u nclaimed l ife i nsurance a udits, s ettlements & l itigation

UNCLAIMED LIFE INSURANCE AUDITS,

SETTLEMENTS & LITIGATION

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John ChiangCalifornia State Controller

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Marc S. Cohen Chair, Bankruptcy & Restructuring, Los Angeles

Steven S. RosenthalChair, Litigation, Washington, D.C.

James HartleyCEO

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California State Controller’s OfficeCalifornia State Controller’s Office

• California has taken a strong and leading stance with respect to unpaid life insurance proceeds, something the Controller regards as a wrongful, pervasive practice throughout the industry

• FY 2007-12 vs. FY 2002-07: ~200% increase in properties returned annually to California owners

• Global Resolution Agreements with 18 life insurance companies

– John Hancock, Prudential, MetLife, AIG, New York Life, Transamerica, Northwestern Mutual, Lincoln National, and 10 others

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“Too many Californians have been victimized by a company they entrusted with their retirement security and the care of their families . . . I am prepared to pursue all actions necessary – including litigation – to bring the rest of the industry into compliance.”

– John Chiang

California State Controller’s OfficeCalifornia State Controller’s Office

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Key Events in Audits, Settlements & LitigationKey Events in Audits, Settlements & Litigation

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• Global Resolution Agreements (GRAs)

– Controllers / Treasurers

• Regulatory Settlement Agreements

– Insurance Commissioners

• Death Master File (DMF) Legislation

• June 2013 multi-state, multi-company GRA

– Consortium of 11 major insurance companies

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• Two lawsuits filed by the California Controller

– American National Insurance Company (ANICO)

• Filed 5/3/2013

– Kemper Companies

• Filed 7/17/2013

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Fundamental PrinciplesFundamental Principles

• Consumers buy life insurance expecting their beneficiaries will be paid when they pass away

• Consumers do not expect that it will be the insurance companies, and not their beneficiaries, who benefit from the use of the funds after their death

• Unclaimed property laws are designed to allow the state to take custody of these funds so that it may locate the owner and ensure timely payment

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Global Resolution AgreementsGlobal Resolution Agreements

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GRAs with Consortium of 11 Insurers GRAs with Consortium of 11 Insurers

• Unprecedented multi-state, multi-company effort

• Executed June 6, 2013

• 8 months of negotiations

• $763 million projected nationally

• $86.7 million projected value to California beneficiaries

• Consortium companies: New York Life, Transamerica, Northwestern Mutual, Western & Southern, Pacific Life, Genworth, Hartford, ING, Symetra, Sammons (Midland and North American), and TIAA-CREF

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GRAs: Key StatisticsGRAs: Key Statistics

• 18 companies have signed GRAs to-date

• >50% of issued & active life insurance policies nationwide

• $2.4 billion projected nationally

• $267 million projected value to California beneficiaries

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GRAs: Key ProvisionsGRAs: Key Provisions

• Scope of the Audit

– To 1992 vs. potentially indefinite scope

• Interest

– 3% compounded interest calculated from date of death

• Dormancy Trigger

– Date of death, not date of notice of death

• Use of DMF

– Provides procedure for DMF matching

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• Releases

– Broad and comprehensive

• Due Diligence Procedures

– After a due diligence period, if no beneficiary can be located, proceeds escheat to the appropriate state for safekeeping

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• Procedures for Industrial Policies

– Special procedures where the company is missing information

– Most common with older, industrial policies

• Procedures for Resolution of Disputes

• ERISA Preemption

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GRA Match RulesGRA Match Rules

Importance of Match Rules: One of the most significant aspects of the GRA is the “match rules” (Schedule B), which require escheatment of property even when the insurer’s records do not match perfectly against the DMF. This significantly increases the amount of property that otherwise would be escheated if a 100% match against the DMF were to be required.

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GRA Match RulesGRA Match Rules

Examples of variances that can exist and a match will nevertheless be considered to have been made:

• First name does not match (e.g., “John” and “Jack” or “J.” and “John”)

• Last name misspelled (e.g., “MacDonald” and “McDonald”)

• Last name of female does not (e.g., “Mary Williams” with same DOB and SSNmatch but other data does as “Mary Cooper”)

• DOB off by up to one digit (e.g., “4/27/46” and “3/27/46”)

• DOB off by up to two years (e.g., “4/27/49” and “4/27/51”)

• SSN off by up to two digits (e.g., “123456789” and “123466781”)

• Part of SSN transposed (e.g., “123456789” and “123457689”)

• SSN missing, but Verus matches name and DOB to one or more individuals listed on the DMF

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Operation of the GRA: Examples of Actual Matches Made by VerusOperation of the GRA: Examples of Actual Matches Made by Verus

MATCHES WITH WRONG FIRST & LAST NAME & SSN

FIRST NAMELAST NAME

DATE OF BIRTH SSN

INSURER DATA

ANTONIO VAUALLINI 04/19/19XX [Missing]

DMF DATA ANTHONY VAVALLINI 04/19/19XX 09003XXXX

FIRST NAMELAST NAME

DATE OF BIRTH SSN

INSURER DATA

C CAHEK 07/15/19XX [Missing]

DMF DATA CHRISTOPHE CASHEK 07/15/19XX 21130XXXX

Red = Data Mismatch

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Dormancy TriggerDormancy Trigger

Uniform Unclaimed Property Acts provide: “Property is payable or distributable for the purpose of this Act notwithstanding the owner’s failure to make demand or to present an instrument or document otherwise required to obtain payment.”

