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MEMORANDUM
To:
Lisbeth Landsman-Smith
From: Kay Noonan, General Counsel
Date: April 26, 2016
Re:
Unclaimed Life Insurance Benefits Model Act – Research Results and Discussion
The Unclaimed Life Insurance Benefits Model Drafting (A) Subgroup has requested the NAIC Legal
Division to conduct research regarding the issue of prospective/retroactive application of the proposed
unclaimed life insurance benefits model law. This memorandum is intended to provide the Subgroup
with a general legal framework for its review and consideration.
The chief criticism against applying the law retroactively is that doing so runs afoul of the United States
Constitution via the Contract Clause. At the same time, critics of applying the law prospectively argue
that such a law results in an unacceptable “carve-out” which essentially denies beneficiaries the monies
to which they are entitled.
1.
Contract Clauses and Constitutional Concerns
The Contract Clause of the United States Constitution states:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque
and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin
a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law
impairing the Obligation of Contracts, or grant any Title of Nobility.
U.S. CONST., art. I, § 10, cl. 1.
Several state constitutions have similar provisions imbedded in their constitutions as well. For instance,
Missouri Constitution, Article I, Bill of Rights, Section 13, states:
That no ex post facto law, nor law impairing the obligation of contracts, or retrospective
in its operation, or making any irrevocable grant of special privileges or immunities, can
be enacted.
Another example, which is perhaps the most noteworthy at this point, comes from the Commonwealth
of Kentucky. Kentucky’s Constitution, Bill of Rights, Section 19(a), states:
No ex post facto law, nor any law impairing the obligation of contracts, shall be enacted.
More importantly, Kentucky has a specific statute which prohibits retroactive application of any statute,
unless otherwise expressly declared in the law itself. See Ky. Rev. Stat. Ann. § 446.080(3). These
provisions are noteworthy as Kentucky appears to be the only state (so far) that has directly addressed
this issue via the judiciary.
In United States Ins. Co. of America v. Com., Dept. of Ins, --- S.W.3d --- (2014), various insurance
companies filed a declaratory judgment action challenging the Kentucky Department of Insurance’s
retroactive application of the Unclaimed Life Insurance Benefits Act to policies that were issued prior to
the Act’s effective date. The insurers argued that the Act did not expressly provide that it was to be
retroactively applied while also arguing that retroactive application of the obligations imposed by the
Act were unconstitutional as they altered the substantive contractual relations between the insured and
the insurer. On the other hand, the Department argued that the Act did not alter the insurer’s contractual
obligations to its insureds or beneficiaries as the Act only imposed an additional requirement on insurers
by requiring them to check the Death Master File on a quarterly basis against their list of insureds and to
attempt to notify listed beneficiaries of a potential claim.
While the Court acknowledged that the Act’s requirements were primarily regulatory and did not
directly alter the operation of any conditions precedent for coverage under the insurance contracts, i.e.,
death of an insured and the making of a claim by a beneficiary, the Court explained that the Act imposed
new and substantive requirements which affect the contractual relationship between the insurer and
insureds. Most notably in the Court’s view, the Act shifted the initial burden of obtaining evidence of
death and locating beneficiaries from the insured’s beneficiaries and estate to the insurer. As a result, the
Court held that the Act violated state law which prohibits retroactive application without express intent.
Having reached this conclusion, the Court opted not to discuss the constitutional issues raised by the
insurers. Notably, the Court found that the Act did not directly alter the operation of any conditions for
coverage under insurance contracts and did not find any substantial impairment of contractual
relationships between insurers and insureds. Although the case is certainly a significant development, it
does not necessarily dictate a result that any retroactive application is impermissible.
While the Kentucky court may not have addressed the Contract Clause in that case, there is federal
caselaw that provides guidance, particularly when a court is confronted with analyzing whether a
purportedly retroactive law is constitutional.
For instance, Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400 (1983), presented a
federal Contract Clause issue as the State of Kansas sought to regulate the price of natural gas sold in the
intrastate market. The issues surrounding the contracts at issue as well as the price regulation of natural
gas are extremely detailed and laborious so they will not be repeated for purposes of this discussion
other than to say that while Energy Reserves Group is not directly on point as it did not involve
unclaimed life insurance benefits, it is worth discussing as it is widely considered to be one of the
Supreme Court’s watershed Contract Clause cases.
In order to determine whether a law conforms with the Contract Clause, the Supreme Court established a
three (3) prong test which provides, in pertinent part:
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First, the state regulation must not substantially impair a contractual relationship;
Second, if the state regulations constitutes a substantial impairment, the State, in
justification, must have a significant and legitimate purpose behind the regulation, such
as the remedying of a broad and general social or economic problem; and,
Third, the law must be reasonable and appropriate for its intended purpose.
459 U.S. at 411-413.
With respect to the first prong, “[t]his inquiry has three components: whether there is a contractual
relationship, whether a change in the law impairs that contractual relationship and whether the
impairment is substantial.” Gen. Motors Corp. v. Romein, 503 U.S. 181, 186 (1992). “Total destruction
of contractual expectations is not necessary for a finding of substantial impairment. In determining the
extent of the impairment, we are to consider whether the industry the complaining party has entered has
been regulated in the past.” Energy Reserves Group 459 U.S. at 411 (citations omitted)(emphasis
added).
Regarding the second prong, “[t]he requirement of a legitimate public purpose guarantees that the State
is exercising its police power, rather than providing a benefit to special interests.” Id. at 412 (citations
omitted).
