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ALIC Annual Meeting: Navigating Through Uncertainty: Life Insurance Regulation and Unclaimed Property Audits Marlys A. Bergstrom Phillip E. Stano Steuart.

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Presentation on theme: "ALIC Annual Meeting: Navigating Through Uncertainty: Life Insurance Regulation and Unclaimed Property Audits Marlys A. Bergstrom Phillip E. Stano Steuart."— Presentation transcript:

1 ALIC Annual Meeting: Navigating Through Uncertainty: Life Insurance Regulation and Unclaimed Property Audits Marlys A. Bergstrom Phillip E. Stano Steuart H. Thomsen Mary Jane Wilson-Bilik May 22, 2012

2 ©2012 Sutherland Asbill & Brennan LLP 2 Contributing Authors Marlys A. Bergstrom Attorney Steuart H. Thomsen Partner Phillip E. Stano Partner Mary Jane Wilson-Bilik Partner

3 ©2012 Sutherland Asbill & Brennan LLP 3 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?

4 ©2012 Sutherland Asbill & Brennan LLP 4 WHERE ARE WE NOW?

5 ©2012 Sutherland Asbill & Brennan LLP 5 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

6 ©2012 Sutherland Asbill & Brennan LLP 6 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.

7 ©2012 Sutherland Asbill & Brennan LLP 7 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

8 ©2012 Sutherland Asbill & Brennan LLP 8 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 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 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

9 ©2012 Sutherland Asbill & Brennan LLP 9 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

10 ©2012 Sutherland Asbill & Brennan LLP 10 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

11 ©2012 Sutherland Asbill & Brennan LLP 11 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

12 ©2012 Sutherland Asbill & Brennan LLP 12 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

13 ©2012 Sutherland Asbill & Brennan LLP 13 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 insurers 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

14 ©2012 Sutherland Asbill & Brennan LLP 14 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

15 ©2012 Sutherland Asbill & Brennan LLP 15 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

16 ©2012 Sutherland Asbill & Brennan LLP 16 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

17 ©2012 Sutherland Asbill & Brennan LLP 17 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, Must complete the cross-check, categorize and report results electronically on spreadsheet using the Departments portal

18 ©2012 Sutherland Asbill & Brennan LLP 18 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

19 ©2012 Sutherland Asbill & Brennan LLP 19 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

20 ©2012 Sutherland Asbill & Brennan LLP 20 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

21 ©2012 Sutherland Asbill & Brennan LLP 21 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

22 ©2012 Sutherland Asbill & Brennan LLP 22 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

23 ©2012 Sutherland Asbill & Brennan LLP 23 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

24 ©2012 Sutherland Asbill & Brennan LLP 24 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.


26 ©2012 Sutherland Asbill & Brennan LLP 26 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

27 ©2012 Sutherland Asbill & Brennan LLP 27 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

28 ©2012 Sutherland Asbill & Brennan LLP 28 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

29 ©2012 Sutherland Asbill & Brennan LLP 29 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

30 ©2012 Sutherland Asbill & Brennan LLP 30 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?

31 ©2012 Sutherland Asbill & Brennan LLP 31 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

32 ©2012 Sutherland Asbill & Brennan LLP 32 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

33 ©2012 Sutherland Asbill & Brennan LLP 33 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

34 ©2012 Sutherland Asbill & Brennan LLP 34 Two Worlds Collide – Insurance Law vs. Unclaimed Property Law 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

35 ©2012 Sutherland Asbill & Brennan LLP 35 Two Worlds Collide – Insurance Law vs. Unclaimed Property Law Insurance regulators lack of authority Contractual obligations Unfair Claims Practices Act Market regulation handbook New York Historical perspective


37 ©2012 Sutherland Asbill & Brennan LLP 37 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

38 ©2012 Sutherland Asbill & Brennan LLP 38 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

39 ©2012 Sutherland Asbill & Brennan LLP 39 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

40 ©2012 Sutherland Asbill & Brennan LLP 40 WHERE ARE WE HEADED?

41 ©2012 Sutherland Asbill & Brennan LLP 41 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

42 ©2012 Sutherland Asbill & Brennan LLP 42 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

43 ©2012 Sutherland Asbill & Brennan LLP 43 Where Are We Headed? 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?

44 ©2012 Sutherland Asbill & Brennan LLP 44 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

45 ©2012 Sutherland Asbill & Brennan LLP 45 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

46 ©2012 Sutherland Asbill & Brennan LLP 46 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

47 ©2012 Sutherland Asbill & Brennan LLP 47 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

48 ©2012 Sutherland Asbill & Brennan LLP 48 Where Are We Headed? Unclaimed Property Claims Litigation – Beyond Ohio Duty to search Beneficiary as plaintiff Negligent escheatment Consequential damages Improper calculations of benefits

49 ©2012 Sutherland Asbill & Brennan LLP 49 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

50 ©2012 Sutherland Asbill & Brennan LLP 50 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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