Beach chairs and umbrella on a beach at sunset

Florida, Life Insurance, and the Death Master File

Beach chairs and umbrella on a beach at sunset

In the early 2010s, state unclaimed administrators and one of their third-party auditors decided to target the life insurance industry.

The theory was that financial service firms were using the Social Security Death Master File (“SSDMF”) in an asymmetrical fashion – they were using the SSDMF to look-up when annuitants died so that they could terminate paying benefits under an annuity contract.

However, the life insurance side of the industry, and often the same companies, would not use the same file to determine when insureds die, which would trigger an obligation to either pay the beneficiary or report the proceeds as unclaimed property if the beneficiary could not be located.

The unclaimed property audits were to use the SSDMF to determine whether additional amounts should be paid to beneficiaries or to the state unclaimed property funds. Many of the large insurance companies decided to acquiesce to the changes because they had both the annuity and life insurance products, which would hinder defense in a litigation situation. In addition, the administrators gave them a carrot – a waiver of penalties and interest on the past due amounts, as determined through the matching process.

However, several of the smaller insurance companies did not want to acquiesce and that has led to almost a decade of litigation and other battles over the SSDMF and the underlying policies. This has led to a series of declaratory statements, declaratory actions, legislative amendments, and additional litigation that continues to present day.

In other words, the story isn’t complete yet, although Florida is claiming (temporary?) victory.

Florida Unclaimed Property Applicable to Life Insurance in 2013

Section 717.107 is the section of the Florida unclaimed property law that governs when a life insurance policy is dormant.

(1) Funds held or owing under any life or endowment insurance policy or annuity contract which has matured or terminated are presumed unclaimed if unclaimed for more than 5 years after the funds became due and payable as established from the records of the insurance company holding or owing the funds, but property described in paragraph (3)(b) is presumed unclaimed if such property is not claimed for more than 2 years. The amount presumed unclaimed shall include any amount due and payable under s. 627.4615.

Subsection (3) of 717.107 deems a life insurance policy as matured and proceeds due and payable if either of two conditions are met: the company knows that the insured has died or if the insured has (or would have if living) the limiting age.

Subsection (6) also comes into play as it says

Notwithstanding any other provision of law, if the company learns of the death of the insured or annuitant and the beneficiary has not communicated with the insurer within 4 months after the death, the company shall take reasonable steps to pay the proceeds to the beneficiary.

Florida’s Declaratory Statement of October 2013

With the backdrop of the ongoing unclaimed property audits and initial litigation on the topic, Florida issued a declaratory statement in October 2013 at the request of a holder. This declaratory statement was the Department’s interpretation of Florida Statute section 717.107 about when a life insurance policy is payable as unclaimed property.

In effect, this declaratory statement said that a life insurance policy “becomes a claim upon the death of the insured” under subsection 717.107(1).

Further, insurance companies have a duty to search accessible databases, such as the SSDMF, to determine if the insured had died.

Challenge by Thrivent Financial

Thrivent Financial for Lutherans was one of several of the insurance companies that routinely fought the changes to their insurance practices in quite a few states, including California, West Virginia, and Florida.

Thrivent brought suit against Florida, seeking a declaratory judgment that the declaratory statement was erroneous and unenforceable. (say that five times really fast!)

The First District Court of Appeal of Florida found that Florida’s declaratory statement was contrary to the plain language of the statute and therefore, clearly erroneous.

Florida tried to rely on a general, catch-all provision that is commonly included in unclaimed property statutes – Section 717.102(2) says that “property is payable or distributable for the purpose of this chapter notwithstanding the owner’s failure to make demand or to present any instrument or document required to receive payment.”

Varying called anti-limitation or private escheat provisions, these clauses are intended to require holders to report unclaimed property even if the owner is not aware of the existence of the property or has any legal claims to the property.

The Court said that the more specific language in 717.107 controls over the more general language of 717.102, specifically in situations where beneficiaries cannot be located or the insured reaches the limiting age of the policy.