Comments to Acts explain that, based upon Connecticut v. Moore, these provisions are “intended to make clear that property is reportable notwithstanding that the owner, who has lost or otherwise forgotten his entitlement to the property, fails to present to the holder evidence of his ownership or to make a demand for payment.”

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GRAs and California FamiliesGRAs and California Families

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• California residents are direct beneficiaries of the GRAs

• $375,000 returned to one LA County family as a result of settlements with life insurers

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• Desiree Tibbets

– 39-year-old resident of Ontario, California

– Mother died in 1995

– Father passed away four years later

– Had policy documents and inquired with the insurer, to no avail

– Recovered $11,000 as a result of settlement with Prudential

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• $65,270 returned to Aptos, CA beneficiary

– 2006: Husband passed away

– 8/2012: Unclaimed insurance proceeds reported pursuant to a GRA

– 12/2012: Check sent from California

“This was one bit of unfinished business that made me feel like a failure, and now it’s done. It was a huge source of frustration, and I’m glad that it’s

resolved.”

“It’s over. I don’t have to fight with these people anymore!”

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• 90-year-old widow of WWII veteran in West Sacramento, CA

– 2004: Husband passed away


– 12/2012: $18,305 check sent from California

“I knew he had left some money for me, but I didn’t know any of the details.”

“It frustrated me to think that nobody made an effort to let me know . . . ”

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• $31,500 returned to brothers in Ventura & San Francisco, CA

– One brother suffers from chronic illness; spent years in low-income housing

– Both concerned that ill brother would pass away before receiving proceeds from their mother’s life insurance

– 2007: Mother passed away


– 1/2013: Check sent from California

“Getting the money sooner would have helped him a ton.”

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Life Insurance LitigationLife Insurance Litigation

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• Controller’s Audit Authority:

The Controller may at reasonable times and upon reasonable notice examine the records of any person if the Controller has reason to believe that the person is a holder who has failed to report property that should have been reported pursuant to this chapter.

Cal. Code Civ. Proc. § 1571(a).

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• Certain companies have refused to comply with audits that the Controller has initiated

• Refused to give the Controller’s auditors full access to their books and records for the purpose of running their policies against the DMF

• The Controller recently commenced two lawsuits — ANICO and Kemper

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Life Insurance Litigation: ANICOLife Insurance Litigation: ANICO

Chiang v. American National Insurance Company

• Filed in Sacramento Superior Court on May 3, 2013

• Complaint seeks injunctive relief to prohibit continued violation of California’s unclaimed property law

• ANICO’s position: “in-force policies” cannot ever lead to escheatable property

• Fundamental flaw in ANICO’s position: requires the Controller to take ANICO’s word on whether policies are “in force” and whether policyholders are still alive

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Life Insurance Litigation: ANICOLife Insurance Litigation: ANICO

• July 26, 2013: ANICO filed (1) Opposition to Controller’s Motion for Preliminary Injunction, (2) Answer to the Controller’s Complaint, and (3) Cross-Complaint for Declaratory Relief

• Cross-Complaint seeks the following findings:

– Controller not entitled to ANICO’s in-force policies

– Controller not authorized to enforce searches using DMF to find deceased

– Controller not authorized to challenge and change ANICO records and contracts through DMF

– Controller may not use date of death as triggering event for dormancy

• August 2, 2013: Controller filed Motion to Dismiss Cross-Complaint on grounds that relief it seeks is not ripe for adjudication

• Motion to Dismiss hearing: August 26, 2013

• Preliminary Injunction hearing: September 19, 2013

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Life Insurance Litigation: KemperLife Insurance Litigation: Kemper

Chiang v. Kemper Corporation, et al.

