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August 2017

Unclaimed Property Issues in

the Insurance Industry:
Be Prepared for Changes

An article by Marc T. Grossman; Christopher J. Hopkins, CPA; and Michael R. Unger

Audit / Tax / Advisory / Risk / Performance Smart decisions. Lasting value.™

Unclaimed Property Issues in the
Insurance Industry:
Be Prepared for Changes

The recordkeeping and reporting of

unclaimed property, such as unclaimed policy
benefits and premium refunds, can present
insurance companies with significant risk and
compliance costs.
Large life insurance companies have been
subject to close scrutiny and aggressive
How We Got Here:
state unclaimed property audits for a Basic Unclaimed
number of years. More recently, however,
health insurance and property and casualty
Property Concepts
(P&C) carriers have begun encountering To appreciate the significance of
similar audit experiences. current unclaimed property trends, it
can be helpful to review how statutory
Some insurance industry and general obligations for unclaimed or abandoned
business organizations have responded property originated. Under common
to these developments by urging state law, whenever property is abandoned,
legislatures to adopt limits and safeguards that property ownership transfers or
that provide insurers with some relief “escheats” to the state. The state, in
from the significant administrative and turn, uses the abandoned property for
financial burdens these audits can cause. public good. This principle applies not
Insurers in all lines of business are only to abandoned tangible and real
advised to stay up to date on legislative property but also to intangible property
proposals, current litigation, and evolving such as uncashed checks, refunds, credit
unclaimed property audit practices balances, abandoned shares of stock,
that could affect their businesses. unclaimed dividends, and various types of
insurance payments, including unclaimed
policy benefits.

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In the United States, individual states after one year, while the dormancy period
act as custodians of such abandoned or for other types of property often is three to
unclaimed property, stepping into the shoes five years.
of the owner. The theoretical rationale 3. There has been no owner-generated
is that the permanence of the states as contact during the dormancy period.
compared to insurance companies leaves
If property meets these three conditions,
property owners in a better position to
the company that holds the property (the
be reunited with their property. As such,
holder) must report it to the state.
businesses are required to identify and
report unclaimed property and to turn
it over to the appropriate jurisdiction. In Audits and Estimates:
most cases, the jurisdiction is determined
by the last known address of the owner Revenue Generators
of the property. If that address cannot be
determined, the property escheats to the
for States
state in which the business is domiciled Some states have come to rely on
(incorporated). As a result, insurance unclaimed property funds as a steady
companies often find themselves subject source of revenue. In Delaware, for
to the unclaimed property laws of many example, unclaimed property collections
different U.S. jurisdictions. in fiscal year 2016 amounted to $528
million – 13 percent of the state’s
The laws vary from state to state, but entire operating budget.1 And any
generally speaking, intangible property unclaimed property proceeds go
must meet three criteria to be considered directly into the state’s general fund.
unclaimed property:
Because so many companies are
1. The property meets the legal definition incorporated in the state, Delaware is
of unclaimed property in the jurisdiction. something of a bellwether for unclaimed
Certain types of property do not fall within property actions. But other states have
the states’ purview, and some states offer come to regard unclaimed property as a
exemptions for some property types, such significant revenue generator and have
as business-to-business or “de minimis” begun to work aggressively to make
transactions. sure companies report and remit all
2. The appropriate dormancy period has such property.
elapsed. This period varies depending
on the type of property in question. For
example, many states consider uncashed
payroll checks to be unclaimed property 3
Unclaimed Property Issues in the
Insurance Industry:
Be Prepared for Changes

