In a massive overreach of authority, the Illinois state treasurer has superseded state law by imposing new standards on how life insurance policies are paid out, and in the process, may fundamentally change the role the state plays in the life insurance industry.
Illinois State Treasurer Michael Frerichs, along with the private company Verus, have been conducting audits of insurance companies and requiring them to pay out life insurance policies based on an unreliable list of the deceased in the state. If a beneficiary can’t be found, that payment goes directly to the state, creating what many see as a taking.
Even more troubling, the private auditing firm Verus will take its paycheck from these payouts.
The laws, rules and policies of life insurance have developed over more than a century. Under the Illinois Unclaimed Property Act, life insurance proceeds become unclaimed property five years after the benefits become due and payable as established by the insurer’s contract or by “actual proof of the death of the insured.”
Through statements and letters to companies, the state treasurer is attempting to force insurers to pay policy proceeds to beneficiaries, or escheat them to the state if a beneficiary cannot be found, based on whether an insured’s name appears on the U.S. Social Security Administrator’s Death Master File, also known as the DMF.
A recent paper, titled Unclaimed Property: Best Practices for State Administrators and the Use of Private Audit Firms found that the DMF is “unverified and often contains inaccurate data.” States also have a poor track record of actually returning unclaimed property to consumers and instead, keep it for their own use.
What is clear is that this is not an attempt by the treasurer to reunite individuals with lost property. Instead, it is an aggressive usurpation of Department of Insurance authority by the state treasurer to impose a requirement that contradicts the Illinois Unclaimed Property Act
It is also being driven behind the scenes with Verus pressuring insurance companies to provide them with all records for policies from as far back as 1996.
This scheme between the treasurer and Verus is ripe for abuse: Verus will receive a 12 percent cut of all proceeds that are identified as unclaimed property as well as a flat fee for those holders with a principal place of business in the state.
In response, the life insurance companies are taking a stand and fighting back by filing suit in Sangamon County against Verus Financial and the state treasurer.
This abuse no longer flies under the radar. This latest lawsuit spotlights the highly unconstitutional nature of promulgating a new requirement outside the regulatory and legislative process and forcing retroactive use of the DMF by insurers. Courts in West Virginia, Florida, Ohio, and the U.S. District Court for the District of Massachusetts all have rejected the private audit firms’ demand that insurers cross-reference against the DMF. It’s time for Illinois to follow suit and reign-in this rogue state treasurer.