Madison - St. Clair Record

Thursday, November 21, 2019

Life insurers sue state Treasurer and contingency fee auditor over new rules imposed on unclaimed property

By Ann Maher | Nov 3, 2015


Life insurance companies are suing Illinois state Treasurer Michael Frerichs and private auditing company Verus Financial alleging that recent efforts to tap into policy proceeds under the Unclaimed Property Act are unconstitutional.

United Insurance Co. of America, Reserve National Insurance Co. and Reliable Life Insurance Co. filed a 10-count suit in Sangamon County Oct. 26 seeking declaratory and injunctive relief.

The suit says that Frerichs and Verus, which operates as a contingency fee auditor, have imposed a new requirement that insurers must pay policy proceeds to beneficiaries or to the state based on whether a policy holder's name appears on the U.S. Social Security Administration's Death Master File (DMF), as opposed to whether proceeds are due under contractual policy language.

Life insurers typically pay death benefits only after they receive a claim and proof of death from the beneficiary or insured's estate. When no claim is made and a policy remains in force when the insured reaches the "mortality limiting age," identified as 99, plaintiffs pay the policy proceeds to the insured or turn them over to the state as unclaimed property. They are are considered unclaimed property, by statute, only after five years upon being due.

"The Treasurer has attempted to impose on life insurers, including Plaintiffs, a new rule that was not properly promulgated and that has no foundation in Illinois law in order to enable the Treasurer to escheat millions of dollars associated with life insurance policies for which no claims and proof of death have been received by the life insurer and where the insured has not yet attained the mortality limiting age," the suit says.

"No law supports this new requirement, which contradicts the plain language of the Unclaimed Property Act. Nor can it be squared with the Illinois Insurance Code or the language of Plaintiffs' policies with its insureds, each of which requires payment of proceeds only upon proof of death."

The suit says that the Treasurer is not only requiring the plaintiffs pay death benefits to a beneficiary or turn them over to the state if the insureds appear on the DMF, he is further asserting that the five year dormancy period under the Unclaimed Property Act starts upon the date of death as established by the DMF not the date due proof of death received by the insurer. If late, interest will be charged.

The insurers are represented by attorneys Scott Heyman and Thomas Cunninghama of Sidley Austin in Chicago and Donald Craven of Springfield.

They argue that the Treasurer's actions exceed the authority of his office as a state regulator and interfere with the Illinois Department of Insurance's exclusive authority to administer insurance laws.

The suit says that the Treasurer has authorized unclaimed property examinations of approximately 40 insurers that issue life insurance policies in Illinois, and in many of these audits has retained Verus to conduct the audit.

Verus is compensated by the Treasurer based on results. The company receives a contingency fee of 12 percent of all policy proceeds identified as unclaimed property from companies registered outside of Illinois, such as Reserve and Reliable.

For holders with a principal place of business in Illinois, such as United Insurance, Verus is paid a flat fee for each policy. The suit does not indicate the flat fee amount.

The plaintiffs claim that Verus has demanded they provide all records for all policies in force from 1996 to the present - a span of 19 years. 

They say that on July 17, 2012, Verus sent plaintiffs a letter responding to their concerns and stating that while it disagreed with plaintiffs' position, it would not require them to produce all in-force policy data at that time.

But then on Oct. 6, 2015, the suit says, "without any prior notice that it would not abide by the July 2012 letter, the Treasurer sent a letter entitled 'Final Demand Letter' which stated that it served as a 'final notice and demand' that Plaintiffs produce the information requested by Oct. 16, 2015, or 'the Treasurer will take the necessary legal steps to compel production.'" 

The insurers say that the information sought is "grossly and unreasonably overbroad and indefinite because defendants seek all records for every single insured covered by a policy issued by plaintiffs and in force at any time during the last nineteen years."

They further object to the collection of personally identifiable information such as names, dates of birth and social security numbers of policyholders and insureds.

"Requiring Plaintiffs to prepare and transmit to a private contractor retained by the Treasurer a database of this information for millions of insureds and policyholders who could not possibly have property subject to escheat to the State of Illinois puts the safety and security of such information needlessly at risk, exposing both the individual as well as Plaintiffs to harm from cyber attackers and from malicious parties seeking to exploit such data," the suit says.

The suit seeks declaratory relief that:

- Plaintiffs have no obligation to use the DMF to identify whether insureds are deceased and benefits due and payable;

- The dormancy period does not commence upon the date of insured's death, but commences only after plaintiffs either receive due proof of death or the insured attains the mortality limiting age;

- The Treasurer's authorization of Verus' unclaimed property audit was improper because the Treasurer did not have reason to believe plaintiffs failed to report unclaimed property;

- Even if the Treasurer could obtain plaintiffs' policy records to perform a DMF comparison. it is limited to obtaining records for policies issued in Illinois which were in force during the five years preceding the exam;

- Defendants' actions violate plaintiffs' constitutional rights under the U.S. and Illinois Constitutions;

- Defendants have promulgated a rule that is invalid and unenforceable because it was issued without following the rulemaking procedures of the Illinois Administrative Procedure Act.

Plaintiffs also seek an injunction prohibiting the Treasurer and Verus from using any policy records or information obtained during audits to perform a DMF comparison.

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Illinois State Treasurer