DOMA, Defaults and Spousal Continuation in NY

At last week’s Speed-to-Market seminar, Peter Dumar of the New York State Insurance Department presented on Supplement 1 to Circular Letter 27 (2008) (CL27). CL27 addresses the annuity issues that arise in annuities due to NY’s recognition of same-sex marriages performed in other states. The Circular Letter itself is pretty straight-forward. Disclosure is required of the conflict between NY’s position on same-sex marriage and the implications of the federal Defense of Marriage Act (DOMA). In addition, CL27 says “every insurer should review its policy forms to determine if revisions are needed so that a same-sex spouse will not be defaulted to the spousal continuation option, and to ensure that the default option for a same-sex spouse is adequately disclosed.”

Reviewing all contracts as required by the Circular Letter is a significant burden, but it is understandable if what a company needs to look for are provisions that don’t work anymore due to NY’s recognition of same-sex marriage and DOMA’s prohibitions on spousal continuation in the context of a same-sex spouse.

But…recently our office has been seeing post-approval reviews come in that require companies to add a default option where the contracts previously had none. This did not make sense to us because CL27 only required a review to determine if there was a conflict. No statute or regulation specifically requires a default option upon death of the owner. If there is no default option there can be no conflict. Not having a default option seemed the best way to preserve the most options for the most people and do so with the fewest possible policy form filings.

I asked Mr. Dumar about this at the seminar and he explained that the requirement for a default is not based on CL27, but on the entire contract mandate. It is the Department’s position that the contract is not complete if it does not include a provision stating what will happen on the death of the owner if the beneficiary does not select an option for receipt of the applicable proceeds.

Therefore, all companies should be aware that if you have an annuity contract that does not have a default option stating what happens upon death of the owner of the contract, you will be required to add one on post-approval review. You will be required to make this change not only on a going-forward basis, but you will also be required to endorse your in-force contracts to add this default option.

If you make the default spousal continuation, you will also need the CL27 language.

In light of all of this, the option that makes to be the default from a filing perspective is likely to be a lump sum payment in 5 years. Then it is unnecessary to add the CL27 disclosures. In addition, in the event that DOMA is repealed, the rights of same-sex spouses to continue the contract when/if that becomes legal are preserved. However, the filing ease and long-term compliance simplicity of the lump sum will need to be weighed against the election paperwork burden on the opposite sex spouse if s/he wants to continue the contract and must make an affirmative election to do so. Because no actual payments can be made to a beneficiary who can’t be found and any beneficiary who can be found will want his/her money, defaults are really about paperwork. Who has to fill out the paperwork for what.

Ultimately now that a default is mandated, that will be the business decision to make: election paperwork vs. complicated continuation provisions and the possibility of future filings to maintain compliance in this rapidly changing are of the law.