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New York Life Insurance Company

Market Conduct
Tuesday, August 23, 2005
Docket No. 05-027-I

DOCKET NO. 05-027- 1

In Re: New York Life Insurance Company, NAIC#66915

ORDER ADOPTING REPORT OF EXAMTNATION

NOW COMES John P. Crowley, Commissioner of the Vem1ont Department of Banking, Insurance, Securities and Health Care Administration, and hereby issues the following Order adopting the Market Conduct Examination Report in the above referenced docket number, subject to the exceptions and qualifications discussed below.

FINDINGS OF FACT

1. Pursuant to the authority granted by Vermont law, including, but not limited to, that contained in 8 V.S.A. §§ 10 - 13, 18, 3564-3574 and 4726, the Commissioner of the Department of Banking, Insurance, Securities and Health Care Administration (the "'Department") is charged with administering and enforcing the insurance laws and regulations of the State of Vermont and is authorized to conduct examinations of insurers and licensees to detem1ine whether they are in compliance with said laws and regulations.

2. New York Life Insurance Company (the "Company") is authorized to transact business in Vermont under Foreign Insurance Company License No. 1452 P.

3. A final target1 market conduct examination report was issued by examiners

Jennifer Greenway, Robbie Kriplean and James Montgomery entitled MARKET CONDUCT EXAMINATION REPORT OF NEW YORK LIFE INSURA NCE COMPANY NEW YORK, NEW YORK AS OF DECEMBER 31,2002 BY VERMONT DEPARTM ENT OF BANKING, INSURANCE, SECURITIES & HEALTH CARE ADMINISTRATION (the "Report").

4. In accordance with the requirements of 8 V.S.A. § 3574(b), the Report was transmitted to the Company and tl1e Company was afforded a reasonable period of time to submit a formal written response to the findings of Report. The Company submitted a formal response (the "Response") addressing the issues raised tl1e Report. Upon review of the Response, the Department has undertaken additional investigation, sought additional information from the Company and negotiated with the Company concerning issues contained herein.

5. Pursuant to 8 V.S.A. § 3574(c), the undersigned Commissioner has fully considered the Report, the Response and additional information provided.

CONCLUSIONS OF LAW

6. To the extent comments made by the Company are not discussed below, such comments are expressly rejected by the undersigned. The examiners' Report, including their reconm1endations, are adopted unless expressly rejected below.

7. In the (V) CLAIMS PROCEDURES AND PROCESSING - (A) Claims Practices and Procedures - Not In Compliance with 8 V.S.A. §3665 section of the Report (pages 7- 8), the examiners discuss the Company's failure to comply with 8 V.S.A. § 3665. 8 V.S.A. § 3665 requires that all payments on claims for life insurance shall include interest from the date of the death of the insured at 6% or the rate of interest paid on proceeds left on deposit, whichever is higher. 8 V.S.A. § 3665(c)(2). Additionally, if claims are paid more than 30 days from receipt of a fully executed proof of loss, interest shall begin to accrue at the judgment rate. 8 V.S.A. § 3665(d).2 In contrast, the Company has applied an interest rate of3.5% since 1993. Further, when the Company has failed to pay benefits within 30 days of receipt of proof of loss, it has not paid interest pursuant to 8 V.S.A. § 3665(d). The examiners recommend that the Company revise its claim procedures to conform with Vermont law and recalculate and pay improperly withheld interest from 1993 until the present. (Recommendation Nos. 1 and 2, Report at page 18.)

In its Response, the Company notes that it has been paying interest consistent with 8 V.S.A. § 3665 since November 2003, when the Company discovered the discrepancy. Nonetheless, the Company disputes the Department' s interpretation of the statute and urges the application of the "rule of lenity" pursuant to State of Vermont v. Greg L. Goodhue, 175 Vt. 457, 833 A.2d 86 1, 868 (Vt. 2003) and related case law.

Upon consideration, the undersigned finds the cases cited by the Company are not applicable to an administrative proceeding such as this. However, it appears the Company has addressed the problems discovered by the examiners at least as far as claims after November 2003. Nonetheless, a remediation plan shall be implemented to address the underpayments.

The Company shall perform an audit and issue a report to the Department. The audit shall be of all life insurance claims received by the Company from January 1, 1999 to the date the Company began complying with 8 V.S.A. § 3665, arising out of policies issued in Vermont. For each claim, the Company shall reopen the date of death, the date the proof of loss was received, the amount of insurance at the time of death, the amount paid to the beneficiaries, the date payment was made to the beneficiary,3 the amount that should have been paid if interest had been calculated in accordance with 8 V.S.A. § 3665, the policy number, and the claim number. The audit shall be provided to the

Department no later than December 15, 2005 and shall be transmitted both in hardcopy and electronically in the form of an Excel spreadsheet. Upon approval, the Company shall refund all underpaid interest owing which exceeds $25 at the time the benefits were paid.4 Upon successful remediation, it is not anticipated any administrative penalty would be warranted.