The Court also rejected the state’s new requirement that insurers search the SSDMF or other similar database. The Court said that nothing in the statutory language imposed the affirmative duty to search for the death of insureds and the Court “may not rewrite statutes contrary to their plain language.” The Court referred the issue to the legislature.

In summary, life insurance proceeds were due and payable as unclaimed property when the insurer receives proof of death and the surrender of the policy in their official records, as established by their records and not outside sources.

Florida Unclaimed Property Amendments in 2016

The Florida unclaimed property administrator was undeterred by the setback in the courts. Instead, they went to the legislature and petitioned for amendments to the state’s unclaimed property law. And the legislature abided.

New Section 717.107(8) imposed a statutory duty for insurers to search the SSDMF at least annually, or for companies that used the SSDMF for annuities, at least as often as they checked for that line of products. This is dubbed the “search amendment.”

Once an insured is identified in the SSDMF, the insurer has 120 days to perform the required due diligence – to confirm the insured’s death, determine potential benefits, and make efforts to locate beneficiaries. This is dubbed the “contact amendment.”

The amendments also changed the dormancy trigger. The original trigger was the date that the insurer received proof of death of the insured. Now, the dormancy trigger would be the date of the insured’s death or the date that the insured reached the limiting age. And this is dubbed the “escheat amendment.”

These new requirements were imposed on all policies in effect at any time on or after January 1, 1992. The legislature did include a temporary waiver of penalties and interest for late reporting if the policies were reported by May 1, 2021.

Initial Challenge to 2016 Amendments

Not surprisingly, because we are still talking about this, several insurance companies challenged the 2016 Florida unclaimed property amendments. Specifically, four insurers (United Insurance Company of America, Reliable Life Insurance Company, Mutual Savings Life Insurance Company, and Reserve National Insurance Company) challenged the retroactive application of the amendments, that they would apply to policies in effect from 1992 to 2016.

The insurers presented a facial challenge to the new provisions, based on a due process claim under the state’s constitution. The trial court agreed with the insurers, holding that all three of the amendments (search, contact, and escheat) were substantive changes to the law and could only apply prospectively and not retroactively. The trial court said that the retroactive application would adversely affect the insurers’ vested rights and impose new obligations on these old transactions.

Florida appealed, sending the case back to the same court that found against it in the Thrivent decision on 2013.

State Wins Appeal in 2020

All of that brings us to the present, where Florida has finally won in a court room.

It is important to emphasize that the insurers brought a facial challenge to the 2016 amendments. Legally, this is an important distinction from an “as applied” challenge. In a facial challenge, the challenger must show that there is no set of circumstances where the statute would be constitutional; potential hypotheticals of future unconstitutional application are not sufficient in this inquiry. In this case, the 2016 amendments could only be overturned if the “legislative enactments are clearly erroneous, arbitrary, or wholly unwarranted” with any doubts in favor of the amendments being constitutional.

The First District Court of Appeals determined that that all three of the amendments were remedial and facially valid.

In fact, the Court found that the entire unclaimed property act was remedial, “to safeguard the economic rights of consumers by providing means to reunite unclaimed property, such as life insurance proceeds, with its rightful and lawful owners.”

“Insurers and the states merely hold unclaimed property for the benefit of policyholders and beneficiaries and do not have a proprietary property interest in its ownership. For that reason, unclaimed property laws are interpreted broadly in favor of protecting consumers’ interests, not those of the insurer or the government. In these situations, the state is deemed hte preferred custodian of escheatable funds (versus private companies), such that unclaimed property laws are distinctively and characteristically ones that further important regulatory interests as well as the remedial purposes of safeguarding consumer interests and remedying marketplace imperfections.”

The Court found that a foundation of a decade of audits, litigation, and settlements in the industry provided the necessary impetus for legislation to further a remedy not being honored by all insurers.

