Transcript Life Insurance Regulation and Unclaimed Property Audits

Marlys A. Bergstrom
Phillip E. Stano
Steuart H. Thomsen
Mary Jane Wilson-Bilik
May 22, 2012
ALIC Annual Meeting: Navigating Through
Uncertainty: Life Insurance Regulation and
Unclaimed Property Audits
Contributing Authors
Marlys A. Bergstrom
Attorney
404.853.8177
[email protected]
Steuart H. Thomsen
Partner
202.383.0166
[email protected]
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Phillip E. Stano
Partner
202.383.0261
[email protected]
Mary Jane Wilson-Bilik
Partner
202.383.0660
[email protected]
©2012 Sutherland Asbill & Brennan LLP
Overview
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Where are we now?
 Audits, market conduct exams, settlements and AG subpoenas
 Conflicting guidance: the New York 308 Letter vs. the Verus
Settlements
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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?
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State Treasurers/Comptrollers
NAIC/State Insurance Regulators
State Attorneys General
Litigation/Legislative (NCOIL)
Questions?
©2012 Sutherland Asbill & Brennan LLP
WHERE ARE WE NOW?
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now? A Timeline
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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 multistate exams of claim settlement practices
 Florida and California conduct hearings
 California DOI appoints Verus as market conduct examiner
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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
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November 2011: NY AG and Controller announce largest
investigation of life insurance industry
 CA Controller hires major law firm
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©2012 Sutherland Asbill & Brennan LLP
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.
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
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”
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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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”
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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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 inforce at death, where locating beneficiary or still investigating
 Very labor intensive
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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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
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 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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Class Actions
 Four class actions filed in Ohio state court; all removed to federal
court under CAFA
 One state remanded to state court
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Now?
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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.
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©2012 Sutherland Asbill & Brennan LLP
TWO WORLDS COLLIDE –
INSURANCE LAW VS. UNCLAIMED PROPERTY LAW
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• Proof of death vs. knowledge of death
 What constitutes knowledge of death
 What constitutes a claim
 What triggers statutory interest
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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?
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
• 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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
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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
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©2012 Sutherland Asbill & Brennan LLP
Two Worlds Collide – Insurance Law vs.
Unclaimed Property Law
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Insurance regulators’ lack of authority
Contractual obligations
Unfair Claims Practices Act
Market regulation handbook
New York
Historical perspective
©2012 Sutherland Asbill & Brennan LLP
POINTERS TO KEEP IN MIND:
UNCLAIMED PROPERTY AND
MARKET CONDUCT EXAMS
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©2012 Sutherland Asbill & Brennan LLP
Unclaimed Property Exams
• How unclaimed property exams differ from state
market conduct exams
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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
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Be proactive – determine your potential liability
Consider running DMF using “fuzzy matches”
Voluntary Disclosure Agreements
Process and procedure review
©2012 Sutherland Asbill & Brennan LLP
Market Conduct Exam Considerations
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Exams will focus on policies and procedures for and results of
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Claims process
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Missing policyholders
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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
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©2012 Sutherland Asbill & Brennan LLP
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
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©2012 Sutherland Asbill & Brennan LLP
WHERE ARE WE HEADED?
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
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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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
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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?
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• 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
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• Unclaimed Property Claims Litigation – Beyond Ohio
 Duty to search
 Beneficiary as plaintiff
 Negligent escheatment
 Consequential damages
 Improper calculations of benefits
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• NCOIL Legislation
 Will an alternative to the Verus Settlement emerge?
 Current draft legislation uses 308 Model and may be
opposed by the Verus states
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©2012 Sutherland Asbill & Brennan LLP
Where Are We Headed?
• Considerations
 Review policies and procedures
 Consider VDAs
 Conduct remediation in advance of audit
 Fuzzy matches – test credibility; determine exposure
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©2012 Sutherland Asbill & Brennan LLP