• Filed in Sacramento Superior Court on July 17, 2013

• Also seeking injunctive relief

• Kemper’s position is similar to ANICO’s — i.e., no obligation to turn over complete data in the form of a policy data download

• Kemper cites Ohio Court of Appeals — Andrews v. Nationwide Mutual Insurance Company

• Andrews does not support Kemper’s position

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Andrews v. NationwideAndrews v. Nationwide

• Life insurance industry has overstated this unpublished opinion

• Lawsuit brought by two insureds, not by representatives of a state

• Insureds alleged that Nationwide had breached its duty of good faith and fair dealing by failing to make reasonable attempts to determine when beneficiaries are entitled to death benefit proceeds

• Court’s holding: Failure to search DMF did not constitute breach of Nationwide’s duty of good faith and fair dealing in connection with contract between company and its insureds

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Andrews v. NationwideAndrews v. Nationwide

• Court said nothing about company’s obligations to escheat unclaimed life insurance proceeds to the states, only that failure to use the DMF did not violate the company’s contractual obligations as to its insureds

• Distinction between private contract rights vs. states’ rights under unclaimed property laws was articulated by the U.S. Supreme Court in Connecticut v. Moore, 333 U.S. 541 (1948)

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Connecticut v. MooreConnecticut v. Moore

• Affirmed constitutionality of abandoned property statutes

• Life insurance proceeds escheatable based on death of the insured alone, notwithstanding the fact that beneficiaries had not provided proof of death or met other contingencies of policies

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“Unless the state is allowed to take possession of sums in the hands of the companies classified by [the unclaimed property law] as abandoned, the insurance companies would retain moneys contracted to be paid on condition and which normally they would have been required to pay . . . .”


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“The fact that claimants against the companies would under the policies be required to comply with certain policy conditions does not affect our conclusion. The state may more properly be custodian and beneficiary of abandoned property than any person . . . .”


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“When the state undertakes the protection of abandoned claims, it would be beyond a reasonable requirement to compel the state to comply with conditions that may be quite proper as between the contracting parties. The state is acting as a conservator, not as a party to a contract.”


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United Insurance Co. of America v. KentuckyUnited Insurance Co. of America v. Kentucky

• Lawsuit in Kentucky brought by Kemper in November 2012

• Seeking declaratory relief regarding obligations imposed by Kentucky DMF statute, which took effect on January 1, 2013

• Kemper’s position: the DMF law interferes with Kemper’s vested contractual rights

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• April 1, 2013 ruling by Kentucky state court:

– DMF statute does not violate the rule against retroactive application

– DMF statute does not impair any vested contractual right

– Even if the statute impairs a contractual right, it is justified by a significant public purpose

– “Vested contract rights”

• Statute only requires insurance companies to take “reasonable steps to provide notice to potential beneficiaries”

• “Does not require contractual rights regarding proof of death to be disturbed”


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“Many Kentucky citizens pay for insurance to help them plan for end of life costs. For insurance companies to attempt to keep the money through willful ignorance of the death of the insured amounts to unjust enrichment at the expense of some of the least privileged citizens in this state.”

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Paradigm ShiftParadigm Shift

An industry-wide change has occurred in the way the insurance industry handles life insurance claims

CLAIMS MADE

OUTREACH

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LegislationLegislation

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NCOIL Model ActNCOIL Model Act

• Many states have modeled their DMF statutes on the draft language of the NCOIL Model Act

• NCOIL Model Unclaimed Life Insurance Benefits Act(1) Compels routine identification of deceased policyholders by use of the

DMF or no less comprehensive database

(2) Establishes steps for beneficiary notification

(3) Promotes timely payment of claims to beneficiaries

(4) In the event that benefits go unclaimed, provides clear procedures for life insurers to escheat the funds, per unclaimed property laws

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DMF StatutesDMF Statutes

• Nine states have enacted statutes that require companies to check their policies against the DMF to identify deceased policyholders

AlabamaKentuckyMarylandMontanaNevada

New MexicoNew YorkNorth DakotaVermont

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Frequency Enacted Effective

Alabama Every 3 years 5/8/2013 8/1/2013

Kentucky Quarterly 4/11/2012 1/1/2013

Maryland Semi-annually 5/2/2012 10/1/2013

Montana Semi-annually 3/29/2013 1/1/2014

Nevada Semi-annually 6/10/2013 7/1/2014

New Mexico Semi-annually 4/1/2013 7/1/2013

New York Quarterly 12/26/2012 6/16/2013

North Dakota Semi-annually 4/26/2013 8/1/2013

Vermont Semi-annually 5/21/2013 5/21/2013

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• Nearly all DMF statutes apply to all policies in-force as of the effective date of the legislation

• Alabama is an outlier – only applies to policies issued or entered into on or after January 1, 2016

• Kemper litigation in Kentucky challenges retroactive application of Kentucky’s statute

Retrospective vs. Prospective Application

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Thank YouThank You

In addition to Controller Chiang, the speakers wish to acknowledge the Comptroller for New York and the Insurance Commissioner for Florida, who deserve the public’s thanks for their vigilant oversight of a life insurance industry that was shortchanging consumers.

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u nclaimed l ife i nsurance a udits, s ettlements & l itigation

Documents

itigation slide

ssn match

major insurance companies

death use of dmf

active life insurance

unpaid life insurance

key provisions procedures

multicompany gra consortium