The insurance industry never ceases to amaze. Set out below is a Wall Street Journal story on an investigation by state Attorney’s General into the industry member’s practices in connection with life insurance. Apparently the industry members use a Social Security database to find death data allowing them to cut off payments of benefits when a person has died. The industry, however, apparently studiously avoids using the same database to make payments when a life insurance policyholder has died, but the family has not submitted a claim.
Assuming the allegations are accurate, it appears to be yet another classic case of a financial services entity refusing to do the right thing when there is no explicit regulation exactly requiring a specific action. Indeed, industry critics can readily imagine an industry spokesperson mouthing a statement to the effect of: "We believe we comply with all applicable regulations." In other words, we the industry choose not to do the right thing unless it is explicitly required in a way that we cannot possibly escape."
Now imagine the reaction if a federal regulation were proposed. The industry would complain that the states are supposed to regulate insurers. But if the state start to regulate one at a time, then the insurers complain that there needs to be a uniform national rule.
When one regulator or the other actually draws close to doing something specific, the industry will invoke the usual stall and delay ploy known as "study." That is, the insurers will suddenly trumpet the purported need for a national study of the supposedly complex issues involved in actually honoring their promises to persons who paid for life insurance. Using the "study" ploy to the fullest is quite the process. The ploy typically begins with a round of press releases, letters and visits to legislators. All will assert the need for a study. absurd delays in naming the study members, going back to the well to redefine the study group, and a long delay wrapped around setting up a massive meeting (probably held at a great resort hotel during winter). With all that delay accomplished, the focus will turn to taking a few months to define and and redefine the mission. When that tactic has been fully milked, the group will turn to endless investigations and hearings, followed by endlessly writing and rewriting draft reports. After delays for "comments," more redrafting will follow. Finally,years after the process started, the industry study group will finally issue a milk-toast report proposing a variety of further subjects for study, and some draft legislation aimed at creating future loopholes to avoid actually complying with the central notion of doing the right thing.
By then life insurance policy language will have been re-written to somehow circumvent or dilute the impact of the regulation. Meanwhile, outside lawyers who work for the industry will be hired to write opinion letters advising the insurers that compliance is not required because [insert excuse]. And, throughout the entire process, the industry doubtless will complain bitterly that it is over-regulated and that "big government" is driving up costs and creating too much paperwork to prove compliance with applicable law.
Polite labels for that process are "government relations," "regulatory capture" and"financial engineering." Others might call use more pejorative terms, such as constructive fraud, and/or an unfair business practice. By any reasonable standard, failing to use the database ti help pay insureds is a breach of the duty of good faith and fair dealing that is is part of the common law of every state.
The Journal article is set out below in full, and is online here, but a subscription is required.
New York Attorney General Eric Schneiderman has issued subpoenas to at least nine leading life insurers in the latest and possibly most potent of probes examining whether the industry has adequately ensured payouts on policies of some deceased customers, according to people familiar with the matter.
In addition, New York’s insurance department is sending letters to more than 160 insurers that will push them to run their policyholder rosters through a Social Security death database to determine if any death benefits are overdue and to report back to the state on the results, one of the people said.
The moves by the New York authorities are another measure of regulatory scrutiny into whether companies have done enough to identify dead customers and their beneficiaries. While life-insurance contracts typically say it is up to beneficiaries to notify insurers of potential claims, regulators are asking whether that approach is sufficient in an era of robust death databases.
Of particular concern is that some insurers have used the Social Security death database when doing so has been beneficial for certain parts of their business, such as to cut off retirement-income checks, but haven’t used it when doing so could mean payouts to families of life-insurance clients who died.
The New York attorney general’s office has a powerful legal tool at its disposal, a state law called the Martin Act, with a sweeping definition of fraud that doesn’t require prosecutors to prove intent to defraud, in contrast to federal securities laws.
While it is too soon to tell if any enforcement action would be brought under terms of the law, the subpoenas seek information partly under authority of it, one of the people familiar with the matter said.
The letters being dispatched by New York’s insurance department are based on a law that allows the regulators to require insurers operating in the state to respond to questions. The letter asks the insurers to provide an answer as to how many death-benefit payouts are owed, as determined by matching their policyholder rosters against the Social Security death database.
Insurers maintain they have behaved lawfully in not routinely using the death databases in their life-insurance businesses, because their contracts generally require beneficiaries to inform insurers of a death. The vast majority of policyholders’ families make prompt claims as per terms of their contracts, insurers say.
That said, some companies also say they have used the death database and taken other steps to proactively identify and pay beneficiaries who are owed money on old policies.
The developments in New York come on the heels of public hearings by regulators and officials in Florida and California into the claims-payment issue. A multistate group of regulators at the National Association of Insurance Commissioners, an alliance of the states’ top insurance officials, also is focusing on the practices.
Meanwhile, some 35 states have been running audits of major insurers to determine if they are tardy in turning over abandoned property, including unclaimed life-insurance proceeds, to their treasurers or other officials who run programs to find rightful owners.
States have an interest in speeding up the delivery of unclaimed property because they generally can spend the money immediately, while repaying the owners with other state funds if they ultimately come forward. Those investors potentially are harmed if insurers haven’t properly accounted for policies that are overdue in payment to beneficiaries, or should already have been handed over to the state as unclaimed property, a person familiar with the matter said.
In New York, the attorney general’s office is seeking information to assess consumer-protection issues, reporting of unclaimed property to the state, and related financial-disclosure matters that could be of relevance to stock or bond holders of the insurers, the people said.
The subpoenas went to units of AXA SA, Genworth Financial Inc., Guardian Life Insurance Co. of America, Manulife Financial Corp., Massachusetts Mutual Life Insurance Co., MetLife Inc., New York Life Insurance Co., Prudential Financial Inc., and TIAA-CREF, the people said.
Some of the companies couldn’t be reached or didn’t have immediate comment over the holiday weekend; others confirmed receipt of a subpoena, saying it is being reviewed and pledging cooperation with the inquiry.
"We believe we have compliant and robust practices to determine when claim payments are due and owing, and to adhere to state unclaimed property requirements and regulations," a Genworth spokesman said.
"We are committed to cooperating fully with the attorney general, as well as with other states conducting similar reviews," a spokesman for AXA’s AXA Equitable unit said.
MetLife declined comment Monday. At Florida’s public hearing last month, it said it is "constantly looking to improve" procedures to ensure benefits are paid, including deciding last year to use the Social Security death database on at least an annual basis, and it welcomed working with regulators on the subject.
Write to Leslie Scism at leslie.scism@wsj.com