Most state treasurers now demand that life insurers search public databases, such as the Social Security Administration’s Death Master File (DMF), for potential claims. State treasurers similarly require insurers to remit “unclaimed” death benefits regardless of whether they are due and payable. Even while courts have generally rejected the notion that a life insurer must search the DMF or that DMF matches implicate unclaimed property laws, many insurers have acceded to the regulators’ demands.

What have these insurers received for their cooperation? In California, they have gotten a demand for even more money.

In the last few weeks, many life insurers received a notice of assessment of interest from the California Controller’s office on voluntarily remitted unclaimed property reported and remitted in December 2014. California is assessing 12% interest, compounded annually, beginning three years after the insured’s death. In some cases, the interest assessments exceed the policy proceeds. California’s latest effort is not just legally dubious, but unfair and ultimately counterproductive.

Remitting Unclaimed Life Insurance Proceeds in California

In California, the due date for remitting unclaimed life insurance proceeds is set forth in California Code of Civil Procedure § 1515(a) and (c). Under § 1515(a), life insurance proceeds escheat to the State if they remain unclaimed for more than three years after they “became due and payable as established from the records of the corporation.” Section 1515(c) provides that a “life insurance policy not matured by actual proof of the death of the insured” is deemed due and payable if “the insured has attained, or would have attained if he or she were living, the limiting age under the mortality table on which the reserve is based.”

Many insurers have taken the position that there is no obligation to search the DMF, and that DMF matches do not implicate the unclaimed property statute. See, e.g., Chiang v. American National Ins. Co., No. 34-2013-00144517 (Co. Sacramento); Chiang v. Kemper Corp., 34-2013-01148154 (Co. of Sacramento). These insurers maintain that the statute clearly provides for two unclaimed property triggers (i.e., receipt of a death claim or reaching the limiting age), and that a DMF match does not trigger the statute, regardless of whether there is an affirmative obligation to search.

Many others have chosen not to challenge the Controller’s position, even if they believe it is inconsistent with the statutory standards. Instead, they have voluntarily begun searching the DMF and remitting unclaimed life insurance proceeds. Any hope for détente among this group, however, has likely been dashed by the Controller’s recent demands for 12% interest.

Controller’s Assessment of Interest on Voluntary Remissions

Notwithstanding the explicit trigger language in § 1515, the Controller maintains that insurers have an affirmative obligation to search the DMF and that a DMF match establishes “proof of death” for purposes of the unclaimed property law. The Controller’s position was set forth publicly for the first time in the Unclaimed Property Holder Handbook in 2013.[1] Even if the Handbook had the force of law, however, insurers who voluntarily report and remit unclaimed property in accordance with the Handbook should be spared a punitive interest assessment.

California’s Code of Regulations § 1172.90 provides that interest should not be assessed against late-reported unclaimed property if there is “reasonable cause” for the delay. “Reasonable cause” exists if the holder exercises “ordinary business care and prudence.” Id. at §1172.90(b). A holder generally can meet this standard if there is an “absence of willful neglect, [or] the failure was due to circumstances beyond the holder’s control.” Id. at §1172.90(b)(1).

Prior to the publication of Handbook, there was no authority of any kind to suggest that an insurer had an obligation to search the DMF. Therefore, insurers doing business in California exercised ordinary business care and prudence by following the law and paying out policies according to their terms, which require a death claim. At a minimum, California should forego interest assessments for death claims reported or paid as a result of a DMF search in 2013 or earlier. In other words, the insurer should not be deemed to have acted unreasonably if the Controller had yet taken a public position on the duty to search the DMF.

California’s punitive interest assessments are even more puzzling in light of the numerous Global Resolution Agreements resolving multi-state unclaimed property audits. In each, California has required the audited life insurer to agree on a going-forward to search the DMF and pay interest at a rate of 3% from the later of the date of death or January 1, 1995. The statutory 12% interest for unreported unclaimed property was not assessed in any of the Global Resolution Agreements. The Controller’s recent conduct encourages insurers to take no action and wait for an audit.

Opposing Controller’s Punitive Interest Assessments

Life insurers that have received interest assessments and wish to fight back should submit a letter to the State Controller’s Office of Chief Counsel requesting a waiver of interest. There is no time limit for making such a request, but if interest is not paid within thirty (30) days, the state may make further collection efforts. If the insurer does not receive a waiver of interest, the insurer may seek an appeal in the California Superior Court.

_{[1] http://www.sco.ca.gov/files-upd/guide_rptg_holderhandbook.pdf}