Gov. Matt Bevin’s new insurance commissioner this week dropped Kentucky’s legal defense of a 2012 consumer-protection law intended to help life insurance beneficiaries.
The Unclaimed Life Insurance Benefits Act requires insurance companies to make “good faith efforts,” using public death records, to determine if policyholders have died so their benefits can be paid. Several insurance companies owned by Kemper Corp. of St. Louis, Mo., sued the state in 2012 to argue that the law should not apply retroactively to their thousands of existing policies in Kentucky.
Attorneys for Insurance Commissioner H. Brian Maynard — a former life insurance executive — on Monday filed a motion to dismiss their previously aggressive defense of the law before the Kentucky Supreme Court. Oral arguments in the case were scheduled for Friday at the high court. The state prevailed in Franklin Circuit Court, but the companies won at the Kentucky Court of Appeals.
“If this is the direction the Bevin administration is moving in, putting insurance industry profits above protecting the consumers, then I’m very, very disappointed. I would hope the governor doesn’t really know what happened here, and he’s just been misled by some industry lobbyists,” said Bob Damron, the former state representative from Nicholasville who sponsored the law.
In a brief statement, the Bevin administration’s Public Protection Cabinet, which oversees the Department of Insurance, said it sided with the insurance companies.
“Upon review by the Office of Legal Services, the cabinet believes, as the Court of Appeals held, that the General Assembly did not intend the statute to apply retroactively to policies written prior to the statute’s effective date,” spokeswoman Ronda Sloan said.
That was “surprising news” to Sharon Clark, who was Kentucky’s insurance commissioner until the newly elected Bevin replaced her with Maynard in January. Clark said her department and its legal team consulted with Damron, the law’s sponsor, and agreed the law was meant to protect all policyholders in Kentucky, not just those who bought policies after Jan. 1, 2013.
“I thought it was a very good consumer-protection bill, worth defending, and that was the department’s position,” Clark said. “I don’t know exactly what changed other than, obviously, the new administration came in with a different philosophy. I’m disappointed.”
Anne Marie Regan, senior staff attorney at the Kentucky Equal Justice Center, said the Bevin administration has subverted the original intent of the legislation.
“To say the law is only effective going forward is to largely undermine the effectiveness of it, because you’re going to miss all of those existing policies the law was intended to capture, where people have died and nobody knew to collect,” Regan said.
Before Kentucky and at least 14 other states started to pass similar versions of the contested law, the life insurance industry was sitting on more than $1 billion in unclaimed benefits, often because companies did not want to know their customers had died, Damron said. Once they officially knew a policyholder was dead, that meant they had to contact the listed beneficiary and cut a check, he said.
“A lot of times, nobody in the family knows the deceased even had a life insurance policy, or they’ve long since forgotten if they knew, so the benefits go unclaimed,” Damron said.
When Damron’s own mother died in her 80s and he found a life insurance policy among her papers, the company repeatedly denied knowing of any such policy, he said. Not until he used his title as a Kentucky state representative in a letter did someone call from the company to acknowledge that yes, his mother had been a policyholder, he said.
“If I had not been a persistent pain in the ass, they would have never paid that claim,” Damron said. “How many people across Kentucky who don’t have job titles to drop do you figure are getting cheated? Folks who don’t know there was a policy in effect on Uncle Bob, and the company sure isn’t going to volunteer the information unless the law requires it to.”
The Unclaimed Life Insurance Benefits Act requires life insurance companies at least twice a year to check a public database at the Social Security Administration called the Master Death File to determine if any of their policyholders have died. The companies already were using the Master Death File to determine if any of their annuity customers had died, so they could cut off payments.
Although some larger insurance companies agreed to cooperate, three smaller companies owned by Kemper Corp. approached the Insurance Department in July 2012 to protest that it would be unfair to apply the law retroactively to existing policies, said Clark, the former insurance commissioner. After the state said it intended to apply the law to existing policies, the companies filed a lawsuit.
Kemper holds more than 9,000 life insurance policies in Kentucky, mostly small “burial plans” with an average value of $4,800, nearly all of them sold door-to-door in poorer neighborhoods, according to legal briefs in the case.
Under then-Gov. Steve Beshear, the Insurance Department defended its retroactive application of the law and won in Franklin Circuit Court. Judge Phillip Shepherd wrote: “The traditional industry practice allows insurance companies to stick their heads in the sand and ignore publicly available data regarding the death of their insureds, to the detriment of the beneficiaries and the public.”
However, in 2014, the Court of Appeals sided with the insurance companies, ruling that the law did not specifically say it was intended to apply retroactively to existing policies, and therefore, it should not. The Insurance Department appealed to the Supreme Court. But given the state’s legal retreat this week, the Court of Appeals ruling will be the final word in the case.
In a statement, Kemper said it did not ask the Bevin administration to drop its defense of the law, but it supports the move.
“Under well-established Kentucky law, the General Assembly intended to make this statute prospective only,” the corporation said. “The Kentucky Court of Appeals agreed with us and, apparently, the new administration does, too. If the sponsor ‘intended’ otherwise, his statute was poorly drafted and its application would have violated Kentucky law and the U.S. Constitution.”
Also Monday, as the Bevin administration dropped out of the case, House Banking and Insurance Chairman Jeff Greer — who owns an insurance agency — filed House Bill 371. The bill, assigned to Greer’s committee, would write into state law the insurance companies’ position that the Unclaimed Life Insurance Benefits Act should not apply to policies written before 2013.
Greer, D-Brandenburg, declined to discuss his bill Tuesday during a brief interview in the House chamber.
“I haven’t really had a chance to read it yet,” said Greer, the bill’s sole sponsor.
Asked who wrote the bill if he didn’t, Greer stood up and walked away from his desk.
“I’m not gonna get into this,” Greer said. “You’re just trying to embarrass me.”
After a pause, Greer added, “I am not trying to undo the law. I’m trying to improve the law.”
Damron, the sponsor of the original law, said exempting insurance policies written before 2013 essentially nullifies the protections because it will take decades for the new crop of policyholders to die.
“He (Greer) has carried the water for the life insurance industry for a long time,” Damron said. “He’s never wanted to do anything the life insurance companies didn’t want him to do, like look out for the consumers.”
Kemper, the insurance corporation that sued the state, said it supported Greer’s bill.
“We have had indirect contact with Representative Greer, who we believe understands the need for statutes that are written with common sense and respect for Kentucky law,” the corporation said in its statement.