alic annual meeting: navigating through uncertainty: life insurance regulation and unclaimed...

ALIC Annual Meeting: Navigating Through Uncertainty: Life Insurance Regulation and Unclaimed Property Audits

Marlys A. BergstromPhillip E. StanoSteuart H. ThomsenMary Jane Wilson-Bilik

May 22, 2012

2 ©2012 Sutherland Asbill & Brennan LLP

Contributing Authors

Marlys A. [email protected]

Steuart H. [email protected]

Phillip E. [email protected]

Mary Jane [email protected]


Overview

• Where are we now? Audits, market conduct exams, settlements and AG subpoenas Conflicting guidance: the New York 308 Letter vs. the Verus

Settlements

• Two worlds collide – Insurance law vs. unclaimed property law• What to consider if you are under, or may be under, an

unclaimed property audit, market conduct exam and/or AG subpoena on these issues

• Where are we headed? State Treasurers/Comptrollers NAIC/State Insurance Regulators State Attorneys General Litigation/Legislative (NCOIL)

• Questions?


WHERE ARE WE NOW?


Where Are We Now? A Timeline

• 2008: Verus starts unclaimed property audits of life insurers• April 2011: First unclaimed property settlement announced• May 2011: NAIC forms Executive Task Force to coordinate

multi-state exams of claim settlement practices Florida and California conduct hearings California DOI appoints Verus as market conduct examiner

• June 2011: New York AG subpoenas• July 2011: New York 308 letters• October 2011: First multi-state market conduct exam (FL lead)

MN administrative subpoena and MN DOC/AG unclaimed property letter

• November 2011: NY AG and Controller announce largest investigation of life insurance industry

CA Controller hires major law firm


Where Are We Now? A Timeline

• January 2012: Second unclaimed property settlement

• February 12, 2012: First multi-state market conduct exam settlement with 20 states

• February 14, 2012: MN DOC/AG issues follow-up letters

• February 2012: Massachusetts AG issues subpoenas• February 2012: NCOIL does not approve model• April 2012: Third unclaimed property/regulatory

settlement agreement• April 2012: Mayor Cuomo announces results of NY

308.


Where Are We Now?

• Verus Unclaimed Property Audits Verus Financial LLC is comprised of plaintiff attorneys and

financial services and life insurance professionals

More than 35 states have hired Verus to conduct unclaimed property audits

Approximately 25 life insurance companies are currently under audit

Since the inception of the audits, two settlements have occurred

Verus has been hired by 30+ states to conduct market conduct exams


Where Are We Now?

• Verus Unclaimed Property Audits Nondisclosure agreements

Permits sharing of data with “other agencies” Addition of states can be ongoing

Document and data requests Processes and procedures for life, annuities and retained assets over

the period 1996 - 2011 Unlike “standard” unclaimed property exams, requests are related

to general processes, not just unclaimed property Data requests encompass life, annuities and retained asset accounts

All policies, contracts and accounts in-force and out-of-force from 1996 - 2011 are reviewed on an “actual basis”

More than 100 data fields for each policy, contract or account System programming frequently necessary to gather data

Dormancy trigger Date of death


Where Are We Now?

• The Social Security Death Match – Verus Style Run the entire data file against the Social Security Death

Master File (SSDMF)

Applying proprietary algorithm to determine “matches”

Actual matches and “fuzzy” matches on four categories SSN, DOB, Last Name, First Name

Potential matches equal potential unclaimed property liability

Four-point exact match

Three-point exact plus fuzzy

Two-point exact plus two fuzzies

One-point plus three fuzzies

Four-point fuzzies


Where Are We Now?

• Unclaimed Property Audits – Verus Style

Dormancy trigger – “date of death”

Limited time to search for the beneficiary

Risk of early escheatment

Threat of large interest payments

Use of “fuzzy matches”


Where Are We Now?

• NAIC Executive Task Force formed May 17, 2011 Florida Insurance Commissioner Kevin McCarty, current

NAIC President, announced NAIC Task Force called “Investigations of Life/Annuity Claims Settlement Practice (D) Task Force”

Purpose. Coordinate targeted multi-state exams of life insurance companies on claims settlement practices

Membership. Florida, California, Illinois, Iowa, Louisiana, New Hampshire, New Jersey, North Dakota and Pennsylvania


Where Are We Now?

• NAIC Executive Task Force formed May 17, 2011 Focus. Initial focus is top 40 life insurance writers,

comprising 92% of U.S. life insurance market

Potential liability. North of $1 billion

No guidance expected. NAIC leadership has “no appetite” for guidance

Prefer to wait for the result of coordinated market conduct exams

Coordination with Verus

Work papers of unclaimed property audit become the work papers of the market conduct exams


Where Are We Now?