8. ln the CLAIMS PROCEDURES AND PROCESSING - (C) Individual Life Claims Underpayment - Claim #679155 section of the Report (page 9), the examiners discuss a claim wherein it appears that the proof of loss was received for claim benefits on December 13, 2001 and yet benefits were not paid until February 11, 2002. The examiners note a $13,030.36 underpayment of statutorily required interest caused by the

Company's failure to pay 6% interest from the date of death as required by 8 V.S .A. § 3665(e)(2) and failure to pay 12% interest from the date the benefits were due until they were paid as required by 8 V.S.A. §3665(d). The examiners recommend the Company recalculate the interest owing and remit amounts owed but not paid. (Recommendation No. 4, Report at page 18.)

In its Response, the Company asserts the claim was timely paid and at the appropriate rate of interest. The Company explains that the claimant failed to submit the tax identification number until February 8, 2002 and the benefits were paid three days later. As such, the Company disputes that money is owing on this claim.

Upon consideration, the undersigned adopts this portion of the Report and the examiners' recommendation. Pursuant to 8 V.S.A. § 3665(c), the Company was obligated to calculate interest on benefits at 6% from the date of death until the date the claim was paid. It appears the Company calculated interest at 3.5%. As such, the Company must pay the difference in interest paid and owed and remit the same to the beneficiary. The undersigned notes that under Vermont law, the Company also owes interest at the judgment rate (12%) on those benefits withheld, but not paid (the 2.5% interest shortfall) from the time such interest was due until the date of payment.

However, the undersigned agrees with the Company that the claim was not paid late the Company asserts the tax identification number was requested and required information in order for benefits to be paid. As such, the "proof of loss" was not complete until February 8, 2002 and interest under 8 V.S.A. § 3664(d) did not accrue. This appears to have been an isolated incident and, as such, no penalty is warranted under these circumstances.

9. In the (V) CLAIMS PROCEDURES AND PROCESSING - (D ) Group Life Claims section of the Report (page 10), the examiners discuss similar problems as noted with the individual policy claims payments. Specifically, the examiners note the Company did not pay interest on claims consistent with 8 V.S.A. § 3665. The examiners further noted four instances where claims were not paid in a timely manner (within 30 days of a completed proof of loss) and interest" as not paid in accordance with 8 V.S.A. § 3665(d) in those cases. The examiners recommend the Company implement the same remediation program for the repayment of past due interest as recommended relating to individual policies.

The Company does not specifically respond to this portion of the Report.

Upon consideration, the undersigned adopts this portion of the Report and the examiners' recommendation. The remediation plan outlined above in Paragraph 7 shall apply to group policies as well. In anticipation of a successful remediation plan, no penalty appears warranted at this time.

10. In the (V) CLAIMS PROCEDURES AND PROCESSING - (E) Group Life Claims and Irregularities section of the Report (page 12), the examiners discuss two separate instances where insureds appeared to have attempted to designate a child as a beneficiary to their life policy (in addition to their spouse), yet the claims benefits were paid exclusively to the spouse. In response to the examiners, the Company explained that upon receipt of instructions from the insured, the Company issued a Certificate showing that the spouse remained the primary beneficiary and the child was listed only as a contingent beneficiary. The examiners maintain that in these situations, the insureds' wishes indicate the desire for the child to have been an equal beneficiary with the spouse and that the Company failed to adequately protect the interests of the insured. The examiners recommend the Company revise its procedures in a manner which will ensure that all claims are paid to beneficiaries in accordance with the insured's instructions. (Recommendation No.6, Report at page 19.)

The Company does not respond to this portion of the Report beyond that which is discussed in the Report by the examiners.

Upon consideration, the w1dersigned adopts this portion of the Report and the examiners' recommendation. The examiners are correct that a failure of the insured to complain upon receipt of the certificate or of the claimants to comp lain at the time of the benefits payments cannot conclusively establish the Company paid the benefits in accordance with the insured's instructions. In the second case discussed by the examiners, based on the information provided in the Report, it appears that the insured intended for the spouse and the child to share equally in the proceeds of the insurance, and yet the proceeds were paid exclusively to the spouse.5 When a consumer chooses to purchase life insurance as part of his or her financial plan, beyond the type of product and benefits purchased , little is more important than the decision of the designated beneficiary or beneficiaries. Often, other financial decisions are based on who has been designated as the beneficiary. The Company must ensure that it takes every reasonable effort to execute the insured's wishes in this regard.

The Company shall submit to the Department, for review and approval, its procedures associated with processing group life beneficiary designation instructions from its insureds. Such procedures shall be submitted no later than December 15, 2005.

Although the Company can rely on not ice to the insured regarding the beneficiary designation, the Company is instructed to make sure that such notice is clear as to the meaning of the change and provides simple instructions for notifying the Company if a Certificate has been issued in error.

11. In the (VI) REPLACEMENTS section of the Report (pages 13- 14), the examiners note violations of the Vermont replacement regulations.6 As a result of their findings, the examiners recommend the Company assign specific staff members the responsibility for reviewing each replacement file to ensure that all documents are included and that all procedures are followed. (Recommendation No.7, Report at page 19.)

