Standard Operating Procedure in the Life Insurance Industry Brings Bad Press and May Spur Regulatory Action

A recent push by insurance regulators across the country on life insurance companies has already resulted in millions of dollars of previously unpaid benefits going out to thousands of beneficiaries, but some suggest that settlement fees, fines, penalties and escheat payments are the real impetus behind state enforcement actions.

The typical life insurance policy requires beneficiaries to notify the insurance company of the death of an insured before policy benefits are paid out. However, as recent press reports have emphasized, this standard operating procedure has left potentially hundreds of millions of dollars in unpaid life insurance claims, and tens of thousands of beneficiaries without the benefits they are due.

The Wall Street Journal suggests that regulators are placing the blame on the insurance companies:

Regulators say most life insurers fail to take steps to determine whether policyholders have died, leaving it to beneficiaries to file claims. But some families don't know their loved ones hold policies. It is a widespread problem, state officials say, and one that hits lower-income families the hardest. [1]

Recently, New York's state Department of Financial Services announced that almost 8,000 people received more than $52 million in unpaid life insurance benefits after it began pushing life insurers to look for unpaid claims internally. The Department of Financial Services urged life insurers to use resources like the U.S. Social Security Administration database to identify deceased insureds under life insurance policies, annuity accounts and retained asset accounts.[2]

Some life insurers have already been performing cross-checks with the Death Master File for years.

While some companies, such as Massachusetts Mutual Life Insurance and Prudential Insurance Company of America have been performing regular cross-checks with resources like the Social Security Administration's Death Master File for years, the Department of Financial Services was pushing life insurers to go back more than twenty-five (25) years in their searches for unpaid life insurance benefits, according to Thomas Workman, president of the Life Insurance Council of New York.[3]

New York is not the only state interested:

Meanwhile, a task force of regulators from Florida, California and eight other states is aiming to reach up to three settlements with major insurers as soon as next month, Florida officials said.[4]

Florida officials have already reached a settlement with John Hancock Life Insurance Company that resulted in payments to beneficiaries, or turned over to states as unclaimed property, of more than $88 million.[5]

Regulators and attorneys general are probing whether regulatory or enforcement action is appropriate.

The regulatory task force, as well as some state attorneys general, are probing whether regulatory or enforcement action is appropriate, although life insurers maintain their procedures are lawful and in accordance with the policy terms.[6]

These probes generally are focused around concerns that many big insurers for years have routinely used a Social Security death database when doing so has been beneficial to their business, such as to cut off retirement-income checks. But they haven't used the same database to ensure payouts to life-insurance policyholders' beneficiaries, the authorities say.[7]

Life insurers are still reviewing up to 950,000 other policies and almost 28,000 old claims for additional unpaid benefits.

The average payment to beneficiaries resulting from the New York push was almost $7,000, which the largest overdue payment was more than $670,000, plus interest. Meanwhile, life insurers are still reviewing up to 950,000 other policies and almost 28,000 old claims that could result in millions more in unpaid benefits to beneficiaries.[8]

The amount of the unpaid benefits and the number of affected beneficiaries in states like New York and Florida have gotten the attention of regulators from across the country:

New York is just one of 35 states that are investigating the Death Master File issue. Regulators have estimated that as a result of those allegedly improper payment practices, the combined damages across the affected states may exceed $1 billion.[9]

While the push by regulators for life insurers to track down unpaid claims is certainly good for beneficiaries, it may also be good for state government treasuries. Settlement agreements, fines and penalties mean money in "depleted state coffers," noted Bruce Ferguson with the American Council of Life Insurers, as reported by the Wall Street Journal.[10]

State escheat laws may require that some abandoned claims be paid out to the state treasury.

Another possible boon for ailing state government pocket books: unclaimed or abandoned property generally escheats to the applicable state treasury. That means if life insurers find that they owe unpaid benefits to beneficiaries on old policies, but they can't track down those beneficiaries, state escheat laws may require that money to be turned over to the state government.

1. Bring Out Your Dead: Push Pays Off for Policyholders, Leslie Scism, Wall Street Journal, December 6, 2011.
2.  Life Insurers Pay Out $52.6 Million after NY Push, Karen Freifeld, Reuters, December 5, 2011.
3.  Life Insurers Pay Out..., Id.
4. Bring Out Your Dead..., Id.
5. Bring Out Your Dead..., Id.
6. Bring Out Your Dead..., Id.
7. Bring Out Your Dead..., Id.
8. Insurance bigs sat on $52M cash owed grieving New Yorkers, Douglas Feiden, New York Daily News, December 6, 2011.
9. Life Insurers Pay N.Y. $52.6M Post Investigation, Jeff Jeffrey, A. M. Best Company, Inc., Insurance NewsNet.com, December 5, 2011,
10. Bring Out Your Dead..., Id.

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