NAIC Works to Adopt Model Rule on Unclaimed Life Insurance and Annuity Death Benefits; Meanwhile States Continue to Adopt DMF Matching Laws
The Unclaimed Benefits Model Drafting (A) Subgroup (a subcommittee of the Unclaimed Life Insurance Benefits Working Group) has been meeting bi-weekly over the past year to develop a new NAIC model law to address the issue of unclaimed life insurance and annuity death benefits. The Unclaimed Life Insurance and Annuities Model Act would require insurers to compare the insurer’s in-force life insurance policies, annuity contracts, and retained asset accounts against the U.S. Social Security Administration’s Death Master File (“DMF”) – or similar database that is at least as accurate and comprehensive – to determine whether an insurer’s insured, annuity owner, or retained asset holder (“the insured”) has died. Upon such reasonable confirmation of the insured’s death, the insurer would then be obligated to perform a reasonable and good-faith effort to seek out and locate any beneficiaries to the policy, annuity, or asset account. If located, the Model Act requires the insurer to provide the beneficiary with the necessary forms and instructions to make a claim (if the beneficiary has not already done so).
The draft Model also recommends annual reporting by the insurer to the state insurance commissioner of any information concerning the number and amount of unclaimed insurance benefits proceeds transferred to the state unclaimed property funds and the number and amount of insurance benefits proceeds provided to beneficiaries as a result of the DMF matches made in accordance with the search requirements of the Act.
Based on UUPA/NCOIL’s Model Unclaimed Life Insurance Act
The National Conference of Insurance Legislators (NCOIL) first adopted its Model Unclaimed Life Insurance Act in November 2011 – and subsequently amended it in 2014. The NCOIL Model is generally based on the Uniform Unclaimed Property Act (“UUPA”), which was first adopted in 1954 and has since been enacted in some form by all 50 states. However, under UUPA, there is no proactive duty for insurers to determine whether an insured has died and to make sure that any benefits are paid. Moreover, in the aftermath of the global settlements that occurred between life insurance companies and state authorities, beginning in early 2011, NCOIL adopted the Model Unclaimed Life Insurance Benefits Act, drawing substantially from the provisions contained in these settlements. It was under the terms of these settlements that insurers were first required to use the DMF to better ensure that death beneficiaries received life insurance proceeds. The starting point for the NAIC’s draft Unclaimed Life Insurance and Annuities Model Act is the NCOIL Model.
Issues Raised During the Model Act Drafting Process
Throughout the NAIC’s model drafting process, a number of issues have been raised – and some have yet to be resolved – including the following:
- Applicability – As illustrated in the following table, many states that have adopted DMF matching laws have made applicability retroactive – in other words, the law’s requirements apply to all in-force policies, contracts, and accounts. This has been controversial, both in terms of legal challenges under common contract law as well as the hardship the DMF comparison process places on smaller insurers. Nevertheless, over the past several years, legislation to limit the retroactivity aspect of the DMF comparison has failed in several states, and two district-level legal challenges to the requirement have also failed. The NCOIL Model endorses retroactive applicability, while the current draft NAIC Model provides three options for states to consider in terms of when the requirements of the Act should apply:
- Prospective Application, which would only apply the Act’s requirements to those insurance policies, annuity contracts, and retained asset accounts issued or put in force on or after the effective date of the Act;
- Retroactive Application, which would apply the Act’s requirements to all in-force and future life insurance policies, annuity contracts, and retained asset accounts as of the effective date of the Act; and
- Asymmetric Conduct, which creates a bifurcated applicability, providing that if the insurer has not engaged in asymmetric conduct – defined as using the DMF in determining whether an annuitant might be deceased but not in connection with determining whether an insurance policy holder might be deceased – then the applicability date is the Act’s effective date.
As stated in the NAIC drafting note: Each state should conduct its own legal analysis of its laws, including case law, to determine which option is appropriate for it to be included in this Act.
- Frequency of the Comparison Requirement – Another bit of contention is how frequently an insurer should be required to conduct the DMF search. The NAIC model language presently suggests that an insurer should conduct its first comparison within a certain number of months after the effective date of the Act (to be determined by each state) and then would require subsequent comparisons at least on a semi-annual or quarterly basis. Most of the states that have already adopted DMF matching laws use the “at least” semi-annual requirement, as does the NCOIL Model. Another potential difference between the NAIC draft Model and the NCOIL Model is when the beneficiary search should begin after a DMF “match” confirms the insured’s death: the NCOIL model says such a search must begin within 90 days, and the NAIC draft Model (at present) allows states to choose either 90 days or 120 days.
- “Fuzzy” Data Matching – The DMF has information regarding 80+ million deaths, and includes the individual’s name (first, last, middle initial), date of birth, and Social Security number. Yet, according to a memorandum provided to the NAIC’s Model Drafting Subgroup by the National Association of Unclaimed Property As stated in the NAIC drafting note: Each state should conduct its own legal analysis of its laws, including case law, to determine which option is appropriate for it to be included in this Act.Administrators, even in instances where a DMF match indicated that a benefit was due and unpaid, anywhere from 20% to 40% were considered to be a “fuzzy” match. Unsurprisingly, the fuzziest of the data points were a mismatched first name and a mismatched date of birth. In the draft NAIC Model, in addition to the DMF search, insurers would be required to follow reasonable procedures to account for, inter alia, common nicknames (e.g., Jim for James), initials used in lieu of first name, interchanged first and middle names, compound names, incomplete social security numbers, and the transposition of dates and numbers.
The following table summarizes the states that have, to date, enacted legislation requiring insurers to perform DMF comparisons:
The NAIC Drafting Subgroup originally expected (hoped!) to complete its drafting work by the end of 2015, but work continues. In the meanwhile, we can expect to see more state legislatures introducing and enacting bills requiring insurers to conduct DMF comparisons to address the issue of unclaimed life insurance and annuity death benefits.
2Originally Kentucky required quarterly DMF comparisons to be conducted. The law was amended in 2014 to make the review semi-annual.
3New York requires at least quarterly comparison searches.
4North Dakota required a first DMF comparison by November 1, 2014 and then semi-annually thereafter.
5Florida requires insurers to conduct the DMF comparison one time for all policies, annuity contracts and retained assets accounts that were in force at any time on or after January 1, 1992, and then at least on an annual basis thereafter prior to August 31 of each year.
6Missouri HB 2150 passed both houses of the MO legislature on May 11, 2016 and is eligible for the Governor’s desk.
*In these states, the requirements apply prospectively to new policies and contracts issued on or after the effective date; however, for Missouri, New Mexico, North Carolina, Tennessee and Utah the new law applies only to newly-issued policies as of the effective date if there has not been an “asymmetric” use of the DMF prior to the law’s effective date. “Asymmetric use” means that the insurer’s used the DMF or other similar database prior to the effective date in connection with searching for information regarding whether annuitants under the insurer’s annuities might be deceased, but not in connection with whether the insureds under the insurer’s policies might be deceased.