Unclaimed Property Landscape for the Life Insurance Industry

Most unclaimed property professionals are familiar with the story of Verus Analytics, LLC’s (“Verus”) [1] appearance on the contract audit “field of play” some ten years ago, as it cut a swath across the life insurance industry with audits focused on the industry’s failure to report and remit unclaimed life insurance proceeds based on the insurers having not researched whether the insureds [2] were deceased. And, you may know that this audit activity had significant impacts on the industry and on multistate unclaimed property laws, including:

1. the numerous audit settlements that poured billions of dollars of life insurance proceeds into the coffers of audit-participating states, for potential return to the owners of such property;
2. the promulgation and enactment of model laws [3] in a majority of states that require life insurers to regularly check the Social Security Administration’s Death Master File or a similar database to ascertain the status of insureds;
3. the corollary requirement [4] adopted by many states to trigger the running of statutory dormancy periods on such a database’s deceased-status indicator (sometimes verified/accurate, sometimes not); and
4. the attempts of Verus and other contract audit firms to apply “external database” findings to the records of holders in different sectors, so as to create a [rebuttable] presumption that death equals lost/dormant status, for unclaimed property purposes.

Can History Repeat Itself?

Probably not, with respect to an audit sweep of major life insurance companies, the changes in state law following the industry’s entrance into Global Resolution Agreements (GRAs) with Verus and settlements with the audit states—which require regular research of the life status of insureds—were designed to ensure prospective compliance by these companies. Then again, although most major life insurance companies experienced audits in the 2010s, mid-sized and smaller life insurance companies certainly should not assume they are too small to attract a customer products-focused audit. [5] Auditors do not discriminate on the type of life insurance company either. Along with size, it does not matter if you are a mutual, stock, or fraternal company.

Delaware was not part of the Verus audits, which means that for life insurance companies, a Delaware voluntary disclosure (VDA) might be an “opportunity” to complete their self-reviews while also securing a waiver of interest and penalties (one of the benefits of executing a GRA with Verus). If a life insurance company is not domiciled in Delaware (i.e., incorporated in or formed under the laws of Delaware) then the VDA scope would include only Delaware-addressed property held by the insurance company. Note, however, that a VDA process would scope in both customer property (insurance proceeds, annuities) as well as general ledger property.

Even if a company is Delaware-domiciled, the likely Delaware liability for insurers with respect to customer products would seem to be a smaller bogey, due to the existence of customer address data. On the other hand, general ledger liabilities of Delaware-domiciled insurers may be calculated with reference to the State’s inflationary estimation techniques, for years where the insurer lacks complete and researchable records.

A Big Game Hunt Continues in This Sector in 2021, This Time for General Ledger Property

As noted, since about 2008 third party audit firms increased their audit focus within the life insurance industry. The audit process entailed comparing an insurance company’s in-force and expired policy database against the social security death master file. The goal was to determine if an insurance company had active policies without knowing a policy owner was deceased. These audits uncovered a multitude of death benefits due to beneficiaries. As the audits and years progressed, the audit findings started to decrease as states adopted procedures to identify potentially deceased policyowners. The auditors needed to find ways to identify other types of unclaimed property. Their focus is now turning to auditing general ledger (G/L) property types.

What is general ledger property? In the unclaimed property world, G/L property refers to the full range of liabilities/obligations to a third party on a holder’s books and records. The most common types of G/L property are:

• Accounts payable (uncashed vendor checks, refunds checks, and other disbursements)
• Accounts receivable
  • Unidentified premium remittances
  • Unapplied credit balances (premium overpayments)

  Insurance companies need to be aware of this shift in audit focus and ensure that appropriate procedures are in place to identify, record, report and remit aged G/L property that becomes reportable to the states. One key must-have procedure is to ensure proper documentation maintenance to support the disposition of liabilities. Audits of insurance companies are now heavily focused on testing voided checks, so be sure to document why a check was voided and not reissued. Insurance companies are witnessing audit findings that lead to millions of dollars in potential unclaimed property due to the states. Why, you may ask? Simply put, a lack of documentation, so be sure to review and ensure your procedures include the necessary guidelines to document how your liabilities (both contingent and fixed/certain) are resolved.

  What’s on the Horizon: Planning or Just Compliance?

  This industry is highly regulated and getting multistate unclaimed property compliance right is always going to be a priority. Are there still planning opportunities for life insurance companies? We certainly encourage the implementation of “best practice” G/L policies and procedures to optimize compliance but also to minimize reporting obligations. Beyond that baseline opportunity, there may be opportunities associated with a life insurance company’s review of customer-facing terms and conditions as well as insurance product design, to take advantage of existing exemptions as well as legal doctrines (e.g., the derivative rights doctrine, the common law rule of offset, etc.) that shape a holder’s unclaimed property compliance obligations.

  [1] Verus was formerly known as Verus Financial, LLC, but has just changed its name to Kroll Government Solutions, LLC.

  [2] As Verus pointed out and news shows such as 60 Minutes reported, there had been a lack of parallel use of databases such as the Social Security Administration’s Death Master File (“DMF”) by the industry prior to the audits, with regard to insurance contracts (the DMF was generally not consulted to establish insured’s death, because contracts required claimants to present a copy of the policy and proof of death) and annuity contracts (the DMF was generally consulted to ensure payouts ceased upon annuitant’s death – in other words, to prevent fraud). See https://www.cbsnews.com/news/60-minutes-overtime-are-you-owed-insurance-money-heres-how-to-check/.

  [3] National Conference of Insurance Legislatures (“NCOIL”) Adopted the Model Unclaimed Life Insurance Benefits Act (“the Act”) in November 2011. An updated version of the Act was adopted by NCOIL in November 2014.

  [4] See RUUPA section 211, for example.

  [5] Verus was not the only contract audit firm auditing life insurance companies – Kelmar similarly targeted this sector, and to the extent a life insurer has not yet been audited with respect to unclaimed proceeds, it should assume this will occur.