In the United States, "escheat" and "bona vacantia" have merged and are usually referred to collectively simply as "escheat." Modern American escheat statutes do not require that title pass to the state; rather they call for unclaimed property to be delivered to the "custody" of the state. This is a critical distinction. Because title passes under traditional escheat, the owner of the property or other rightful claimants cannot recover the property once it has been transferred. Modern custodial escheat statutes, on the other hand, permit the owner or others with legitimate claims to reclaim the property from the state after it has been transferred to the state.

The constitutionality of state escheat statutes as they pertain to abandoned and unclaimed insurance policy obligations was established in the landmark case Connecticut Mutual Life Insurance Company v. Moore, 333 U.S. 541, 68 S.Ct. 682 (1948) rehearing denied (1948), in which the Court was asked to consider the validity of New York's Abandoned Property Law (a custodial law) as applied to policies of life insurance that were issued for delivery in New York on the lives of residents of New York by companies incorporated in states other than New York. Nine insurance companies sought a declaration of the invalidity of the Abandoned Property Law and sought to enjoin the state comptroller and all other persons acting under state authority from taking any steps from asserting a claim over the unclaimed life insurance proceeds. The Court upheld the constitutionality of the New York statute and thereby permitted death proceeds to escheat to New York where the insurance was issued by an out of state corporation on the lives of New York residents.

Issues that were raised by the insurers in Connecticut Mutual included the impairment of contract that would result from the escheat statute ignoring such contractual requirements as the insurer not being liable under the policy until proof of death or other contingency was submitted and the policy surrendered. The insurers also argued that they would not be able to establish such defenses as the fact that the insured understated his/her age in the application for insurance, that the insured died as a result of suicide, military service or aviation, and that the insured was not living and in good health when the policy was delivered. Nevertheless, the Court opined that the insurers would receive a windfall if they were allowed to retain the unclaimed proceeds and upheld the validity of the statute. Better the state hold the monies for the benefit of all than the insurance companies for the benefit of themselves.

The Connecticut Mutual insurers contended, in addition, that the state of the insurer's incorporation should be the state to which the property escheated. However, the Connecticut Mutual opinion was limited to its facts and did not address what might occur if more than one state asserted claims to unclaimed and abandoned intangible personal property. As stated by the Court, "The problem of what another state than New York may do is not before us. That question is not passed upon." Connecticut Mutual, supra, 333 U.S. at 548.

After the Connecticut Mutual decision in 1948, the Uniform Disposition of Unclaimed Property Act of 1954 was drafted to facilitate an orderly process for escheat when several states were asserting rights to the monies. Prior to the 1954 Act (and to some extent even thereafter), states did what they could to try to assure that they had a claim superior to those of other states. For example, states would shorten the period of presumed abandonment to a time shorter than that used by sister states, thereby assuring that the property would transfer to that state before it was eligible to transfer to the other state(s). In addition to shortening the period for presumed abandonment, states also sought to broaden the scope of intangible properties over which they asserted a claim of right. Thus, escheat statutes and case law came to permit states to assert claims over property not even physically located within its borders, such as intangibles and contractual rights and obligations that existed between foreign corporations and residents of the state. The 1954 Act was revised in 1966 and a new Act, the Uniform Unclaimed Property Act of 1981, revised in 1995, was drafted to address the competing interests of the various states by setting forth proposed uniform laws that would be adopted and respected by the various states. Tables of the jurisdictions that have adopted the 1981 Act and the 1995 Act, as well as jurisdictions that have adopted their own statutes, are appended below.

Because the Acts are custodial in nature, judicial involvement in escheat matters is kept to a minimum, only coming into play when disputes arise and judicial enforcement is required. Court orders are not required to transfer property to the custody of the state. Under the Acts, property transfers from the holder to the state administratively by the filing of reports by the holders and the tendering of the property to the state abandoned property administrators. Undoubtedly, this results in a cost savings to the states and the holders. Although the Acts impose substantial reporting and record keeping requirements on the insurance companies and impose severe penalties for failure to comply with those requirements, the Acts nevertheless have the added benefit of holding the insurance companies and other holders harmless if they transfer property to the state administrators in good faith and in compliance with the respective Acts.

