A state court judge in California has taken up a question that has confused many insurance agents and brokers over the years: What the heck is “guidance?”
San Francisco Superior Court Judge Harold Kahn wrote last week, in a ruling on a life insurance unclaimed property case, that two pieces of California unclaimed property “guidance” are really just invalid regulations.
Kahn blasted California’s life insurance unclaimed property regulations in Thrivent Financial for Lutherans et al. v. Betty T. Yee, individually in her capacity as California state controller, et al. (Case Number CGC 15-548384.)
Kahn granted summary judgment in favor of Thrivent, which is a Minneapolis-based life insurer, and against Betty Yee, the California controller.
The Case
In California, the controller is the official in charge of handling unclaimed life insurance death benefits and other types of unclaimed assets and dormant accounts.
The controller’s office has an incentive to maximize the amount of unclaimed assets it takes in, because the state adds the money to its budget and uses the money while waiting for the owners to show up.
The California state controller’s office talks, in a handbook, about how life insurers should proceed when insureds die. In a dormancy trigger section, officials talk about how long life insurers should hunt for the beneficiaries before notifying the controller’s office. The office recommends, in an external database section, that life insurers should check the Social Security Death Master File and similar databases to see whether any of their insureds have died.
Thrivent sued over the handbook sections in 2015, arguing that the controller’s office had adopted what amounted to harmful regulations through an informal process, without providing the kind of public comment period proposed regulations would have received.
Yee has argued in court pleadings that the handbook is an informal batch of guidance that describes best practices, not a set of regulations.
In the death dormancy trigger section in the handbook, for example, the controller’s office suggests that a life insurer turn a policy over to the controller’s office after three years, even if the insurer has known about the death for less than three years.
In a pleading filed June 25, Yee argued that the death dormancy trigger is simply her office’s interpretation of what Section 1515(a) of the state unclaimed property law, means not a regulation.
The interpretation is not a regulation for two reasons, Yee said:
1. The controller’s office has not applied it generally.
2. Even if the interpretation were applied generally, it’s the only legally tenable construction of Section 1515(a) of the unclaimed property law.
Yee made a similar argument about the nature of the external database section.
Kahn’s Ruling
In the new ruling, Kahn says Yee’s reasoning lacks merit.
The regulations are rules of ‘general application,’ because they require the insurer to check outside databases in some cases, and, in some cases, they require an insurer to report a policy to the controller’s office less than three years after learning about the insured’s death, the judge writes.
Section 1515(a) could also have multiple legally tenable interpretations, because Thrivent thinks the dormancy trigger should be the time when an insurer learns that an insured is dead, not the date when the insurer “had reason to know” the insured is dead, Kahn writes.
The controller’s office can adopt its life insurance death benefit dormancy trigger interpretation and its external database interpretation as formal regulations, or it can get lawmakers to adopt those requirements in the form of laws, Kahn says.
Until the office adopts the requirements through one of those mechanisms, the controller’s office must stop enforcing or threatening to enforce the requirements, Kahn writes.
The office “must remove all references to those regulations in the materials they disseminate to life insurance companies unless accompanied by a conspicuous disclaimer that the purported requirements of these two regulations are merely defendants’ views and do not have any legal effect,” Kahn writes.
A copy of the ruling is available here.
Reactions
Officials from the controller’s office could not be reached immediately for comment. It was not clear whether the office is planning to file an appeal.
Thrivent has welcomed the ruling as a victory for its California members.
Thrivent believes the controller’s interpretation of Section 1515(a) would have improperly cut down on the time a life insurer has to locate beneficiaries before turning death benefits over to the state, Thrivent says in an announcement of the ruling.
“Thrivent felt strongly that its members should be provided the period specified under California law for beneficiaries to be located so they can receive the life insurance proceeds they are entitled to,” the company says.
Paul Johnston, Thrivent’s general counsel, said in a statement accompanying the announcement that the new ruling shows that Thrivent has been doing the right things for its members.
“We have complied with California law, as written,” Johnston said. “We were simply challenging efforts by the controller to improperly and unilaterally expand the scope of California unclaimed property laws in an effort to enrich the state government to the detriment of Thrivent members.”
Implications
Other California agencies, state agencies outside of California and federal agencies have set many requirements by posting batches of guidance.
During the administration of former President Barack Obama, for example, federal agencies implemented many key parts of the Affordable Care Act by posting batches of guidance formatted as sets of answers to frequently asked questions.
The new California ruling could be a sign that federal and state agency use of informal guidance will face tougher scrutiny from judges.
