A federal district court judge in Massachusetts has called into question the very basis for the aggressive efforts of states to collect the unclaimed proceeds of life insurance policies.
In a decision handed down Tuesday, Judge Joseph Tauro said that Massachusetts and Illinois allow insurance companies to require a beneficiary to furnish proof of death before paying policy proceeds.
The case is Richard Feingold v. John Hancock Life Insurance Co.
The judge acted in dismissing a class action lawsuit against John Hancock Life Insurance Co.
A lawsuit filed last month in California against state Comptroller John Chiang makes a similar claim.
An industry lawyer who asked not to be named noted that the Feingold decision is the second recent instance where a court has rejected a plaintiff's attempt to impart liability on a life insurer for breach of an alleged obligation to engage in efforts to determine whether insureds have died before a claim for death benefits is submitted.
The first was in Andrews v. Nationwide Mutual Insurance Company, another putative class action, where, in October 2012, Ohio's Court of Appeals affirmed dismissal of the complaint, holding that the defendant companies did not have a duty under the insurance contract to search the Social Security Death Master File for potentially deceased insureds, the lawyer said.
All courts addressing this issue have ruled that insurers do not have a duty to search the Social Security Administration’s Death Master File. The law provides no support for a “duty to search” in states which have not adopted NCOIL type legislation,” said Phillip E. Stano, a partner at Sutherland, Asbill & Brennan in Washington. Stano represents a number of clients in litigation and negotiations with state regulators on this issue.
In this most recent decision, Tauro relied on "established principles of insurance law," including that an insurance policy may require a beneficiary to furnish proof of death before paying policy proceeds, according to an alert on this decision issued by Jorden Burt LLP's Unclaimed Property Task Force.
The alert said that the court found that "Hancock's practice of requiring the life insurance policy beneficiary to submit proof of death before payment comports with both Massachusetts and Illinois law."
As a result, the judge held that “plaintiff's claim that Hancock engaged in unfair and deceptive conduct in violation of state consumer protection laws failed," according to the alert.
It also said Tauro concluded that the same established principles of insurance law undermined the unjust enrichment, conversion, and declaratory relief claims.
Because the insurance policy and state law permitted Hancock to hold policy proceeds until proof of death was provided, plaintiff could not establish that Hancock's actions violated “fundamental principles of justice, equity and good conscience” sufficient to state an unjust enrichment claim, Tauro said in his decision.
The alert said the court also rejected plaintiff's argument that a Global Resolution Agreement (GRA) between Hancock and the unclaimed property administrators of several states altered Hancock's obligations under established law.
In addition to noting that this issue was not raised in plaintiff's complaint, the court held that nothing suggests Hancock and the states intended plaintiff to be a third party beneficiary of the GRA.
Unclaimed property probes are the No. 1 regulatory issue for insurance companies at this time.
More than 40 states are conducting audits of insurance companies. Chiang also recently filed suit making the same claims against Kemper Insurance Co. of Chicago, formerly Unitrin, the parent of three debit insurance companies, or those that issue small face-value policies.
At least 44 states are using outside auditors to conduct probes of the unclaimed property practices of the largest insurers.
In addition, a hearing is scheduled next month in a lawsuit filed by the West Virginia treasurer against 68 insurance companies nationwide.
The probes are on three tracks: State insurance regulators, state treasurers/unclaimed property agencies and a market conduct exam.
They are dealing with two sets of regulators: Unclaimed property administrators or treasures vs. state insurance commissioners. And there are two sets of agreements per company: A Global Resolution Agreement (GRA) with administrators/state treasurers and a Resolution Settlement Agreement (RSA) with insurance commissioners.
“Moreover, GRAs look backwards; RSA look forward,” according to one industry lawyer. “The outside auditors make more money -- 10 percent to 13 percent on the GRAs -- so they are more willing to work with state administrators/treasurers," according to another industry lawyer.
The suit was filed on behalf of Feingold as lead plaintiff in February. It said Feingold was the beneficiary of a life insurance policy purchased in1945 by his mother, Mollie.
She died in 2006, but he learned that she had the policy only in 2010, through a website on unclaimed property that said he was owed $459.
According to the lawsuit, he took that money, but, only received an additional $1,349.71 “without explanation as to why this money was not escheated to the state of Illinois when the dividend monies were escheated or explaining with any degree of certainty what the check was for.”
It was likely prompted by the settlement John Hancock reached last November regarding its unclaimed property policies with the insurance departments of six states.