The showdown is as a result of a little-known auditing firm that three years ago pitched cash-strapped states on identifying unclaimed life policies that those states could seize as abandoned property. Some 35 states eventually signed up, agreeing to give Verus Financial LLC a cut of any take. The Waterbury, Connecticut firm is now examining nearly two dozen insurers for tardiness in turning over policies.
Along the way, concerns emerged that insurers weren't just slow in turning over unclaimed funds. Rather, some appeared to have turned a blind eye to data sources that could have revealed that certain policyholders had died and that their heirs were owed money. This happened even as the insurers used the same sources to justify cutting off annuity payments for customers who had died, according to preliminary findings by regulators in California and Florida.
Insurers maintain they are behaving lawfully. Under policy contracts, insurers aren't required to take steps to determine if a policyholder is still alive, but instead pay a claim upon proper notification from beneficiaries or others.
Florida and California regulators are questioning if the legal dynamics change if insurers learn of a customer's death while monitoring databases to determine when to cut off retirement-income checks such as annuity payments.
In the past week, those regulators subpoenaed MetLife Inc., the nation's biggest life insurer by assets, to testify at separate hearings. Florida also has subpoenaed Nationwide Financial Services Inc. A 10-state group of regulators at the National Association of Insurance Commissioners, an alliance of the states' top insurance officials, is also focusing on the issues.
"We want to have a clear understanding of what is an appropriate claims-settlement practice," said Florida Insurance Commissioner Kevin McCarty. "It is hard for me to get my arms around the concept that a company would use a database to terminate an annuity, but fail to use that same database to investigate whether a claim exists on a life policy."
Some insurers say they already take aggressive measures to identify deceased policyholders. MetLife and Nationwide say they are cooperating with the inquiries. In a statement, MetLife detailed numerous steps it has taken since 1989 to find owners of old policies on its books. Nationwide said it strives to comply with laws and regulations and is committed to its customers.
Manulife Financial Corp.'s John Hancock unit last week became the first insurer to disclose a settlement with officials on the abandoned-property issue, saying it had agreed with 23 states to set up a system to determine which policies should be handed over to those states.
The insurer said it hadn't violated the law. The company's general counsel, Jonathan Chiel, said in an interview: "Hancock realizes this is the right way to go: Be proactive. Figure out if someone has died" and contact the beneficiary as soon as possible.
James Hartley Jr., co-founder and CEO of Verus, said he became interested in the handling of old policies after big insurers converted to publicly traded companies from "mutuals," owned by policyholders.
In a wave of conversions from the 1990s through the early 2000s, the insurers tried to find millions of "lost" policyholders who had bought small policies decades earlier. Those customers were entitled to stock, or cash, as part of the corporate transformations.
At the time, the insurers sent large sums to states' unclaimed-property coffers because they couldn't locate addresses.
Mr. Hartley was one of many plaintiffs' lawyers in a class-action lawsuit against Prudential Financial Inc. in the 1990s over allegedly improper life-insurance sales practices. He said the "eureka moment" for his new business was when he and Jeffrey Drubner, a former agent with the Federal
Bureau of Investigation, used publicly available information "to determine that a number of the people for whom de-mutualization payments had been given to the states appeared to be dead."
He said that raised questions about the fate of the underlying life policies.
They formed Verus Financial in late 2007, Mr. Hartley said, because we "thought we could provide a valuable service" to state treasurers by running audits that would match up old policies with names of deceased people to identify those that should be turned over to the states.
In California, meanwhile, Controller John Chiang was growing more concerned about a trend in which several large life insurers were reporting "minimal" unclaimed funds—a few thousand dollars a year in some instances and none at all at other companies, according to Jacob Roper, a spokesman for the controller.
California signed up for audits in 2008. Verus now is working on behalf of 35 states, according to documents from last week's settlement between California and Hancock. Verus typically gets a 10.5% cut of the sum turned over to a state, Mr. Hartley said.
Hundreds of millions of dollars are potentially at stake. States are acting under unclaimed property laws, which generally require financial-services firms to turn over customer accounts when they go "dormant," in, say, three to five years.
"Unclaimed property is not a tax, and the states are looking for a new source of revenue," said Kathleen Moyer, a senior manager in the unclaimed-property group of Thomson Reuters, which provides consulting services.
Unclaimed property can also include bank and brokerage accounts, and consultants and state officials say that states typically get 25% to 40% of the money they collect into the hands of rightful owners.
Until funds are claimed, some states use them for their own purpose. California supplements its general fund with unclaimed funds, said Mr. Roper.
Insurers can reap financial gain, too; by holding onto money, they earn investment income. But their benefit is less clear-cut, because they must hold reserves to back up policy obligations. In addition, many states require payment of interest on any delayed claim payments.
States say their own budgets aren't their main concern. "The controller's interest here is getting the property back" to its owner, said Mr. Roper, the California controller's spokesman.