Unclaimed property laws have existed for decades, but recently states have sought to apply these laws in novel ways to unpaid life insurance benefits. The flurry of state activity in this area has ranged from passive fact gathering to aggressive third party administered audits. Whether due to state budgetary shortfalls or other reasons, the trend is for state treasury/unclaimed property and insurance regulatory officials to become much more active in the unclaimed property area, including with respect to life insurance benefits.
The National Association of Insurance Commissioners (“NAIC”), the National Conference of Insurance Legislatures (“NCOIL”), individual state regulators, and, as in recently publicized investigations, groups of state regulators have all entered the scene. The NAIC has formed the Investigation of Life/Annuities Claims Settlement Practices Task Force to consider these issues, and NCOIL has introduced the Model Unclaimed Life Insurance Benefits Act. Unclaimed property inquiries and audits usually require insurers to gather large amounts of data to respond to the information requests and have frequently included expansive demands for changes in claims practices and requests for significant monetary settlements. Outside audit firms commonly work on a contingency basis and tend to take more aggressive positions than the positions taken in state administered investigations.
The expanded expectations of regulators seeking to apply unclaimed property laws to life insurance are inconsistent with existing life insurance policy forms and settlement practices which have been in existence for generations. Approved policy forms, insurance laws, and past practice require a claimant to submit proof of a valid claim before life insurance benefits are paid. In particular, under existing state laws and market practice, the dormancy period used for determining the timing for escheat of benefits of life policies generally does not commence until a claim is submitted, the insurer has knowledge of an insured’s death, or the insured reaches a limiting age based on the mortality table then in effect. Recent regulatory initiatives attempt to shift the burden to the insurer to determine whether an insured is deceased and benefits are payable through a periodic sweep of the Social Security Administration’s Death Master File and attempt to trigger the escheat dormancy period from the date of the insured’s death.
The increased activity in this area has resulted in regulatory uncertainty. In addition, there are potential public relations issues, particularly for those insurers that previously used the Death Master File with respect to annuity contracts but not with respect to life insurance policies. Finally, there are class action and other litigation concerns for life insurers with respect to these issues, as class action lawyers are likely to seek to use any settlements with states as a “roadmap” to civil litigation.
Prior to or in connection with a response to an inquiry (or consideration of a potential settlement), life insurers would be well served to examine their escheat policies and procedures and develop a strategy to address an inquiry. Such process should include an assessment of how unclaimed property laws relate to in-force life insurance and underlying claims practices. Understanding the full implications of the business, regulatory and potential civil litigation issues is critical in connection with unclaimed property investigations, including the importance of maintaining positive relationships with regulators while seeking to protect an insurer’s rights. A comprehensive, thoughtful strategy to address unclaimed property issues will benefit insurers seeking to reduce the uncertainty and exposure resulting from the recent activity in this area.
The Insurance and Financial Services Practice of Sidley Austin LLP
Sidley is one of only a few internationally recognized law firms to have a substantial, multidisciplinary practice devoted to the insurance and financial services industry. We have approximately 85 lawyers devoted exclusively to providing both transactional and dispute resolution services to the industry, throughout the world. Our Insurance and Financial Services Group has an intimate knowledge of and appreciation for the industry and its unique issues and challenges. Regular clients include many of the largest insurance and reinsurance companies, brokers, banks, investment banking firms and regulatory agencies, for which we provide regulatory, corporate, securities, mergers and acquisitions, securitization, derivatives, tax, reinsurance dispute, class action defense and other transactional and litigation services.
The Unclaimed Property Group of Sidley Austin LLP
Sidley’s Unclaimed Property group is a cross-disciplinary team that includes lawyers from our regulatory, securities, tax, and litigation groups. This mix allows us to provide clients with unclaimed property advice and audit defense legal support, with a nuanced understanding of the day-to-day practices and challenges faced by holders of abandoned property. We regularly counsel both financial institutions (including insurance companies, broker-dealers, banks, and mutual fund complexes) and telecommunications, technology, mercantile, and manufacturing companies on escheat law compliance. We have years of experience assisting clients in defending audits conducted by state abandoned property authorities and third party vendors acting on their behalf, such as ACS, Kelmar, and Verus. We work closely with audit defense accounting firms to assist our clients in managing the audit process efficiently and with minimal disruption, and to resolve disputes as they arise during audit relating to particular property types, look-back periods, scope issues, estimate techniques, and confidentially and recordkeeping issues. Our litigation team has represented clients in unclaimed property disputes in trial courts and appellate courts, including the United States Supreme Court, and also in other investigations premised on alleged failures to escheat unclaimed property.
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This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
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