WASHINGTON BUREAU — The California Department of Insurance has armed a private auditing firm with the powers of the insurance commissioner, in an apparent sign that the department is making an investigation of life insurer claim settlement practices a top priority.

The California department has retained Verus Financial L.L.C., Waterbury, Conn., as a special examiner, according to a letter obtained by National Underwriter.

Verus will “examine insurer practices regarding payment of benefits under life insurance policies and annuities; termination of annuity payments; payments to holders of retained asset accounts; use of the Social Security Administration ‘Death Master File’; and other matters as directed by Californiathe Department related to life insurance policies, annuities, and retained asset accounts,” the department says in the letter.

The letter obtained by the National Underwriter indicates that Verus’ examination of insurers’ books includes “but is not limited to” the unclaimed property issue. Verus would be paid monthly, according to the letter.

Verus must submit monthly invoices “summarizing the services performed and expenses incurred for the period” to the insurers involved, the department says.

Verus will receive $125 an hour for the examination services it provides, as well as reimbursement for meals and travel, the department says

The insurers being audited will be assessed and, if an insurer does not pay within 30 days of being billed, its license to do business in California can be revoked, the department says.

The department does not describe any contingency fee arrangement in the letter.

In other cases, Verus has received a percentage of monies recovered from insurers on behalf of policyholders.

Industry officials say Verus is likely to be given the money that insurers pay in fines, and the officials expect these fines to be in the range of 12% to 20% of the monies that the insurers should have turned over to beneficiaries or to state unclaimed property funds.

Verus has signed contracts with 35 states, and the contracts call for Verus to be paid a fee for auditing the unclaimed property practices of insurers doing business in those states, according to papers filed in May in connection with a settlement California officials negotiated with John Hancock, Boston. It is unclear whether those contracts give Verus employees the same powers as California has given them.

Byron Tucker, deputy California insurance commissioner, says state insurance law specifically authorizes the type of exams the state has hired Verus to conduct. “It is somewhat routine to bring in outside auditors with special expertise to assist the department in conducting these exams,” Tucker says.

States routinely deploy outside auditors to conduct extensive market conduct exams because they lack the staff to conduct these audits, Tucker says.

In this case, Verus has the proprietary software needed to conduct a thorough examination, Tucker says.

The American Council of Life Insurers, Washington, says there may be a conflict between insurance regulators, who look out for consumers, and state financial officers, who are looking at the issue in the hope of having their states gain access to the unclaimed funds.

The move to hire Verus “creates a perplexing situation where the same auditor has been hired by two state agencies to conduct audits for different purposes,” says Whit Cornman, an ACLI representative. “One agency, the insurance department, is interested in returning assets to policyholders and beneficiaries and the other, the state comptroller, is interested in transferring assets to the states.”

Officials at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., are believed to be crafting a “best practices” approach to dealing with the unclaimed property issue going forward.

Industry officials are being contacted for their views on the new approach. Whether the approach would be expressed in the form of guidance or in the form of a model law or rule that would be adopted by the states is unclear.

Kevin McCarty, the Florida insurance commissioner and head of the NAIC’s unclaimed property task force, said recently after a hearing on the issue in Florida that regulators are working to compile best practices for use of the Social Security Death Master File database for the nation’s 40 biggest life insurance and annuity sellers. Regulators want to see insurers look at data from past years, to ensure that no consumers from years past lost out on payments, McCarty said.

“If they have spent a lot of time and energy over the years to solicit consumers’ business, then we expect them to use that same time and energy to ensure beneficiaries are found and paid,” McCarty said.

In comments at a recent public hearing on the issue, California Insurance Commissioner Dave Jones said state regulators are examining whether insurers may be using death information to boost their finances by stopping annuity payments on “one side of their house but not using that same information on the other side of their house to pay policyholders beneficiaries the benefits they are due.”

The issue is called being called an “asymmetrical” use of the Social Security Death Master File.

A lawyer familiar with the issue but who is not representing any of the clients involved said industry lawyers — both in-house and outside counsel — “consider this an ‘over-reach’ and are grappling with how they will respond.”

The industry view is that this is a “money-generating issue” for states, the lawyer said.

A second lawyer who also asked not to be named said the issue has been a concern since Georgia several years ago used the same approach to deal with an investigation of agent-broker-compensation.

Other unclaimed property coverage from National Underwriter Life & Health: