New York AG Expands Life Insurance Industry Probe
New York Attorney General Eric Schneiderman has issued subpoenas to at least nine leading life insurers to examine whether the firms have adequately ensured payouts on policies of deceased customers. The investigation is believed to
encompass three areas of inquiry.
The first is whether life insurance companies have taken sufficient actions to identify deceased insureds and their beneficiaries, and make policy payouts that are owed. Although life insurance contracts typically provide that beneficiaries
must notify insurers of potential claims, regulators are asking whether that approach is sufficient if databases of government agencies maintain such information and are potentially accessible by private industry.
The investigation alleges that while life insurance companies can track the deaths of insured people through the U.S. Social Security Administration’s Death Master File, they selectively review the database to obtain information
only when it may result in savings to the company and not to identify individuals to whom benefit payments may be owed.
The second focus is whether the companies have been remiss in turning over abandoned property, namely unclaimed life insurance proceeds, to state officials who run programs to find rightful owners. Every state has unclaimed property
laws, which declare money, property and other assets to be abandoned after a period of inactivity.
During this period, insurance companies are required to try to return the unclaimed property to its rightful owners. If they are unsuccessful, they then turn the property over to the state’s abandoned-property division or unclaimed
property office.
The third focus is whether the act of retaining assets materially alters the earnings profile of a company, thereby affecting the value of its securities. The concern underlying this inquiry is that investors are potentially harmed
if life insurance companies haven’t properly accounted for policies that are overdue in payment to beneficiaries or surrendered proceeds to states as unclaimed property. It is this last focus that has led the New York Attorney
General to use one of the most powerful legal tools at its disposal, the Martin Act, to further the investigation.
New York’s Martin Act
The Martin Act, as interpreted by New York courts, gives the New York Attorney General exceptionally broad enforcement authority to bring both civil and criminal actions. Former Attorney General Eliot Spitzer is credited with expanding
the use of the Martin Act to target alleged corruption at Wall Street’s most prominent financial institutions. Former Attorney General, now Governor, Andrew Cuomo continued that robust use of the act, directing it to market
participants beyond financial institutions to include the energy and insurance industries, among others.
The Martin Act, originally passed in 1921, is one of the many state “Blue Sky” laws adopted in the early years of the 20th century that regulate the offer and sale of securities. What sets the Martin Act apart, making
it such a powerful tool, are that legal elements of scienter (intent to defraud), reliance and damages, need not be demonstrated as with other securities laws. All that is required to establish a Martin Act violation is a misrepresentation
or omission of material fact in connection with the promotion, issuance, distribution, exchange, negotiation or purchase of securities. New York regulators assert that even a negligent or unintended misrepresentation can result in
a Martin Act violation.
The Martin Act's power is further enhanced by its nationwide reach, a result of the fact that New York is the center of the U.S. financial markets. Although a life insurance company might be headquartered in Illinois and may not even write policies in New York, the fact that its securities are offered and sold on an exchange in New York results in potential Martin Act exposure given that the company is deemed to be doing business there.
The Martin Act grants the Attorney General extremely broad investigative powers, including a right to undertake administrative discovery and the ability to subpoena any document from anyone doing business in New York. New York regulators contend failure to comply with a Martin Act investigative subpoena can constitute prima facie proof of fraud. New York has become the avenue through which other regulators have become aware of areas for investigation. It is believed that the Martin Act’s broad discovery provisions have resulted in the recent broadening of the life insurance investigation from its origins involving deceased military personnel life insurance policies.
Finally, the Martin Act allows the Attorney General to seek a broad array of remedies, including fines, penalties and restitution of money or property improperly obtained or retained as a result of the improper conduct.
Where New York Leads, Others Follow
In state regulatory actions, it is a general rule that where New York leads, other states will follow. The life insurance industry practices now under scrutiny are not confined to New York, and many believe that the current inquiry will become an expansive, multi-state investigation. Already, the National Association of Insurance Commissioners has formed a task force to investigate the possible failure of dozens of life insurers to pay death benefits. Industry leaders estimate life insurance companies nationwide owe beneficiaries more than $1 billion. It has been reported that similar investigations are already underway in the states of California and Florida.
What We at Troutman Sanders Offer
Individual states realize the value of strategic coordination, using the resources of various Attorneys General offices to serve as force multipliers in investigations that can test the resources of the largest modern corporations. These investigations present daunting challenges to industries and counsel unfamiliar with their mechanics and maneuvers.
The Troutman Sanders team has built a record of success by being proactive in alerting potential investigative targets before they are served with a subpoena, assisting them in preparing for that possibility, and thereafter attempting to resolve investigations before they result in actual litigation. When litigation is unavoidable, we aggressively defend our clients in court.
Our team includes two former state Attorneys General, a state Solicitor General, and several Assistant Attorneys General and insurance department personnel from around the nation. Our extensive network of contacts enables us to serve our clients by engaging the Attorney General organizations at the senior political level or the career staff ranks, or both, according to the client’s particular circumstances. We can identify emerging trends in single- and multi-state investigations, and design and implement the strategies that are best suited to bringing matters to a quiet, and successful, conclusion.
We are monitoring the life insurance investigation on a continuing basis, and stand ready to assist in developing the response best suited to ensure a favorable outcome.
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