• Tallahassee, Florida, Hearing on May 19, 2011 Insurance Commissioner McCarty, the FL State Controller

and the FL Attorney General conducted evidentiary hearing

Representatives of MetLife and Nationwide were subpoenaed to attend

Controversial positions of regulators:

Claim is matured on “knowledge” of death. Even if a claim for a death benefit is not filed, a claim is matured on the insurer’s books and records for UP purposes, if a company “knows” the insured has died

“Asymmetrical” use of DMF is problematic. Use of DMF to stop annuity payments to deceased annuitants, but not identify life insurance deaths to pay benefits


Where Are We Now?

• Controversial positions of regulators: Taking premium and fees (or lapsing a policy) after death is

problematic. Focus on whether insurers “true-up” on paying claim

Dormancy period begins on date of death, not when insurer “knows” of a death, receives a claim or “proof of death”

• Sacramento, California, Hearing on May 24, 2011 Similar to Tallahassee hearing

CA DOI appointed Verus as market conduct examiner

Examine 10 life insurers on: Use of DMF Practices for paying benefits under insurance policies and

annuities, and Payments to holders of retained asset accounts


Where Are We Now?

• New York Attorney General Subpoenas: On June 21, 2011, the NY AG issued subpoenas to nine life

insurers on their use of the DMF and their compliance with the NY unclaimed property laws

Two weeks to comply Look-back to January 1, 2001, to present All documents and communications on insurers’ policies and

procedures for: Determining when to cease making payments of benefits

due to a death Use of death record databases, like the DMF Locating and notifying owners, insureds and

beneficiaries of matured policies


Where Are We Now?

• New York Attorney General Subpoenas: All documents and communications on insurers’ policies and

procedures for: Identification of policies without an address for any

owner, insured, annuitant or beneficiary Tracking and monitoring returned mail Payment of death benefits Allowing term policies to lapse

Wide range of documents on these topics, as well as unclaimed property filings and set asides/reserves to cover shortfalls in unclaimed property filings

Documents identifying senior and middle management Documents on media coverage of shortfalls in unclaimed

property payments in any state


Where Are We Now?

• New York 308 Letter Following week, on July 5, NY DOI issued “308” Letter to

172 companies

Ordered life companies to cross-check all life insurance, annuity contracts and retained asset accounts on their administrative files against the DMF

Look-back 25 years to 1986

NYS issued four sets of guidance on use of DMF

Two-stage reports

First stage report. Due October 31, 2011. Must complete the cross-check, categorize and report results electronically on spreadsheet using the Department’s portal


Where Are We Now?

• New York 308 Letter Methodology required to do cross-match

If SSN: one-point check of SSN against DMF Exact match only – no “fuzzy match”

If no SSN: match first and last name and date of birth against the DMF

Must verify the death

Second-stage progress updates on the last day of each month

From November 2011 through March 2012

Progress updates must be cumulative

Show matches eliminated because previously paid or not in-force at death, where locating beneficiary or still investigating

Very labor intensive


Where Are We Now?

• Proliferation of uncoordinated state market conduct exams, surveys, audits and subpoenas since May 2011

Inquiries from DOI in at least ten states, such as CT, CO, IA, IL, KS, LA, MI, MA, MN and OH

Market conduct single state exams by at least nine states: CA, FL, NE, ND, MA, MD, MN, NY and PA

FL and CA appointed Verus as market conduct examiner

Multi-state market conduct exams from seven states on NAIC EX Task Force signed by FL, plus 23 others

Materials provided to Verus in unclaimed property audit are working papers in market conduct exam


Where Are We Now?

• Ongoing Escalation of Unclaimed Property Probes On October 28, 2011, the MN AG and State Commissioner of

Commerce issued a letter requiring insurers to perform a comprehensive review of internal records and policies on unclaimed property

Certify compliance with unclaimed property laws by November 30

On October 31, 2011, MN DOC issued subpoenas – like NY AG – but going back 20 years

On November 4, 2011, the NY AG and Comptroller jointly vowed “to undertake the largest and most comprehensive investigation of life insurance practices in the country”

To make sure life insurance companies “make good on their promises to beneficiaries and their obligations to the state of New York”

In February 2012, MA AG issued subpoenas, even though MA is a Verus state for unclaimed property and market conduct exam purposes


Where Are We Now?

• Class Actions Four class actions filed in Ohio state court; all removed to federal

court under CAFA One state remanded to state court

• Plaintiffs’ Theory Insurer duty to affirmatively determine whether any insured with

greater than 70% (or 60%) chance of having died has in fact died and to pay benefits without proof of claim

Seek classes of all insureds for past 15 years with > 70% (or 60%) chance of death – including those who have died

Defenses including lack of legal support for alleged duty and absence of injury/standing for living plaintiff where no benefits are due

One motion to dismiss granted by state court on basis of these defenses; on appeal

One case voluntarily dismissed; motions pending in two cases


Where Are We Now?

