Wednesday, December 16, 2015

No. 133: Unclaimed Property—The Battle Heats Up as Three Insurers File a Lawsuit against an Auditing Firm and a State Treasurer

Verus Financial LLC (Waterbury, CT) audits insurance companies on behalf of state treasurers about unclaimed property held by the companies. Michael Frerichs is the Illinois State Treasurer. United Insurance Company of America (Chicago, IL), Reserve National Insurance Company (Oklahoma City, OK), and Reliable Life Insurance Company (St. Louis, MO) are among several companies in the Kemper group and are referred to here as "Kemper."

On October 26, 2015, Kemper filed a lawsuit in an Illinois state court against Frerichs and Verus. The lawsuit is a preemptive action following an October 6 "final notice and demand" and threat of legal action by Frerichs to compel production of data.

On November 2, 2015, Frerichs issued a press release about the lawsuit. He has not yet responded to the lawsuit in court. (See United v. Frerichs, Seventh Judicial Circuit Court, Sangamon County, Illinois, Case No. 2015-MR000998.)

Kemper's Complaint
Kemper's 31-page complaint contains 11 counts. Ten are requests for declaratory judgments and one is a request for injunctive relief. Here are the counts:
  1. Kemper has no obligation arising under Illinois law to use the Social Security Death Master File (DMF) to determine whether insureds are deceased and benefits are due and payable.
  2. The dormancy period under Illinois law commences with Kemper's receipt of proof of an insured's death or attainment of the mortality limiting age (often age 100), not an insured's date of death.
  3. The Frerichs unclaimed property audit of Kemper is unlawful because he has not shown he has reason to believe that Kemper failed to report unclaimed property in Illinois.
  4. Frerichs and Verus cannot compel Kemper to provide policy records for comparison against the DMF for the purpose of seeking to create unclaimed property.
  5. Frerichs and Verus can only obtain records related to policies which were in force during the five years prior to commencement of the audit.
  6. The request by Frerichs and Verus is ultra vires [in excess of legal authority], overbroad, and unduly burdensome, and thus violates Kemper's rights under the Fourth Amendment of the U.S. Constitution.
  7. The request by Frerichs and Verus is ultra vires, overbroad, and unduly burdensome, and thus violates Kemper's rights under Article 1, Section 6 of the Illinois Constitution.
  8. The request by Frerichs and Verus violates Kemper's due process rights under the Fourteenth Amendment of the U.S. Constitution.
  9. The request by Frerichs and Verus violates Kemper's due process rights under Article 1, Section 2 of the Illinois Constitution.
  10. Frerichs failed to follow requirements of the Illinois Administrative Procedure Act in promulgating rules.
  11. Kemper needs injunctive relief barring Frerichs and Verus from requiring Kemper to produce policy records to enable DMF comparison and requiring Kemper to pay or escheat policy proceeds to the state based on the results of such a comparison.
Exhibits to Kemper's Complaint
Attached to Kemper's complaint are 161 pages showing 14 exhibits that are referred to in the complaint. Here are the exhibits:
  1. The original 2008 contract between Frerichs' predecessor and Verus.
  2. The current 2015 contract between Frerichs and Verus.
  3. A sample policy issued by United.
  4. A sample policy issued by Reserve.
  5. A sample policy issued by Reliable.
  6. The multistate settlement agreement entered into by Verus and the Pacific Life companies several years ago.
  7. An August 8, 2011 letter from the Illinois Unclaimed Property Division to Verus authorizing an audit of Kemper.
  8. An August 19, 2011 letter from Verus to Kemper notifying Kemper of the audit.
  9. A November 7, 2011 letter from Kemper to Verus containing requests relating to the audit.
  10. A March 28, 2012 letter from Kemper to Verus containing further requests relating to the audit.
  11. A June 29, 2012 letter from Kemper to Verus expressing concerns about the data requested by Verus.
  12. A May 3, 2012 memorandum from Verus to Kemper containing details of the data request from Verus. [Note that exhibits 11 and 12 are out of date sequence.]
  13. A July 17, 2012 letter from Verus to Kemper in response to the June 29, 2012 letter from Kemper.
  14. An October 6, 2015 letter from Frerichs to Kemper containing a "final notice and demand" that Kemper produce the requested data by October 16, 2015, or Frerichs "will take the necessary legal steps to compel production."
The Frerichs Press Release
The Frerichs two-page press release is entitled "Kemper Companies Sue to Block Audit to Confirm Payment of Life Insurance Policies." The subtitle is "Audits of Other Life Insurance Companies Identified More Than $195 Million Owed to Grieving Families."

My reason for mentioning the press release is that Frerichs and Verus have not yet responded to the complaint in court, and the press release provides at least an inkling of Frerichs' views. The press release says Frerichs has asked Illinois Attorney General Lisa Madigan to represent the state's interests in the lawsuit. The press release attributes this statement to Frerichs:
We made a simple request to audit these companies to determine whether they are holding onto unpaid death benefits. I can only guess as to why their lawyers responded with a lawsuit rather than work with us to help those who have suffered a death in their family.
My Articles about Unclaimed Property
I wrote articles about unclaimed property in the October 2010, November 2010, and December 2010 issues of The Insurance Forum. The first article was prompted by a story in Bloomberg Markets magazine alleging that life insurance companies were "secretly profiting from death benefits owed to the survivors of service members and other Americans" through so-called retained asset accounts. The second article reported the results of my survey of 20 large states and 20 large life insurance companies in an effort to learn the magnitude of unclaimed property turned over (escheated) to states by life insurance companies. The third article was a follow-up to my first article about retained asset accounts.

General Observations
I have three comments about unclaimed property in connection with life insurance. First, the insuring agreement in a life insurance policy usually says the company pays the death benefit when the company receives proof of the insured's death. For example, the key sentence in United's sample policy says "Payment will be made after we receive proof of the insured's death, subject to the terms of this policy." Interestingly, there is often no mention of the filing of a death claim, suggesting that the company could obtain the proof of death on its own volition. It should be recognized that it may be unrealistic to require a beneficiary, who may be unaware of the existence of the insurance, to notify the company of the insured's death. I think it is wrong to say the beneficiary's ignorance frees the company from responsibility.

Second, I have long argued that companies should be required to mail a report at least once a year to every policyholder irrespective of whether a premium payment is due. The mailing should be made in such way that the postal service will notify the company of a change of address when it forwards mail to a new address, and will return mail that was undeliverable because no forwarding address is on file. Such information would alert the company in a timely manner each year to policyholders with whom the company has lost contact. It would also alert the company to insureds who might be deceased. To my knowledge, no state insurance law or regulation has ever required life insurance companies to mail annual reports to policyholders.

Third, what brought unclaimed property held by life insurance companies to national attention was the demutualization wave beginning in the early 1990s. To complete a demutualization, a mutual company must contact its policyholders to ask for their approval of the demutualization plan, and later must send them cash and/or stock to which they are entitled. Some demutualizing companies received a deluge of undelivered mail, thus showing they had huge numbers of lost policyholders. It is ironic that the problem initially was ignored by state insurance regulators. Instead, the problem was addressed by state treasurers. They have a vested interest in obtaining unclaimed property, most of which never reaches the rightful owners and therefore remains forever with the states.

Available Material
I am making available a complimentary 206-page PDF consisting of four items: the 31-page complaint by Kemper against Frerichs and Verus, 161 pages of exhibits to the complaint, the two-page press release issued by Frerichs, and 12 pages containing the three 2010 articles in The Insurance Forum about unclaimed property. E-mail and ask for the December 2015 unclaimed property package.