In most states, unclaimed property the model law had not been updated
administrators engage private firms since 1995, before many of the most
to conduct audits in exchange for a aggressive audit and estimation practices
contingency fee based on the total were adopted.
amount of funds collected. Because these
companies’ fees are directly related to the Within two months of the final RUUPA draft,
funds they collect, insurers and industry the state of Delaware passed legislation
groups have objected to particularly that adopts some – but not all – of the
aggressive audit practices. RUUPA language. Utah and Tennessee
also have passed new RUUPA-inspired
This situation is further complicated laws, and legislatures in a number of other
because, unlike tax obligations, many states are working on similar bills. Although
states do not have a defined statute of statutory changes are based on the RUUPA
limitations for reporting unclaimed property. language, variations exist from state to
As a result, audits can span several state, and departures from the RUUPA
decades’ worth of transactions. Because model are, in some cases, significant.
most companies do not retain records for
such long periods of time, auditors will At the same time, case law governing
choose a more recent sampling period unclaimed property is evolving. Among
for which records do exist and will then the various recent or pending cases, one
estimate obligations for prior years. particularly important decision came in
2016: Temple-Inland v. Cook.2 In ruling
The combination of contingency fee audit for the plaintiff, the U.S. District Court
contracts and aggressive estimation for the District of Delaware declared that
techniques has led to large assessments, Delaware’s approach to auditing and the
especially in the past few years when state’s method of estimating an unclaimed
auditors began targeting life insurance property liability violated the company’s
companies. Inevitably, it also has led to due process rights. The court stated that
court challenges and efforts to rein in audits Delaware had “engaged in a game of
through legislation. ‘gotcha’ that shocks the conscience.” The
case was settled less than two months later
In late 2016, the Uniform Law Commission when the state and Temple-Inland reached
(ULC) finalized a draft of the Revised a voluntary settlement agreement.
Uniform Unclaimed Property Act (RUUPA).
This revision is a significant step, as

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Issues for Life Furthermore, insurers require certain steps
to perfect a claim, such as receiving a
Insurance Companies verified death certificate and verifying the
appropriate beneficial parties.
Of the various types of insurance
businesses, life insurers have been under Conversely, states and private auditors
the most intense unclaimed property have maintained that insurers routinely
audit scrutiny. After some of the nation’s relied on DMF data to suspend annuity
largest insurers agreed to large settlements payments to deceased customers. So, they
in several high-profile situations, other contend, why shouldn’t the same source
auditors began copying the pattern and be acceptable evidence of death for life
expanding audits to smaller insurers. insurance claims?
One of the most contentious issues is In 2015, the National Conference of
the question of what steps an insurer Insurance Legislators (NCOIL) updated its
must take to determine if a policyholder Model Unclaimed Life Insurance Benefits
is deceased. Beginning in 2009, some Act in an attempt to standardize these
states began requiring insurers to cross- requirements. More than 20 states now
reference their policies against the Social have adopted variations of the model act,
Security Administration’s Death Master requiring insurers to conduct semiannual
File (DMF) on a recurring basis, rather than DMF searches. Many states also require
waiting for beneficiaries to file a claim or insurers to conduct “fuzzy matching” to
otherwise provide notice of death. The capture misspellings, transposed letters
objective was to proactively identify more or numbers, and other variables that could
potential instances of unclaimed benefits. lead to a positive match being overlooked.
Insurance industry groups pointed out that While this trend is leading to some clarity,
at the time, no law required insurers to take many questions remain, including how to
such actions, particularly since the DMF manage varying requirements from state
is a partial and unverified database that to state and how to handle false positives.
often generates false positives – incorrect For many insurers, the larger question is
declarations of death that later must be how to address the significant resource
reversed due to typographical errors requirements that are needed to handle the
or other clerical issues. This contention intensive manual data reviews that often are
was reinforced by a 2013 Government required for fuzzy matching of DMF data
Accountability Office report that found and related claims processing.
the Social Security Administration “does
not independently verify all reports before
including them in its death records.”3 5
Unclaimed Property Issues in the
Insurance Industry:
Be Prepared for Changes

