Several years ago a controversy arose about whether life insurance companies were wrongly holding on to life insurance proceeds when policyholders died and no one claimed the funds. New York, among other states, looked into this issue because New York’s Abandoned Property Law, deems life insurance proceeds abandoned when the proceeds are not claimed within three years. When property is deemed abandoned, the law requires that those funds are to be paid by the life insurance company to the state comptroller. This is the concept of escheatment. The controversy resulted in statutory and regulatory changes to make sure life insurance companies were taking appropriate action to determine if a policyholder had died and whether their existed any beneficiaries rather than merely relying on a party to file a claim for policy benefits.
As a result of this controversy, certain parties brought qui tam claims against life insurance companies under various statutes claiming that the life insurance companies had made false claims to the state to avoid escheating these allegedly abandoned life insurance proceeds to the state. In a recent case, a New York intermediate appellate court reversed the dismissal of a false claim action and allowed the plaintiff to file a third amended complaint, albeit on a limited basis.
In Total Asset Recovery Services LLC v. Metlife, Inc., Nos. 2019-3806, 2019-3807 (N.Y. App. Div. 1st Dep’t, Dec. 10, 2020), a company claiming that several New York life insurance companies had breached New York’s False Claims Act by filing reports with the state claiming no or lower amounts of abandoned life insurance proceeds. According to the complaint, the life insurance companies failed to maintain proper records to determine if policyholders had died and whether there were beneficiaries who should be paid life insurance proceeds.
The life insurance companies moved to dismiss the complaint and the motion court granted the motion. On appeal, however, the Appellate Division, First Department, reversed. The reversal, however, left the plaintiff with a limited path to a successful result.
First, the court made it clear that a life insurer’s obligation to escheat abandoned life insurance proceeds to the state did not depend on proof of death. The court held that under Connecticut Mutual Life Insurance Co. v Moore, 187 Misc. 1004 (Sup Ct, NY County 1946), aff’d 271 App. Div. 1002 (1st Dep’t 1947), mod 297 N.Y. 1 (1947), aff’d 333 US 541 (1948), which upheld the constitutionality of the Abandoned Property Law, the Abandoned Property Law required life insurers to escheat unclaimed life insurance proceeds even in the absence of notice and proof of death.
The court also stated that
. . . if a life insurer files a false report with the State certifying that it has no abandoned property, within the meaning of Abandoned Property Law § 700, to escheat in a given year, and has the requisite level knowledge, within the meaning of State Finance Law § 188(3)(a), as to the falsity of that report, then the filing of that false report may properly serve as the basis for a NYFCA claim, even if the life insurer has not been presented with notice and proof of the policyholder’s death.
The court found that the plaintiff adequately alleged that the insurers knowingly filed false reports with the state that failed to identify escheatable life insurance proceeds. But, the appellate court agreed with the motion court that plaintiff failed to plead the insurers’ purported fraud on the state with the requisite level of specificity. Moreover, held the court, the 10-year statute of limitations in the False Claims Act barred plaintiff’s claims relating to allegedly false reports that the insurers filed more than 10 years before the commencement of this action.
Thus, while the court granted plaintiff leave to file a third amended complaint (the second amended complaint added additional insurers as defendants), plaintiff was limited to only those claims within the 10-year statute of limitations period and was directed to state with the necessary level of specificity, which insurers engaged in what conduct that allegedly gave rise to liability under the False Claims Act. Not an easy task.