Blue Shield’s Life Insurance Problem

Bedeviled by regulatory headaches in the past year, Blue Shield of California is struggling with a new issue: Paying the beneficiaries of life insurance policies who had no idea coverage had been in effect.

The San Francisco-based medical insurer also sells life insurance, and it confirmed to Payers & Providers earlier this month that it is dealing with the issue of unpaid claims.

“Blue Shield of California is aware of beneficiaries of policyholders who may have died and have not made a claim,” the company said in a statement made to Payers & Providers. “While we don’t know how many at this point, we are working to find out and will contact those who have not yet filed.”

Blue Shield declined comment beyond that, other than saying it would pay all beneficiaries who make a valid claim.

Sources have suggested most of the policies at issue were bundled into group health insurance for medium to large employers beginning in the 1980s. Tax incentives for employers made such a product attractive to them. Typically, the payout was for a relatively modest amount, usually $50,000 to $100,000.

Beneficiaries, such as a spouse or child, may not have been aware a life insurance policy existed because Blue Shield’s primary product is medical coverage. However, a Blue Shield subsidiary, Blue Shield of California Life & Health Insurance Company, has been offering coverage for accidental death and dismemberment since at least the mid-1980s to both group and individual policyholders.

Sources have suggested that the issue is significant for Blue Shield, with at least scores, if not hundreds, of unpaid policies extant. Some industry observers believe the number could be even higher than that.

“It could be more like in the thousands,” said Jerry Flanagan, lead staff attorney for Consumer Watchdog, a Santa Monica-based advocacy group, although he was quick to add that was an estimate. Flanagan noted that he recently began receiving inquiries from consumers regarding the matter.

Virtually all life insurance policies issued in California are regulated by the California Department of Insurance (CDI). However, CDI spokesperson Madison Voss said that health insurers do not have to report how many life insurance policies they have in effect.  “Insurers don’t have to report the number of policies sold for property or life to the department, we would only have the number of covered lives on a particular rate plan filing for health insurance policies with the insurer,” Voss wrote in an email. She noted that no consumers have filed complaints with the department regarding Blue Shield.

According to Voss, under California law, insurers who use for any purpose what is known as the “Death Statistical Master File” -- a database of those who have died in California and related demographics maintained by the Department of Public Health -- are required to match deaths against their lists of insured. The Social Security Administration maintains a similar database for deaths nationwide.

The state and federal death master files have been the subject of abuse in the past, with some insurers using the file to discontinue annuity benefits but not to pay off life insurance claims. In 2013, insurer ING reached a settlement with California Insurance Commissioner Dave Jones and regulators in other states over misuse of the death master files, paying $10.7 million. At least seven other insurers nationwide have agreed to reform their practices after being sued by Jones and insurance commissioners in other states.

Although no actions have been taken against Blue Shield for unpaid life insurance policies, the insurer has had its share of regulatory woes as of late. Last year, the State Franchise Tax Board stripped Blue Shield of the tax-exempt status it had held in California for 75 years, citing the insurer’s multibillion-dollar surplus of cash and its tendency to operate like a for-profit operator. It has been ordered to file state tax returns beginning with 2013. It also has come under fire for what some say are excessive premium hikes. 

Blue Shield has also been scrutinized by the Department of Managed Health Care regarding its proposed $1.3 billion acquisition of Monterey Park-based Care 1st Health Plan, which would help it break into the state’s huge Medi-Cal market. The deal has yet to be approved by regulators.