• Illinois False Claim Act Lawsuits – Sealed Lawsuits alleged insurers’ failure to transfer policy proceeds to state

Alleged 4,766 policies valued at $524.3 million

More than $1 billion counting alleged penalties

Whistleblower plaintiff receives 15%-30% of proceeds recovered

• New York Securities Derivative Suit Asymmetrical use of DMF

Alleged breach of directors’ fiduciary duties to insurer

Alleged breach purportedly caused devaluing of stock; increased regulatory exposure to insurer


Where Are We Now?

• Regulation by Settlement Industry standards developed from company-specific

settlements

Huge regulatory fees; no clear authority

Inherent uncertainty after settlement

No finality


Where Are We Now?

• Settlements: Unclaimed Property and MCE Date of death is dormancy trigger on unclaimed property audit

settlements (no basis in law) Possible conflicts of law issues on “beneficiary presumption” “Settlement” is a misnomer: Verus will present “fuzzy matches” to

insurer at a rate of 10,000 or more per month for a year or so, for validation or proof that match is invalid, which must be provided to Verus within 30 days

ERISA annuity contracts are carved out of UP settlement, but not market conduct settlement

Insurer agrees to conduct quarterly searches of DMF using unproven “fuzzy match” algorithm to obtain “notice” of death

Once insurer receives “notice” of valid death, must conduct a “thorough search” for beneficiaries – or escheat

Market Conduct Exam Settlement continues for an additional 8 years, with payments to Verus and the states for administering the exam throughout that period.


TWO WORLDS COLLIDE –

INSURANCE LAW VS. UNCLAIMED PROPERTY LAW


Two Worlds Collide – Insurance Law vs. Unclaimed Property Law

• Conflicting demands and tensions resulting from different approaches of

Insurance regulation and traditional insurance practices

Unclaimed property law and positions staked out by auditors and unclaimed property administrators

• Conflicting objectives of regulatory schemes Insurance regulation – insurer solvency and protection

of insureds and beneficiaries

Unclaimed property – earliest possible escheatment of funds to state



• Insurance regulation Unfair Claims Practices Act

What constitutes a claim

• Unclaimed property laws General concept – if property is unclaimed for full dormancy

period, report it and escheat it to state

Outside of insurance, generally based on loss of contact with property owner

Different dormancy period triggers for insurance

Typically when (i) proceeds became due and payable or (ii) insured reaches or would have reached limiting age

Some states have knowledge of death trigger



• Proof of death vs. knowledge of death

What constitutes knowledge of death

What constitutes a claim

What triggers statutory interest



• Time limits Insurance – often no time limit for submission of death

benefit claim

Unclaimed property

In some states, escheatment is required at the end of a dormancy period triggered by knowledge of death, without regard to submission of any claim for benefits

Verus contends that the dormancy period is triggered by date of death, without regard to any claim for benefits or even any knowledge of death



• Impact of knowledge of death In less than half of states, knowledge of death an

express dormancy trigger

In more than half of states, not an express dormancy trigger

Arguably no dormancy period triggered until limiting age reached if merely knowledge of death without proof of death and no claim

Not necessarily a good position for insurers to be in

Consider impact in states where statutory interest runs from date of death

What position will insurance regulators take?



• Date of death as dormancy trigger

Verus position, citing Connecticut Mutual v. Moore, apparently for all states

Not supported by Moore

Not supported by language of most statutes

Implies duty to search affirmatively for deaths to avoid unclaimed property penalties

Duty – Insurance regulators may attempt to impose and/or adopt new statutes



• Duty to maintain contact with insureds and beneficiaries

Insurance law generally does not appear to impose duties to seek out new addresses (although referenced in NAIC Market Conduct Examination Handbook)

Relevance of loss of contact under unclaimed property laws

Relevant to limiting age triggers

Some duties imposed by 1981 Act

Loss of contact after submission of a claim



• Time period to verify deaths and attempt to pay claims Where claim submitted, Unfair Claims Practices

statutes typically set time frames

Verus audit process seeks to impose short period to verify deaths and determine whether policy proceeds may be due and owing

Insurance regulators may attempt to impose new requirements and/or sponsor new statutes



• Protection against liability for early and/or improper escheatment

Unclaimed property administrators and auditors are urging procedures that may involve escheating early or to the wrong state

Not clear whether liability relief provisions in unclaimed property statutes apply in such circumstances

Insurance regulators should be concerned about exposure to insurers possibly created by questionable escheatment procedures

