Thursday, June 10, 2021

No. 424: Kemper's Long Struggle Relating to Lost Policyholders

On April 5, 2021, the Florida Supreme Court agreed to take a case that has been progressing in Florida state courts. I have been writing for years about the underlying subject matter, which is the handling of lost policyholders. Here I discuss the background and recent developments.

Retained Asset Accounts
The September 2010 issue of Bloomberg Markets magazine carried a special report entitled "Duping the Families of Fallen Soldiers" and subtitled "Life insurers are secretly profiting from the death benefits owed to the survivors of [military] service members and other Americans." The report became a media sensation.

Metropolitan Life Insurance Company (Met) was heavily involved in the administration of government life insurance for members of the military. An attorney at Met dreamed up the idea of sending the beneficiaries of deceased members of the military a book of drafts instead of a check for the death benefit. Met then set up for the beneficiary a "retained asset account" (RAA). Other life insurance companies did the same. As beneficiaries moved around, companies lost contact with many of them. When state unclaimed property agencies learned that companies had not been remitting unclaimed RAA funds in accordance with state unclaimed property laws, the agencies began to investigate.

During the 1990s, many mutual life insurance companies, which at least in theory are owned by their policyholders, converted themselves into shareholder-owned companies through a process called "demutualization." When that occurs, the companies must contact their policyholders, for two reasons. First, they must ask their policyholders for permission to demutualize. Second, if they go through with demutualization, they must compensate their policyholders—with cash or with shares of stock in the new company—for the loss of the policyholders' ownership rights.

Unfortunately, however, the companies may have lost contact with many of their policyholders. The problem was most acute for Met, Prudential, and John Hancock. Those large companies had long been prominent in the sale of so-called industrial life insurance, which is also called "home service life insurance." When the companies exited that business many years ago, they stopped collecting premiums and deemed all their industrial policies as paid-up. Consequently, the companies lost contact with many of their policyholders.

For example, John Hancock, then based in Massachusetts, received huge amounts of undeliverable mail because the mailing addresses were outdated. That attracted the attention of Massachusetts unclaimed property officials. They were concerned that huge amounts of unclaimed property were not being turned over to the state, as required by the state's unclaimed property law, and they launched investigations. Later the matter attracted the attention of state insurance regulators, who also launched investigations.

Kemper's Litigation
In No. 133 (December 16, 2015), I wrote about a lawsuit filed by several Kemper companies against an auditing firm that was conducting an investigation on behalf of state treasurers about unclaimed property held by the companies. In that litigation, Kemper was not successful in blocking the investigation.

Florida's Tough New Rules
In 2016, the Florida Legislature imposed tough new rules on insurance companies with regard to lost policyholders and unclaimed property. Kemper has been fighting the new rules, arguing they are unconstitutional. On June 3, 2020, a three-judge panel of the District Court of Appeal of Florida, First District, in a 2-1 decision, upheld the constitutionality of the new rules. A 26-page document containing the majority and the dissenting June 3, 2020 opinions is here.

Recent Developments
As mentioned at the beginning of this post, on April 5, 2021, the Florida Supreme Court agreed to hear Kemper's appeal of the June 3, 2020 decision by the Florida First District Court of Appeal. As of May 31, 2021, several insurance industry parties have received approval to file amicus briefs in support of Kemper's argument that Florida's new rules are unconstitutional. It appears that no one has indicated an interest in filing an amicus brief in support of the argument that Florida's new rules are constitutional. Clearly the case has a long way to go. (See United Insurance Company of America v. Patronis, Florida Supreme Court, Case No. SC20-1306.)