Keane's Unclaimed Property Blog

Unclaimed Property Guidance or Regulation? California Superior Court Decides.

On July 17, 2018, the California Superior Court issued an order granting a motion for summary judgement in favor of Thrivent Financial in a decision that significantly impacts life insurance holders reporting unclaimed property to California.

In Thrivent Financial for Lutherans v. Betty T. Yee, et al., Case No. CGC-15-548384, the court held that the guidance issued by the Controller’s Office in its holder handbook amounted to improperly promulgated regulations under the California Administrative Procedure Act, which requires a public comment period, and were therefore unenforceable.

The court enjoined the Controller’s Office from enforcing or threatening to enforce the “Dormancy Trigger Regulation” and the “External Database Regulation” and ordered the removal of any such reference in any material issued to life insurance companies, unless accompanied by a disclaimer stating that these are the views of the Controller’s Office and have no legal effect. 

Under Section 1515 of the California unclaimed property law, the dormancy period for life insurance proceeds begins three years after the funds become due and payable, as established from the records of the insurer.   Under the Dormancy Trigger Regulation, however, dormancy begins three years after the date the insurer had reason to know of the death of the insured (date of death).

Thrivent Financial maintained that this date could be less than three years from the date of death disclosed by the insurer’s records (proof of death and receipt of a claim).  The court rejected the Controller’s argument that the Dormancy Trigger Regulation was not a regulation since it was not generally applied, and that even if it were generally applied, that it was “the only legally tenable construction of Section 1515(a).”  The court concluded that the regulations were of general application, that the Controller’s Office did not provide evidence that the regulations were not adopted as law, and that Thrivent’s interpretation of Section 1515 was a tenable interpretation of the law.

The court also determined that the External Database Regulation, which requires life insurers to perform comparisons of policies against the Social Security Administration’s Death Master File or similar database to determine whether any of their insureds are deceased, is not a requirement under Section 1515.

The court barred the Controller’s office from “knowingly [imposing] any financial consequences of any kind on any life insurance company for failing to comply with [the] regulations,” unless and until the Controller’s Office either promulgates the regulations in accordance with the California Administrative Procedure Act or amends Section 1515 of the law.

Read the complete order from the California Superior Court

It remains unclear if and how the court’s order impacts current audits and/or settlement agreements.  What is clear is that the Controller’s Office can no longer force life insurers to use date of death as the dormancy trigger for life insurance proceeds or require comparisons using the death master file,  nor can the Controller’s Office enforce or threaten to enforce penalties and interest against life insurers who choose not to comply with these “underground” regulations.

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