Although both Acts contain specific provisions applicable to life insurers, it is clear that escheat principles and the requirements of the Acts apply to other insurers and insurance products as well. Section 17(a) of the 1981 Act and Section 7(a) of the 1995 Act state, in substance, that holders of tangible or intangible property presumed abandoned must file the required report with the administrator and Section 19(a) of the 1981 Act and Section 8(a) of the 1995 Act state, in substance, that the holder of property presumed to be abandoned must deliver the property to the administrator. Additionally, it was held in Louisiana Hospital Service, Inc. v. Collector of Revenue, 293 So.2d 663 (La. App. 1974), that insurance companies offering group and non-group hospital-surgical-medical contracts were subject to Louisiana's unclaimed property statute and had to tender to the state monies that were sent by check to policyholders that were never cashed. In Treasurer and Receiver General v. John Hancock Mutual Life Ins. Co., 446 N.E.2d 1376 (Mass. 1983), John Hancock was required to remit to the state funds represented by uncashed checks issued by John Hancock covering its obligations for accident and health payments, life insurance proceeds, agent commissions, salaries and vendor payments.

The 1981 and 1995 Acts are quite similar, but vary in a number of significant respects. Additionally, the language of the model acts may have been altered by the adopting jurisdiction. Therefore, when confronted with the issue of abandoned property, it would behoove one to carefully review the escheat laws of states with possible interests in that property. Also, careful consideration must be given to whether a state's escheat laws are preempted by ERISA. For example, in Aetna Life Ins. Co. v. Borges, 869 F.2d 142 (2d Cir. 1989), it was held that Connecticut's escheat statute was not preempted by ERISA because the law did not have an effect on the original determination of an employee's eligibility for benefits and the economic and administrative impact on the ERISA plan was very minimal. The ERISA benefits had been determined by the insurer funding the ERISA plan, but the employee failed to present the insurer's draft for payment. The Plan did not prohibit the insurer from retaining those monies and the Plan had no claim thereto. Connecticut's law had no effect on the original determination on the employee's eligibility for benefits.

In contrast, see Commonwealth Edison Co. v. Vega, 174 F.3d 870 (7th Cir. 1999), in which ERISA preemption of Illinois' escheat statute was found. There, Illinois sought to apply its unclaimed property law to benefits payable under Com Ed's pension plan that had not been claimed by plan beneficiaries. Under the terms of the Plan, unclaimed benefits remained in the Plan's, not the funding insurer's, possession. The presence of the money in the Plan would mean that Com Ed would be required to contribute less to the Plan in order to assure the Plan's ability to meet its obligations. According to the Court, until the check to the beneficiary was actually cashed, the money due the beneficiary was an asset of the Plan and the application of the Illinois law resulted in taking a portion of the Plan's assets and putting it in the state treasury. Thereafter, the beneficiary would have to apply to the state and the state would, in effect, become the Plan Administrator.

ERISA preemption was also addressed in The Manufacturer's Life Ins. Co. v. East Bay Restaurant and Tavern Retirement Plan, 57 F.Supp.2d 921 (N.D. Calif. 1999), in which the Court held that ERISA preempted the California unclaimed property law in that instance. The Plan was entitled to request a premium refund from ManuLife for any annuitant not located after a certain date. Thus, ManuLife, unlike the insurer in Aetna, supra, would not necessarily retain the funds, but, on the contrary, was obligated to return the funds to the Plan. The Court did not address whether the unpaid benefits were a plan asset. Instead, it held that the annuity contract between the Plan and ManuLife was itself a plan asset and that its value derived directly from the refund provision's guarantee that unclaimed benefits would be returned to benefit all plan participants pending location of those participants who were missing. The Court opined that California was seeking to insert itself between the ERISA plan and an asset of the Plan, the annuity contract, and that it wished to seize funds to which the Plan had a contractual right.

