Attention to unclaimed property issues affecting life insurance companies – including issues relating to unpaid life insurance and annuity benefits – has significantly escalated in recent weeks, due to regulatory actions, media coverage, and public expressions of interest by the plaintiffs’ bar. This Legal Alert discusses those developments and puts them into perspective.

Given the precarious financial condition of many states, the pace of unclaimed property audits has increased rapidly in the past several months. Over the past three years, more than 20 insurance companies have become subject to unclaimed property audits by 35 cash-hungry states. What many insurers originally viewed as routine unclaimed property audits of their business have now evolved into a challenge to alleged widespread industry practices pertaining to compliance with states’ unclaimed property laws. State regulators are asserting that insurers are engaging in an alleged industry-wide practice of improperly failing to pay death benefits to the beneficiaries of life insurance policies. Insurers have also been accused of reducing cash values of these policies by collecting insurance charges from deceased policyholders. Once the policy’s cash surrender values were exhausted, the insurer would purportedly cancel the policy. State officials claim that insurers consult certain government databases – e.g., the Social Security Administration’s Death Master File (DMF) – to terminate annuity and claim payments when beneficiaries die, but ignore these same databases to determine if policyholders have died and beneficiaries should be paid.

A contingent fee audit firm founded by former class action plaintiff attorneys has been retained by the unclaimed property administrators of many states to conduct these audits. These state audits have gone beyond traditional unclaimed property audits in seeking information and taking positions about the insurer’s procedures. (Traditional unclaimed property audits have focused more on actual property and accounting information.) Positions that the auditors are taking or suggesting include the following:

-Insurers may have a “duty” to use the Social Security Death Master File to try to identify insureds under life insurance policies who have died.

-Unless an annuity’s Maturity Date is extended by contract or an owner’s affirmative behavior, an annuity that remains in the accumulation phase after the Maturity Date should be treated as unclaimed property.

-Insurers should have procedures in place to carry out their alleged duties related to locating and notifying beneficiaries.