Life insurance companies pay billions of dollars in life insurance claims annually, yet a significant percentage of benefits remain unclaimed each year. State unclaimed property laws, generally based on the Uniform Unclaimed Property Act ("UUPA"), require life insurers to report unclaimed proceeds. The UUPA, intended to provide more uniformity to state laws, recognizes that life insurance cannot be unclaimed until it matures or, if there is no claim until the insured reaches the limiting age.
Under the UUPA, life insurers have no affirmative duty to determine whether an insured has died to assure payment of benefits. The question whether life insurers should be required to take proactive measures to determine if a policyholder has passed away is an issue that falls under insurance regulation rather than unclaimed property law. Whether insurance regulators will take a consistent approach toward resolution of the question remains open.
The quest for enforceability and consistency has compelled the enactment of laws in many states requiring life insurance companies to conduct database searches, reach out to beneficiaries and report their findings to state insurance regulators. State regulators continue to struggle with the issue of unclaimed benefits. The U.S. Social Security Death Master File ("DMF") is one contributor to the controversy underlying how much due diligence is required of insurers to confirm whether an insured has died. Over the past several years, state unclaimed property administrators began to assert that life insurance proceeds become due and payable immediately upon the death of the insured and have aggressively demanded significantly accelerated reporting to the states.
In November 2011, the National Conference of Insurance Legislators ("NCOIL") passed a resolution that supported a model law addressing unclaimed property policies for insurers, now known as the Unclaimed Life Insurance Benefits Act ("ULIBA"). This resolution mandates the use of the DMF as a cross-reference against an insurer’s list of in-force life insurance policies and retained asset accounts each quarter. Additionally, once the decedents have been identified and confirmed, the NCOIL model requires the insurer to perform a good-faith effort to seek out and locate any beneficiaries and provide the necessary claim forms and instructions. In the event that benefits go unclaimed, the NCOIL model provides direction to life insurers to notify state treasury departments and to properly escheat the funds.
The Life Insurance Working Group of the National Conference of Commissioners on Uniform State Laws also is working to adopt revisions to the UUPA consistent with the ULIBA, as revised in November, 2014. (to view Proposed Model Submitted by National Alliance of Life Companies ("NALC"), click here). The revisions will allow insurers to hold unclaimed benefits for three years running from the date of the notice of death, after which time the funds would escheat to the state. Where the insurance company is unable to confirm the policyholder’s death, the rules would not apply. In addition, the NCOIL model includes a requirement that life insurers use the DMF, or other comparable database that may be enacted as part of unclaimed property laws or as part of the insurance code.
The Unclaimed Life Insurance Benefits (A) Working Group of the NAIC Life Insurance and Annuities (A) Committee has recommended that a new NAIC model law be developed related to unclaimed life insurance benefits to address the issue of unclaimed death benefits. The Working Group’s recommendation and proposal to develop a model law were adopted by the Life Insurance and Annuities (A) Committee at the NAIC 2014 Fall National Meeting. The NAIC Executive (EX) Committee approved the Committee’s model law development request at the NAIC 2015 Spring National Meeting in Arizona.
Also at the NAIC 2015 Spring National Meeting, the Unclaimed Life Insurance Benefits (A) Working Group appointed a new subgroup (Unclaimed Benefits Model Drafting (A) Subgroup) to begin developing the new NAIC model law. The first draft of the new model is expected to be presented at the August NAIC Summer National Meeting in Chicago.
There are three significant issues underlying the proposal of an NAIC Model Act. First, the Subgroup must determine whether the Model will impose fines for past non-compliance. Significantly, neither unclaimed property laws nor insurance codes have required that insurers search for potentially deceased policyholders or otherwise seek to accelerate the contractual claims process or the statutory escheatment schedule in the absence of a claim. Thus, should an insurer now be required to take affirmative steps to make payment and if so, can this requirement be retroactively applied? On the other hand, should the insurer be held accountable for past actions only if it is established that the insurer used the Social Security Death DMF to remove people who had annuities with lifetime payouts but not in determining that life insurance benefits should be paid? The Subgroup’s decision ultimately depends upon whether a retrospective application is constitutional.
A second issue expected to be addressed by the Subgroup at the Summer Meeting is whether the Unclaimed Property Model Act should apply equally to both large and small insurers, even though their resources and volume of policyholders may differ significantly. Finally, the Subgroup will determine whether exceptions should be included in the NAIC Model for certain life insurance policies that are exempted under the NCOIL model, e.g., credit life policies. It is anticipated that some lead state regulators, NCOIL and states that have proposed alternative approaches (such as New York [1], Oklahoma and Louisiana) will present positions at the Subgroup’s August meeting. To date, 18 large insurers, representing over 60% of the U.S. life insurance industry assets, support the lead state proposals. The lead states include California, Florida, Illinois, New Hampshire, North Dakota and Pennsylvania.
Before the August NAIC meeting, the Unclaimed Benefit Model Drafting (A) Subgroup will meet by telephone on four separate occasions, on June 26, July 10, July 24 and August 7, in hopes of developing a finalized proposal for the NAIC Summer National Meeting. The Subgroup’s charge is to develop, draft and expose a Model by the end of 2015. An NAIC proposal, however, is the first step toward consistency, as state legislators must next propose and adopt a law based on the NAIC Model before widespread uniformity can become a reality.