The rule for which state can take custody of unclaimed property is set forth in Section 3 of the 1981 Act and Section 4 of the 1995 Act. Both Sections contain similar, but not identical language. According to Section 4 of the 1995 Act, except as otherwise provided by the Act or by a state's statute,

1. The last known address of the apparent owner, as shown on the records of the holder, is in this State;
2. The records of the holder do not reflect the identity of the person entitled to the property and it is established that the last known address of the person entitled to the property is in this State;
3. The records of the holder do not reflect the last known address of the apparent owner and it is established that:
1. The last known address of the person entitled to the property is in this State; or
2. The holder is domiciled in this State or is a government or governmental subdivision, agency or instrumentality of this State and has not previously paid or delivered the property to the State of the last known address of the apparent owner or the other person entitled to the property;
4. The last known address of the apparent owner, as shown on the records of the holder, is in a State that does not provide for escheat or custodial taking of the property and the holder is domiciled in this State. . . ;
5. The last known address of the apparent owner, as shown on the records of the holder, is a foreign country and the holder is domiciled in this State. . .; and
6. The transaction out of which the property arose occurred in this State, the holder is domiciled in a State that does not provide for the escheat or custodial taking of the property, and the last known address of the apparent owner or other person entitled to the property is unknown or is in a State that does not provide for the escheat or custodial taking of the property.

Section 7(a) of the 1981 Act states that funds held or owing under a life insurance or endowment insurance policy or annuity contract that has matured or terminated are presumed to be abandoned if unclaimed for more than five years after the funds became due and payable. However, if the insured has attained, or would have attained if he were living, the limiting age under the mortality table on which the reserve is based, the period is two years.

On the other hand, Section 2(a) of the 1995 Act states that

* * *

1. amount owed by an insurer on a life or endowment insurance policy or an annuity that has matured or terminated, three years after the obligation to pay arose or, in the case of a policy or annuity payable upon proof of death, three years after the insured has obtained, or would have obtained if living, a limiting age under the mortality table on which the reserve is based.

Section 7(c) of the 1981 Act and Section 2(d) of the 1995 Act both address when insurance intangibles are matured, due and payable and unclaimed, but use slightly different language. Generally speaking, though, property is deemed to be "unclaimed" where for the applicable period the owner has not communicated in writing or by other means with the holder concerning the property or the account in which the property is held, has not assigned, readjusted or paid premiums on the policy, has not subjected the policy to a loan and has not otherwise indicated an interest in the property. Under Section 2(d) of the 1995 Act, a communication with an owner by a person other than the holder or its representative who has not in writing identified the property to the owner is not an indication of interest in the property by the owner.

According to Section 7(d) of the 1981 Act and Section 2(d)(ii) of the 1995 Act, the application of an automatic premium loan provision or other nonforfeiture provision contained in an insurance policy does not prevent a policy from being matured or terminated if the insured has died or the insured or the beneficiary of the policy has otherwise become entitled to the proceeds before the depletion of the cash surrender value of a policy.

Both the 1981 Act (Section 17) and the 1995 Act (Section 7) have extensive reporting requirements for the holders of intangible property such as insurance obligations. Where a person or corporation holds property that is presumed to have been abandoned, the holder must file a report with the state's unclaimed property administrator. The report must be verified (signed under oath) and contain a description of the property, the name and the last known address of the insured or annuitant and the beneficiary. If the insurer is a successor to another corporation which previously held the property for an apparent owner or the holder has changed its name while holding the property, the holder must file with the report a statement of its former names, if any, and the known names and addresses of all previous holders of the property.

Sections 17 and 7 of the respective Acts also require that reports by life insurance companies be filed before May 1 of each year for the previous calendar year. Non-life insurer holders must file by November 1 of each year and cover the 12 months next preceding June 30/July 1 of that year. The holder must send written notice to the apparent owner not more than 120 days or less than 60 days before filing the report stating that the holder is in possession of the property if the holder has in its records an address for the apparent owner which the holder's records do not disclose to be inaccurate.

The 1981 and 1995 Acts differ significantly on when property must be paid or delivered to the administrator. According to the Section 19(a) of the 1981 Act, payment or delivery must be within 6 months of the final date for filing the report. According to the Section 8(a) of the 1995 Act, though, payment is to be made contemporaneously with the filing of the report.

