California Fines 60 Insurers for Late Life Payments

WASHINGTON – California has collected $29.8 million from approximately 60 life insurance companies based on their alleged failure to pay the state on a timely basis the proceeds of insurance policies where the owner died and the beneficiaries failed to claim the policies.

Insurance industry lawyers say that state Controller Betty T. Yee has assessed the insurers $1.9 million in interest even though the insurers voluntarily checked their records and submitted the funds from unclaimed policies, where applicable.

The interest charge is 12 percent based on Yee’s interpretation of California law by compounded annually.

A spokesman for the controller said the fines were appropriate, but that insurers can request a waiver of the compounding. The fines were levied April 1, according to a Legal Alert by Sutherland, Asbill & Brennan.

As a result, industry lawyers are being told to be careful when reporting to California. That’s because the unclaimed property reporting forms used nationally are not really written for life insurance, said Mary Jo Hudson, a lawyer at Bailey Cavalieri LLC in Columbus, Ohio,

“They require reporting the ‘dormancy date’ in a column labeled ‘Date of Last Contact’," she said.

The insurers who are being assessed are smaller insurers that were not targets of the multi-state investigation of larger insurers, which constitute 61 percent of the U.S. life insurance market, according to the California controller’s office and the Sutherland Legal Alert. They did not settle with California and 35 other states on the multi-state agreements whereby the companies paid fines, remitted the proceeds of unclaimed policies and agreed to run the Social Security Death Master File on their records quarterly.

Hudson, who has served as a consultant to the American Council of Life Insurers on the issue, said even those who settled are complaining.

She argued that, “insurers under the market conduct settlement agreements are getting overly penalized.”

She said that, as a result of the California policies, “Insurers now need to be more strategic when reporting in any state so they are not inadvertently billed for unnecessary interest charges.”
John Hill, a spokesman for the controller, said that the insurers were assessed for late remitted properties associated with the 2010, 2011, 2012 and 2013 reports. He said the total amount of the interest assessments for the four years was approximately $1.9 million.

“That being said, the controller remains open to negotiate a Global Resolution Agreement with these companies,” Hill said. Moreover, Hill said the companies can request a waiver of the interest “upon a showing of reasonable cause for the late remittance.”

However, that would force these companies to run their policies against the DMF and to conduct a due diligence search for the beneficiary, which would be a huge expense for small insurers, according to several lawyers.

These smaller companies would also have to agree, in the event the DMF indicates that the policy owner is dead and they have not been able to locate the beneficiary, to turn such property over to the states three years from the date of death.

According to the Legal Alert from Sutherland, most insurers report unclaimed monies to California based on a dormancy period that begins to run three years from when the insurer received a claim and/or notice of death.

The interest was assessed on the remaining insurance companies, which voluntarily agreed to remit the unclaimed property after checking their records, according to a Sutherland lawyer.

A Sutherland lawyer said the fine is being compounded and that the total levy from the controller could exceed the value of the policy.

Hill argued that it is “incorrect to say that the interest is ‘compounded’,” especially since the plain language of the statue states that it is “simple” interest.

That being said, Hill acknowledged that “it is possible that the interest calculated could equal or exceed the amount of the policy.”

However, he added, those situations would be the exception rather than the rule and would depend upon the date of death of the policy owner and the date the property was ultimately remitted to the State of California.

Hill said California authorities are acting that way because they have found that rather than remitting the property three years from the date of death, “what we find is that – despite the death of the owner – the company maintains possession of the policy and treats the it as ‘in-force’,” which allows the company to use the accumulated cash to continue premiums payments long after death.

Historically, companies should have used the limiting age or date a claim was filed but not perfected, Hudson said. “Actually, company staff used a variety of dates that sometimes tried to respond actually to the request (i.e, the last date of correspondence or contact).”

Hudson explained that under the settlement agreements, insurers are required to use Date of Death in this column, even though that is not the law in any state.

“These companies will be hardest hit by the California controller's penalizing policy,” she said.

“Where the company is not in a settlement agreement, companies are receiving these bills when staff inadvertently insert the insured's date of death as reported from the DMF rather than use the date of the DMF match or the date when the insurer learned of the insured's death (per the NCOIL Model & some states, but ironically not under California law,” Hudson said.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].