chiang v. American National Insurance Company, Case No. 34-2013-00144517 (Sup. Ct. Sacramento Cal. Oct. 9, 2013).  The California Court of Appeals will consider the question of what information must be turned over to the state in an audit.  These and other issues will also continue to play out in ongoing unclaimed property audits and market conduct examinations.

1 W.Va. Code§ 36-8-1 (13)(vi).

2 W. Va. Code § 36-8-2(a)(8).

3 W. Va. Code § 33-13-14.

4 W. Va. Code § 36-8-2(e). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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