Both Acts state that holders who fulfill the reporting and delivery requirements of the respective Act will be absolved of further liability and will be defended and indemnified by the administrator should ostensible owners assert claims against the holder in the future. 1981 Act Section 20(a)(e); 1995 Act Sections 8(d) and 10(b)(f). Indeed, this is the crux of the custodial nature of the modern escheat statute, since they state that the administrator, rather than the holder, is liable to satisfy any future claims that are rightfully asserted and proven. Section 20(a) of the 1981 Act and Section 10(b) of the 1995 Act both state in pertinent part:

A holder who has paid money to the administrator pursuant to either Act may, but is not required to, subsequently make payment to a person reasonably appearing to the holder to be entitled to payment. Upon filing a proof of payment and proof that the payee is entitled to the payment, the administrator is to promptly reimburse the holder for the payment made by the holder. 1981 Act Section 20(b); 1995 Act Section 10(c).

The 1981 Act and the 1995 Act grant state administrators considerable power. State administrators may require holders who have not filed a report or persons who the administrator believes have filed an inaccurate, incomplete or false report to file a verified report in a form specified by the administrator. 1981 Act Section 30(a); 1995 Act Section 20(a). Administrators may, at reasonable times and upon reasonable notice, examine the holder's records to determine whether the holder has complied with the Acts and may conduct the examination even if the holder does not believe it is in the possession of any property that must be reported, paid or delivered under the Acts. 1981 Act Section 30(b); 1995 Act Section 20(b). If the holder does not maintain the required records or if the available records are insufficient to permit the preparation of a report, the administrator may require the holder to report and pay to the administrator the amount the administrator reasonably estimates from any available records of the holder, according to the Section 30(e) of 1981 Act, and, additionally "by any other reasonable method of estimation," according to the Section 20(f) of the1995 Act.

Holders who are required to file a report must maintain the records containing the information required to be included in the report for ten years after the report is filed. 1981 Act Section 31(a); 1995 Act Section 21(a). Administrators are authorized to maintain actions in their own state or in sister states. 1981 Act Section 32; 1995 Act Section 22. Reasonable attorney's fees may be awarded to the prevailing party under Section 22 of the 1995 Act.

The failure to file reports or transfer property to the state as required can subject the holder to substantial penalties. Section 34 of the 1981 Act and Section 24 of the 1995 Act state that a holder who fails to report, pay or deliver property within the time prescribed by the Act is required to pay the administrator interest at an annual rate specified by the state's statute and can be assessed a civil penalty of a specified amount for each day the report, payment or delivery of property is withheld, up to a maximum amount. Holders who willfully fail to report, pay or deliver property as prescribed by the Act and holders who make fraudulent reports can be assessed civil penalties plus 25% of the value of any property that should have been reported.

A significant difference between the 1981 Act and the 1995 Act is the applicable statute of limitations. Section 29(b) of the 1981 Act states simply that "no action or proceeding may be commenced by the administrator with respect to any duty of the holder under this Act for more than ten years after the duty arose." Section 19(b) of the 1995 Act states, on the other hand, that

Lastly, both Acts state that the respective Act "does not apply to property held, due, and owing in a foreign country and arising out of a foreign transaction." 1995 Act Section 26; 1981 Act Section 36).

State escheat mechanisms are codified and a "road map" for the steps to be followed therefor exists. Even so, care and consideration must be given to the handling of unclaimed property, particularly in the context of ERISA, where state unclaimed property statutes may or may not be preempted depending on the facts of the case and the specific language of the statute.

• TABLE OF JURISDICTIONS THAT HAVE ADOPTED THE 1981 ACT
• TABLE OF JURISDICTIONS THAT HAVE ADOPTED THE 1995 ACT
• TABLE OF JURISDICTIONS THAT HAVE ADOPTED THEIR OWN STATUTES

For further information on this issue, please contact John P. Davis, III at John P. Davis, III at jpd@jgcg.com