A Closer Look at the States' Aggressive Pursuit of Life Insurers & A Programming Notice

Recently, we touched upon a recent settlement between a life insurance company and the State of California concerning unclaimed life insurance proceeds.  It appears that that settlement was just the tip of the iceberg.  As reported in the Wall Street Journal, approximately 35 states are currently in the process of auditing almost two dozen life insurers regarding their payment of death benefits.  As mentioned in the article, those audits are being conducted by a third-party unclaimed property auditing firm, which, according to the article, may be entitled to collect "a 10.5% cut of the sum turned over to the state."  So, what exactly is this all about?

Under the unclaimed property laws of most states, matured or payable life insurance proceeds are deemed abandoned (and thus, subject to escheat) 3 or 5 years after the insurer's duty to pay is triggered.  For example, pursuant to the 1995 Uniform Unclaimed Property Act:

[An] amount owed by an insurer on a life or endowment insurance policy or an annuity that has matured or terminated [is deemed 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 attanained, or would have attained if living, the limiting age under the mortality table on which the reserve is based.

1995 Uniform Unclaimed Property Act, Sec. 2(a)(8).

The statute is seemingly straightforward, so what is the problem?  Well, while the law is clear that the amounts are deemed unclaimed 3 years after the obligation to pay arose, for a life insurance policy, that generally translates into 3 years after the death of the insured.  But how should the holder know that the insured has died?  Therein lies the controversy.  In most situations, of course, either an heir or the administrator of the deceased's estate will notify the insurer that the policy has become triggered, and often there is no issue.  Instead, the crux of the dispute centers upon what, if anything, the holders are required to do to determine whether or not an insured has died in the absence of such notification.  Because this topic may come up in our professional capacity, we are not going to analyze this question in any great detail except to say that the unclaimed property laws are generally silent as to how (or whether) the insurer has such an obligation.  At the same time, however, the states allege that the insurers were actively researching for such information regarding annuity products (i.e., where the insurer was paying benefits until the policyholder died) but not using those same sources for the payment of death benefits. 

The article is well worth a read, and has interesting sidebars concerning the "life" of unclaimed property and how to find it. 

Also, we are pleased to announce that we will be introducing a new feature tomorrow on this blog:  "Meet Your Escheator," where we publish an interview with a state unclaimed property adminstrator.  We are pleased to announce that our first participant is Missouri State Treasurer Clint Zweifel.  Please check it out tomorrow.