California today announced a settlement with John Hancock Financial Services Inc. after an investigation revealed that the carrier failed to deliver deceased clients' death benefits promptly to the tune of $20 million.
The announcement follows a three-year audit investigation of 21 life insurers performed by the state's controller, John Chiang, in an attempt to determine whether the carriers were complying with California's unclaimed property laws.
Those escheatment laws require businesses to submit lost or abandoned financial accounts to California after three years of inactivity in order to protect clients' property from getting lost during mergers or bankruptcies, or from being depleted by fees. Other states have similar unclaimed property laws.
“While John Hancock is the first to be held accountable, it will not be the last,” Mr. Chiang said. “I am prepared to pursue all actions necessary — including litigation — to bring the rest of the industry into compliance.”
California's investigation revealed that life carriers failed to pay up death benefits to clients' beneficiaries. Instead, they would draw from the policies' cash reserves to pay premiums even after the client had died, according to the controller's announcement. Once the policy was fully depleted, the insurers would cancel coverage.
Further, the investigation revealed that carriers did not routinely cross-check the owners of the dormant accounts with government databases listing the names of the dead. In other situations, the carrier knew the policy owner was dead but still failed to tell the beneficiaries, according to Mr. Chiang's office.
In one of the John Hancock cases, the carrier issued a policy in 1963 to a client who died in 1999. John Hancock allegedly continued to pull premium payments from the cash reserves until the policy was canceled in 2009. Eleven years after the customer's death, the carrier still hasn't paid the beneficiaries or sent any of the death benefits to the state controller's office, according to the controller.
The same activity occurred with annuity contracts, according to Mr. Chiang's office. John Hancock issued a contract in 1991 to a client who died four years later. The insurer's files reveal that the deceased client's mother called in 2002 to report the client's death. Even though John Hancock noted in its files in 2005 that the client had died, the company allegedly didn't pay out the death benefits to the client's estate until 2009, the investigation revealed.
Aside from reuniting owners or their heirs with more than $20 million of death benefits and matured annuities, John Hancock also will have to restore the value of some 6,400 affected accounts going back to 1992 and pay California compounded interest of 3% on the value of the amounts held from 1995 or from the date of an affected policy owner's death, whichever is later.
"John Hancock is outraged by the unfounded allegations and characterizations contained in today's press release by the California controller's office," the insurer said in a statement. "Indeed, by its actions today, California has violated the very agreement that it negotiated and signed with John Hancock." The insurer denies any allegations or characterizations of wrongdoing.
Florida Too
Carriers' compliance with unclaimed property laws also will be the topic of a May 19 hearing in Florida, hosted by that state's Office of Insurance Regulation. The office subpoenaed Metropolitan Life Insurance Co. and Nationwide Life Insurance Co, asking that the insurers send representatives to discuss the carriers' practices.
An investigation in Florida revealed that some carriers use the
Social Security Administration's death master file to find out about a client's death and stop annuity payments, but fail to use that information to look into claims for death benefit. The state is a part of a national task force looking into carriers' claims settlement practices.
“This appears to be an industry practice,” said Jack McDermott, a spokesman for Florida's Office of Insurance Regulation. “We're looking at a multitude of companies — some of the largest ones in the country.”
“Nationwide will review the information from the Florida Office of Insurance Regulation and will cooperate with their inquiry,” said spokesman Chad Green. “We stand by our business practices and are committed to serving the needs of our customers.”
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MetLife always fully cooperates with inquiries from regulators,” said spokesman John Calagna. “We will address whatever questions the Florida insurance department may have regarding this matter.”