Moreover, the Court found that the 2016 amendments did not impair any vested rights, create any new obligations, or impose new penalties. The Court relied on their insurers’ pre-existing duties to conduct “due diligence and good faith efforts to ascertain whether policyholders had died and to locate beneficiaries so that policy proceeds would be given to the rightful owners.”

The Dissenting Opinion

Justice Winokur dissented with the majority opinion. Because this case is likely to be appealed (the insurance companies have proven to be a tenacious holder alliance over the past decade), it is worth the time to review the dissenting opinion in the 2020 appellant decision.

In dissent, Winokur disagreed that it a facial challenge had to be so clear cut, and rather it was the remedy that determined whether the challenge was a facial or as-applied challenge. The insurers narrowly tailored their complaint to the retroactive application of the amendments and that this was a valid facial challenge.

The dissent said that since this very Court had declared that nothing in the statutes as of 2013 required such searches as indicated in the 2013 declaratory statement, the new 2016 amendments established new requirements and did not confirm rights that already existed. Despite the fact that it was “intended to rectify industry practices deemed harmful to consumers does not make it “remedial.”” The dissent goes on to dispute that unclaimed property laws can be applied retroactively because the statute is itself remedial. (footnotes for the win!)

The new accelerated escheat obligation were sufficient new legal consequences to tip the due process scale, in the dissent’s eyes. Even the new search and notification provisions could be sufficient, as was found in a similar case in Kentucky (United Ins. Co of America v. Commonwealth). Any of these provisions would be new obligations for the insurers and thus substantive changes that would prohibit retroactive application. Even the potential for penalties and interest on the newly accelerated escheat obligations would be enough to say that the amendments provided new obligations and penalties and thus cannot be applied retroactively.

What’s Next for Florida’s Unclaimed Property Life Insurers?

First, it is important to note that none of the insurers challenged the requirement to search the Social Security Death Master File going forward. As such, life insurers will need to implement processes to satisfy those requirements on new policies starting from 2016.

Second, the life insurers may very well appeal this latest decision. They could request a rehearing or an en banc hearing before the full First District.

The insurers may also take the case to the Florida Supreme Court. The Florida Supreme Court must review cases brought before it when the district court finds a state statute unconstitutional and has discretionary authority to review cases that are deemed valid. Thus, in this case, the Supreme Court would have discretionary authority. The insurers have a split decision between the circuit court and the district court with a dissenting opinion, which could set the stage for an appeal to the state supreme court.

What About Non-Life Insurers?

There are quite a few legal points of order in here, even for non-life insurers.

First, the ongoing debate about how unclaimed property laws shall be applied retroactively. The trend is for states to continue to move into smaller and smaller dormancy windows, which leads to greater impacts on the corporate holders of unclaimed property. Can states continue to shorten these windows to the detriment of holders? For now, it appears so, at least in Florida, if the state can show that the change is “remedial” in nature and the Court is saying that the entire unclaimed property scheme is remedial.

Second, it is entirely foreseeable that the states and their third-party auditors will go after very specific property types for “problem” industries. They have attacked rebates, life insurance, and are working on stocks and dividends. Another area that has opened up in recent years is gift cards. Are your compliance programs solid in all of these areas? What about AR credits?

Finally, can states change the due diligence requirements? Again, that appears to be yes, at least in Florida. It is feasible that states will impose similar due diligence search requirements on financial institutions for checking, savings, investment, and similar accounts. They could even impose such a requirement on payroll or other general property types.

Don’t think that just because they haven’t tried yet that they won’t. States are looking at large budget crises in 2020, so anything will be on the table that will increase revenue to the state or money to the people, even at the expense of businesses.

No matter what type of unclaimed property holder you are, it would be wise to review your unclaimed property compliance for potential problem areas.

Contact Kimberly DeCarrera to discuss how DeCarrera Law, LLC can assist your company in identifying these problem areas and resolving them before you end up as a case study in unclaimed property litigation.

Return to Unclaimed Property Litigation