Background

Unclaimed Property: It’s not just about life insurance. The same contingency-fee unclaimed property auditors that targeted unclaimed life insurance proceeds are now turning their focus to other types of insurance, including health insurance and property & casualty insurance (P&C). For companies with multiple lines of business, auditors are expanding the scope of ongoing life insurance audits to target health and P&C; meanwhile, auditors have initiated separate audits specifically targeting health, P&C and other types of insurance. Sutherland has been actively defending unclaimed property audits involving all types of insurance.

How Do Unclaimed Property Audits Impact Insurance?

Unlike the life insurance audits, where auditors compare policy data against death records to identify unknown deaths, an audit of a health or P&C insurer involves a burdensome review of a company’s books and records to identify items that cannot be reconciled or where payment cannot be conclusively established by the company. This type of review may include:

  • A 15- to 30-year audit period where the auditor will employ controversial estimation techniques to assert a liability for years where the company no longer has complete records.
  • An item-by-item review of voided and uncashed checks over a multi-year period where the auditor will assert a liability unless the company can reconcile each item under an unreasonable standard of documentation. For an insurance company with large volumes of claim and commission payments, this review can be extremely burdensome and expensive.
  • A detailed audit of the company’s general ledger, including credit balances, amounts held in suspense and write-offs, which the auditor will assert are due to the state as unclaimed property.

Auditors may take ordinary insurance business occurrences, such as checks that are uncashed due to unresolved claims, and assert the checks are unclaimed property. Then, through estimation techniques and interest accumulation, a single disputed uncashed check can result in an auditor assessing an amount that is grossly disproportionate to the check’s value.

What Should an Insurer Do to Prepare Before Receiving an Unclaimed Property Audit Notice?

  • Prepare for the inevitable. All companies are likely to be audited eventually.
  • Be proactive. Conduct a self-review to assess potential unclaimed property issues and analyze whether entering into a voluntary disclosure agreement (VDA) with select states could mitigate audit risk.
  • The best defense is a good offense. Check the company’s level of compliance and methodology for complying with state unclaimed property laws. Does the company have procedures and controls for unclaimed property reporting? 
  • Identify data deficiencies. Imperfect data and gaps in records can generate unclaimed property issues. If data gaps exist, quantify what those gaps mean. Identify potential legal defenses and remediation strategies.

What Should an Insurer Do If It Receives an Unclaimed Property Audit Notice?

  • Take it seriously. Bring the audit notice immediately to the attention of the company’s top legal, compliance and financial officers. 
  • Establish a team that will be responsible for coordinating the company’s response to the audit and seek assistance from knowledgeable professionals. Unclaimed property law is a highly specialized legal area. A company’s strategy in responding to the notice should reflect affirmative legal defenses from the outset.
  • Decide who will represent the company in the initial calls with the auditor. These calls are important. The auditor has a game plan, and the company must have one too.
  • Make sure the company team responsible for coordinating the audit includes knowledgeable persons from technology. An audit of this type involves aggregating massive amounts of data going back 15 or more years. The company will need to draw from technology specialists who know where the data has been and is being stored and how to access it.
  • Map out a plan for understanding what records are in the company’s possession and what records are not.
  • Prepare an estimate of the potential areas of exposure, and prioritize entities and accounts for further review. Allocate sufficient resources, either internally or externally, to the project.

Are All States Involved in Unclaimed Property Audits?

Yes. Every state has unclaimed property laws that are enforced through the audit process. State administrators hire contingency-fee audit firms to conduct these audits. The auditors most frequently identified with unclaimed property audits are Kelmar Associates, LLC; Verus Financial LLC; and Unclaimed Property Clearinghouse (UPCH/Xerox). All three auditors have significant unclaimed property experience and are currently auditing multiple insurance companies. Verus has conducted numerous multi-state audits of life insurers and broker-dealers involving a majority of the states and is now targeting health insurers. Kelmar has conducted audits, most notably of Fortune 1000 firms, on behalf of several dozen states—including Delaware, Illinois, Michigan and New Jersey—for more than 15 years. UPCH contracts with more than 40 states and has audited companies in nearly every industry.