Unclaimed property administrators and auditors not taking into account federal securities laws



• Insurance regulators’ lack of authority• Contractual obligations• Unfair Claims Practices Act• Market regulation handbook• New York• Historical perspective


POINTERS TO KEEP IN MIND:

UNCLAIMED PROPERTY AND

MARKET CONDUCT EXAMS


Unclaimed Property Exams

• How unclaimed property exams differ from state market conduct exams

No statute of limitations Utilizing third-party contingent fee auditors Aggressive definitions of unclaimed property types Burden of proof is immediately shifted to the company Very few administrative remedies

• Preparing for the unclaimed property exam Be proactive – determine your potential liability Consider running DMF using “fuzzy matches” Voluntary Disclosure Agreements Process and procedure review


Market Conduct Exam Considerations

• Exams will focus on policies and procedures for and results of Claims process

Missing policyholders

Limiting age and maturity dates

• Steps to consider Form your team (compliance, legal, unclaimed property) to do

internal compliance review under attorney-client privilege

Know whether you have used the DMF in your business and evaluate your processes for paying death benefits

Evaluate how you identify and locate beneficiaries

Evaluate what you do to find missing policyholders, see if insured on lapsed policy died, determine if the missing person is deceased, treat maturity date

Examine your processes around escheatment


Market Conduct Exam Considerations

• Confidentiality of market conduct exam papers In 2004, the NAIC adopted Model 693, which has been

adopted or is consistent with a majority of state laws Strong confidentiality protections in the Model. Section

7.A. of Model 693 requires that “all documents, including but not limited to working papers” be kept confidential

But confidentiality provisions of Model 693 are not uniformly adopted. Not all state laws treat market conduct materials as confidential or prohibit states from disclosing those market conduct materials Some states make disclosure of market conduct

materials permissible at the discretion of the commissioner

Get legal advice because litigation may be a real possibility


WHERE ARE WE HEADED?


Where Are We Headed?

• State Comptrollers and Treasurers Reducing budget deficits

Unclaimed property is a proven revenue raiser States are holding more than $6 billion in unclaimed

property Companies remit hundreds of millions a year States return only a fraction of the amount collected States benefit from poorly documented beneficiary

information Third-party unclaimed property audits are a win-win for the

state



• Unclaimed Property Administrators Continue to utilize unclaimed property as a revenue

generator

Creative theories of what is unclaimed property

Changes in state laws regarding dormancy trigger

Uniformity?

Lack of knowledge of insurance law

Willingness to enter into voluntary disclosure agreements

Improved procedures for returning escheated property to beneficiaries



• NAIC/State Insurance Regulators Likely require a DMF match at regular intervals across the business Require investigation of matches under the Unfair Claims Practices

statutes What level of “match” will be required?

Single point match of SSN like New York 308 guidance? “Fuzzy matches” under the Verus algorithm? Model Law and/or 50 state variations?

What level of proof of death will be required to pay and/or escheat a “claim” and trigger “interest” on death proceeds?

Model Law and/or 50 state variations? Existing contract language? Variable contracts?

What types of duties will be imposed?



• NAIC/State Insurance Regulators Multi-state exams are likely

Multi-state MCE for top 40 life insurers

Coordinate with multi-state unclaimed property audit so data from audit becomes market conduct work papers

Prepare Remediate Legal defenses



• Potential Challenges with Unclaimed Property/Market Conduct Exams/Settlements

Lack of authority

Violates existing authority

Conflict of interest

Confidentiality of records

Examiner qualifications

Insurer privileges

Sampling

Credible match criteria



• State Attorneys General More subpoenas or inquiries possible

Unclear whether AGs are coordinating with each other or with

Unclaimed property administrators

Insurance regulators

Can be very onerous in scope



• Possible Further State False Claims Act Litigation Cited in Minnesota Attorney General Letter

32 states and DC have False Claims Acts

Six apply only to Medicaid

Most modeled after federal statute

Most have qui tam provisions

Most apply to reverse false claims



• Unclaimed Property Claims Litigation – Beyond Ohio Duty to search

Beneficiary as plaintiff

Negligent escheatment

Consequential damages

Improper calculations of benefits



• NCOIL Legislation Will an alternative to the Verus Settlement emerge?

Current draft legislation uses 308 Model and may be opposed by the Verus states



• Considerations Review policies and procedures

Consider VDAs

Conduct remediation in advance of audit

Fuzzy matches – test credibility; determine exposure

alic annual meeting: navigating through uncertainty: life insurance regulation and unclaimed...

Documents

unclaimed property settlement

sutherland asbill brennan

unclaimed property law

fuzzies slide

market conduct exams

verus settlements

pennsylvania slide

life insurance regulation