American International Group (AIG) has agreed to pay $25 million to $30 million to 10,000 California beneficiaries of life insurance policies the company overlooked, bringing to $138 million the amount recovered by the state from five insurance companies.

The latest agreement is part of a larger pact that recovered $300 million for beneficiaries in 39 states and the District of Columbia. California will also get about $1 million of an additional $11 million paid by AIG to insurance regulators who have been investigating insurance company practices since 2008.

As part of the settlement, AIG agreed to regularly check the Social Security Administration's Death Master File and match it against its own list of life insurance policyholders, annuity owners and holders of retained asset accounts. If AIG finds a match, it is supposed to follow a set of directives for finding beneficiaries and if unsuccessful turn over the proceeds to the state as required by unclaimed property laws.

Until recently, life insurance companies only paid claims when approached by beneficiaries or outside parties. It was not unsual for companies to draw down the cash value of a life insurance policy to continue paying premiums, even when they knew or should have known the policy holder was dead. Then the insurance companies would cancel the policies without notifying the policyholder or their family members. 

The state reached a similar settlement with John Hancock in April 2011 for $20 million and in January 2012 California State Controller John Chiang sounded what would become a familiar theme when announcing a settlement with Prudential Insurance Company of America for an estimated $20 million: “For decades, the surviving families of policyholders have been cheated by life insurance companies who either knew or should have known that payout was due.”

Another agreement was reached with MetLife Inc. in April, in which California beneficiaries netted approximately $40 million of a national $500 million settlement.

In announcing the settlement Tuesday, Chiang lauded AIG for its cooperation in settling the matter but said, “For decades, too many insurers have fleeced their policyholders.”

–Ken Broder

To Learn More:

AIG Reaches Settlement on Unclaimed Property (by Arthur D. Postal, LifeHealthPro)

AIG to Pay up in California Death-Benefits Probe (by Dale Kasler, Sacramento Bee)

Controller Chiang, Insurance Commissioner Jones Announce Settlement with AIG Insurance (State of California)

Protecting Life Insurance Beneficiaries (California State Controller’s Office)