And finally, with respect to the third prong, “unless the State itself is a contracting party, ‘[a]s is
customary in reviewing economic and social regulation, . . .courts properly defer to legislative judgment
as to the necessity and reasonableness of a particular measure.”
Id. at 412-13 (citations
omitted)(brackets in original). According to this analysis, “[o]nly if there is a contract, which has been
substantially impaired, and there is no legitimate public purpose justifying the impairment, is there a
violation of the Contract Clause.” City of Charleston v. Pub. Serv. Comm’n, 57 F.3d 385, 391 (4th Cir.
1995).
It is also worth noting that in Gen. Motors Corp. v. Romein, supra, the Supreme Court also conducted a
due process analysis with respect to retroactive legislation. The Supreme Court held, “[t]he retroactive
aspect of legislation, as well as the prospective aspects, must meet the test of due process”: a legitimate
legislative purpose furthered by rational means.” 503 U.S. at 191 (citations omitted)(brackets in
original). “[O]ur cases are clear that legislation readjusting rights and burdens is not unlawful solely
because its upsets otherwise settled expectations. This is true even though the effect of the legislation is
to impose a new duty or liability based on past acts.” Pension Ben. Guar. Corp. v. R.A. Gray & Co., 467
U.S. 717, 729-30 (1984)(citations omitted).
Applying this precedent to the issue at hand, arguments can be made on both sides as to whether
retroactive application of an unclaimed life insurance benefits law would substantially impair the
contractual relationship between an insurer and its insured.
In Gen. Motors Corp. v. Romein, 503 U.S. 181 (1992), the Supreme Court held that the law did not
violate the Contract Clause because there was no contractual agreement in the employment contracts
regarding the specific workers compensation terms at issue. After reviewing the three components to
the analysis, the Supreme Court explained:
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Normally, the first two are unproblematic, and we need address only the third. In this
case, however, we need not reach the questions of impairment, as we hold that there was
no contractual agreement regarding the specific workers compensation terms allegedly at
issue…It is undisputed that the contracts themselves were formed before the 1981 law
was enacted requiring benefit coordination. It is also undisputed that the contracts make
no express mention of workers compensation benefits. Petitioners argue that the workers’
compensation law is an implied term of the contracts, because the parties bargained for
other compensation with workers’ compensation benefits in mind…While it is true that
the terms to which the contracting parties give assent may be express or implied in their
dealings, cf. Garrison v. City of New York, 88 U.S. 196, 21 Wall. 196, 203, 22 L. Ed. 612
(1875), the contracting parties here in no way manifested assent to limiting disability
payments in accordance with the 1981 law allowing coordination of benefits. The
employment contracts were formed before the 1981 law allowing coordination of benefits
came into effect. Thus, there was no occasion for the parties to consider in bargaining the
question raised here: whether unanticipated reduction in benefits could later be restored
after the “benefit period” had been closed.
503 U.S. 186-88. Arguably, here, the insurance contracts to which the model law would be applied
retroactively do not impair the insurance contract, because the parties did not contemplate the
availability of Social Security Death Master Files to identify deceased insureds.
Even if a court finds there is contractual impairment, it can be argued that an insurer’s contractual
expectations are not totally destroyed when the burden to file a claim and to provide notice and proof of
death, etc. remain with the beneficiary and the remaining obligations under the policy are not impacted.
The Kentucky court found the new requirements to be substantive, not remedial, and it did not conduct a
substantial impairment analysis. Multiple states have enacted unclaimed life insurance benefits laws
with retroactive effect intended, presumably representing a finding by those states that such laws do not
represent a substantial impairment of contractual rights.
Absent substantial impairment, the second and third prongs of the Contracts Clause analysis are of
course never reached. If substantial impairment is found, that is not the end of the inquiry. Multiple
states, along with NCOIL and the NAIC, have already identified that assuring beneficiaries receive
monies to which they are entitled is a legitimate public purpose – whether the law is retrospective or
prospective. The Kentucky court found, in fact, that the Act at issue in that case may very well be a
valid exercise of the state’s regulatory authority.
Regarding the third prong, again several states have already determined that requiring DMF searches is a
reasonable and appropriate legislative response to the public purpose identified. Kentucky has a specific
statute which allows for retroactive application of a law if explicitly called for in the statute. If a law
explicitly provided for retroactive application as permitted by state law, a Court may defer to the
legislature’s judgment as to the necessity and reasonableness of the law such that the third prong would
be met. As previously noted, the Supreme Court has noted that deference to legislative judgement on
this prong of the inquiry is appropriate.
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2.
Summary
The research results discussed herein are by no means conclusive but are instead provided merely to
provide a framework for discussion. States have taken different approaches on the issue of retroactive
vs. prospective application and it is not clear if those different approaches are driven by state
constitutional or statutory analysis, one or more elements of a Contract Clause analysis, a Due Process
analysis, or a general public policy choice. I understand the Subgroup is considering including multiple
options for a state to consider as well as a Drafting Note describing the framework for analysis. Because
of the issues discussed herein, the Drafting Note, at the very least, should state then when a jurisdiction
is debating whether the retroactive option is appropriate, the jurisdiction should review all of its laws,
case law and any other relevant authority in order to determine whether, and in what circumstances,
retroactive laws are permitted and whether the statute must expressly provide that it is intended to be
retroactive.
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