In its Response, the Company describes its revamped procedures in Vermont intended to ensure that products sold to Vermonters are sold in compliance with the replacement regulation.

Upon consideration, the undersigned adopts this portion of the Report and the exan1iners recommendation. According to the information provided in the Response, it appears that Company has implemented the examiners recommendations into its processes. As such, no additional action is necessary on the part of the Company. However, the undersigned finds that a $2,000 administrative penalty is warranted based on the replacement violations discovered. Although the statutes allow a far greater penalty, the Company's proactive and innovative organizational approach to addressing these issues justifies a lesser penalty.

12. In the (VII) SALES AND MARKETING - (A) INCOM PLETE/INCORRECT

APPLICATIONS section of the Report (page 15), the examiners discuss the use of a form developed to be used by the Company or by New York Life and Annuity Company which contains a box required to be checked to identify the issuing company. In certain instances, the producer did not check off a box or the appropriate box, resulting in confusion regarding from which company the consumer intended to purchase coverage. The examiners note the Company's Administrative Manager stated he would reaffirm the necessity of completing this portion of the application and the examiners make no further recommendation.

In its Response, the Company notes that two of the policies noted are issued by New York Life and Annuity Company and should not be in this Report. Further, the Company notes that in three of the four instances, the name of the issuing company was identified in other portions of the application, even if the box was not checked as noted by the examiners. Nonetheless, the Company indicated that it has reminded its Vermont producers of the importance of using this application form correctly.

Upon consideration, the undersigned adopts this portion of the Report, subject to the following modification: the reference to Po l icy 62841337 is considered deleted because it does not implicate the Company. Nonetheless, regarding the other two policies to which the Company objects, the fact that the issuing company was identified in other unspecified portions of the application does not alter the fact that the applications should be used as intended, particularly when the issuing company identification must be prominently identified. However, the Company's corrective action appears sufficient and no additional action is necessary.

ORDER

13. The Report is adopted in its entirety without modification unless expressly stated to the contrary herein.

14. As discussed more fully in Paragraph 7 above, discussing the (V) CLAIMS PROCEDURES AND PR OCESSING (A) Claims Practices and Procedures Not in Compliance With 8 V.S.A. § 3665 section of the Report, the Company shall undertake the audit described above and provide a report to the Department no later than December 15, 2005. As noted above in Paragraph 9 above, such remediation program shall include claims made under both individual and group life policies issued in Vermont. It is anticipated upon approval of the report, the Company shall refund underpaid interest due under 8 V.S.A. § 3665 which exceeds $25.00, as more fully described above.

15. As more fully discussed in Paragraph 8 above, discussing the CLA IMS PROCEDURES AND PROCESSING - (C) Individual Life Claims Underpayment ­Claim #679155section of the Report, the Company shall pay the interest due on Claim #679155 as described above. Such payment should occur no later than ten days from the expiration date of the appeal deadline of this Order.

16. As more fully discussed in Paragraph 10 above, the (V) CLAI MS PR OCEDURES AND PROCESSING - (E) Group Life Claims and Irregularities section of the Report, the Company shall submit, no later than December 15, 2005, for the Department's review and approval, its procedures for processing and executing beneficiary change instructions received from its insured.

17.As discussed in Paragraph II above, addressing the (VI) REPLACEMENTS section of the Report, the Company shall pay a $2,000 administrative penalty for the replacement violations discovered by the examiners.

18. Al l penalties described above shall be paid to the Department no later than 10 days after the expiration of the appeal deadline of this Order, or other administrative or judicial order, as appropriate.

PURSUANT TO 8 V.S.A. § 3574(c), THIS ORDER AI D REMEDIAL ACTION SET FORTH HERFI N MAY BE APPEALED TO THE COMMISSIONER BY FILING AN ADMINISTRATIVE APPEAL WITHIN THIRTY (30) DAYS OF THE DATE SET FORTH BELOW. FURTHER REMEDIAL ACTIONS AND PENALTIES ORDERED UPON RECEIPT OF INFORMATION ORDERED HEREIN MAY BE APPEALED WITHIN THIRTY (30) DAYS OF SUBSEQUENT DECISIONS BY THE COMMISSIONER.

1 The market conduct examination focused on marketing and sales, consumer complaints, claim' procedures and processing, and replacement procedures from January 1, 2000 to December 31, 2002 (Report at page 3.)

2 The judgment rate of interest is 12%. 9 V.S.A. § 41a.

3 The date of payment shall refer to either the date that the check was issued or, on the event of an electronic transfer, the date the transfer was made.

4 Refunds shall also accrue interest from the date the benefits were paid until the refunds are paid. Pursuant to 9 V.S.A . § 41a, interest shall be calculated on the refunds exceeding $25.00 at 12% simple interest per annum.

5 This is not so obvious in the first instance. Based on the instructions provided by the insured, it is possible the insured had intended the child co be a contingent beneficiary.

6 For those policies issued before March 1, 2002, the examiners assessed compliance with Regulation 88-2;

For those policies issued after that date, compliance with Regulation J-200 1-03 was evaluated .