Issues for Health Health insurers face other unique concerns,

including how to maintain the privacy of
Insurance Companies protected health information (PHI) given
the massive amount of information these
For many years, unclaimed property audits
auditors request. Unresolved questions also
were less frequent in the health insurance
exist about the commingling of patient data,
sector. Since early 2016, however, a
insurers’ responsibility for tracking patients,
noticeable increase in audit activity has
and the inevitable concerns over possible
taken place. Insurers and plans, both large
negative stereotypes and public relations
and small, are beginning to be audited by
problems as insurers seek to maintain
some of the same contract audit firms that
responsible and practical processes for
swept through the life insurance industry
managing claims. Health insurers are
using the DMF file and other questionable
advised to follow unclaimed property
theories for determining what might be
developments closely, be prepared for
considered unclaimed property.
audits, and consider whether proactive
In the case of health insurance, it seems state voluntary disclosure agreements
that unclaimed property audits might might be advantageous.
be aimed beyond simply identifying
unreported, uncashed checks. Contract
auditors appear to be interested in
Issues for P&C
exploring the claims adjudication Insurance Companies
process to identify sources of unclaimed
The property and casualty (P&C) insurance
amounts, such as miscalculated
industry has seen a relatively moderate
patient responsibility amounts, errors
amount of unclaimed property audit
in crediting patient payments against
activity so far, but considering how states
deductibles, and errors resulting from
and contract auditor firms have been
provider and payer settlements. In so
expanding their scope to include health
doing, state administrators and private
insurance companies and smaller life
audit firms are attempting to expand
insurers, presumably P&C companies
the definition of unclaimed property
will see increased audit scrutiny.
to include transactions that arise from
the ordinary conduct of business – a
potentially significant expansion.

6 August 2017 Crowe Horwath LLP

Challenges unique to P&C insurers include
the need to distinguish between “offers to
The Bigger Picture
settle” and “fixed and certain payments.” A In addition to exploring steps to counter
best practice is to record such payments as certain arguments unclaimed property
distinct or in separate accounts altogether. auditors might make, insurers of all
It also is important to adequately document types should understand that auditors
how offers ultimately are settled, so that might be looking further upstream in
they are not misinterpreted as pending the chain of transactions to identify
or unresolved. Unidentified payments possible breakdowns in documentation
and suspense accounts are areas that could result in putative unclaimed
auditors generally scrutinize as well. property. Auditors no longer are content
with identifying uncashed checks or
P&C insurers should retain clear unapplied credit balances. Instead, they
documentation for all transactions, are looking for anomalies that occur
especially when legacy systems are earlier, such as during the adjudication
involved as the relevant data can be process. Unfortunately, this scope
difficult to maintain for often protracted creep often is welcomed by state
periods. This step can help establish a unclaimed property administrators for
clear audit trail to show how claims were the extra revenue it can generate.
resolved, why checks were voided, and
how amounts in suspense or unidentified Despite attempts to standardize and
payments were correctly resolved. clarify various state laws, certain state
governments likely will continue filling
Like health insurers, P&C companies their coffers with unclaimed property
should analyze risks and take steps to proceeds. Additionally, contingency
address audit exposure proactively. It fee audits and aggressive estimation
also is wise to investigate whether it is practices will continue to be a
advisable to submit either catch-up filings concern for insurers of all types.
or state voluntary disclosure agreements
prior to receiving an audit notice. With the
rise in costly natural disasters and loss
events (for instance, hurricanes Katrina,
Sandy, Ike, and Rita), and the resulting
spike in claims now reaching or passing
unclaimed property dormancy periods,
P&C companies should prepare in advance
for fee-hungry contingent fee auditors. 7
Learn More
Marc Grossman
+1 404 495 7107

Chris Hopkins
+1 212 575 5592

Michael Unger
+1 317 706 2777

“Delaware Fiscal Notebook: 2016 Edition,” State of Delaware Department of Finance, November 2016, p. 30, http://
Temple-Inland, Inc. v. Thomas Cook, No. 1:14-cv-00654-GMS (D. Del. 6/28/16),
“Unclaimed Property: Best Practices for State Administrators and the Use of Private Audit Firms,” U.S. Chamber of
Commerce Institute for Legal Reform, April 15, 2014,

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© 2017 Crowe Horwath LLP, an independent member of Crowe Horwath International FS-17007-003E