Cash-starved state governments are hiring more unclaimed property contract auditors to help them look for what amounts to spare change hidden in the nation’s financial services sofa cushions.

State insurance departments bill unclaimed life insurance property audits as a chance to surprise beneficiaries with unexpected blasts of cash. In some cases, that is what happens.

But figures from the National Association of Unclaimed Property Administrators (NAUPA), Lexington, Ky., show that state unclaimed property administrators typically pay only about 5% of the $50 billion in unclaimed property they manage to the owners each year.

While states are taking care of unclaimed life property, they get to use it.

“In today’s environment, states are actively pursuing unclaimed property as a means to mitigate budget shortfalls,” Duff & Phelps, Chicago, says in a promo for its unclaimed property portal.

Moody’s Investors Service, New York, predicts the current wave of life insurance property audits will cost the life insurers it audits hundreds of million dollars. If all U.S. life insurers make $1.3 billion in extra unclaimed property-related payments this year, that would amount to 0.1% of state governments’ $1.3 trillion in annual expenditures–the equivalent of a worker who earns $50,000 a year feeding $50 in loose change into a coin counter.

If those mislaid pennies are out there, contract unclaimed property auditors like Affiliated Computer Services Inc., Dallas, and Verus Financial L.L.C., Waterbury, Conn., are promising to bring it in.

“Unclaimed,” Verus says on its website, “but not lost.”

Verus made headlines in April by providing California Comptroller John Chiang with data he used to negotiate a settlement with John Hancock, Boston, that could cover about $20 million in unclaimed insurance assets. Nevada Treasurer Kate Marshall says 35 states and the District of Columbia are now using Verus to audit unclaimed property at 20 insurers.

Caroline Marshall, the Verus general counsel, said confidentiality agreements prevent the firm from giving interviews.

The firm’s website indicates that Jeffrey Drubner, the president, is not just another guy in a green eyeshade: He spent nine years working as a special agent at the Federal Bureau of Investigation.

Valerie Jundt, the Bismarck, N.D.-based managing director of Keane Unclaimed Property, a firm that will be helping insurers respond to the unclaimed property audits, said Verus seems to have done a good job of combining unclaimed property expertise with life insurance expertise –and of attracting attention to unclaimed property.

“I can see everyone wanting to hang out a shingle and become a contract auditor,” Jundt said.

State insurance regulators have been hiring outside vendors to help them review insurers since the 1800s. In 1878, for example, John Smyth, a former New York insurance superintendent, had to fight off allegations that he had rewarded political allies by making insurers pay them for unnecessary examinations.

The “National Convention of Insurance Commissioners”–the organization that later became the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., addressed examination practices in the 1910s. The Fraternal Monitor reported in 1922 that, before the convention had stepped in, examinations were often a scheme to subject a “hapless company” to “examiners galore, running up bills of ten to fifty dollars a day for each man.”

Today, insurance companies still have concerns about exam costs, but any outside examiners are usually paid on an hourly or per-job basis, according to George Keiser, North Dakota state representative and the president of the National Conference of Insurance Legislators (NCOIL), Troy, N.J.

State unclaimed property operations are usually part of state treasury, revenue or comptroller agencies.

The National Conference of Commissioners on Uniform State Laws, Chicago, developed the first unclaimed property model in 1954 and the newest version, the Uniform Unclaimed Property Act (UUPA), in 1995. UUPA covers life and annuity property as well as many other types of property.

Only 15 states and the U.S. Virgin Islands have adopted the UUPA model, and unclaimed property rules tend to vary greatly from state to state.

NAUPA promotes use of a standardized unclaimed property reporting form for insurers and other unclaimed property “holders,” but NAUPA and the Unclaimed Property Professionals Organization (UPPO), New York, the group for corporate unclaimed property advisors, have not developed a widely accepted accreditation or professional designation program.

State unclaimed property operations often pay contract auditors “contingency fees”–fees contingent on the auditors’ success at finding unclaimed property.

States have been auditing insurance claimed property since at least the 1960s, and they have been using contract auditors to do the job since at least the 1980s.

Jundt, who was the unclaimed property administrator for the state of North Dakota from 1984 to 1996, said the number of contract auditors has increased to about half a dozen today, from one or two in the 1980s.

The new audits seem to focus less policyholder lists checks and more on reviews of procedures, Jundt said.

Many insurance companies thought the outside claim administrators they had hired were already using state-of-the-art techniques to handle unclaimed property operations, and they seem to accept the idea that states will be using audits to enforce unclaimed property rules, Jundt said.

“They just want to do the right thing,” Jundt said. “Their attitude is, ‘Set the guidelines and give us some time to get them implemented.’ A liability is a liability. If you owe it, you owe it.”

The insurers themselves are not saying much about the hiring of contract auditors for insurance unclaimed property.

The Association of California Life and Health Insurance Companies (ACLHIC), Sacramento, Calif., has no official position on this matter. “As yet, it has not come up for discussion as a legislative or regulatory issue in California,” a spokesman said.

The American Council of Life Insurers (ACLI), Washington, said that it has no objection to the idea of states hiring qualified vendors to help with examinations or investigations, if that is the most effective and cost-efficient way to get the job done and the vendors are selected through a competitive process.

But states should communicate and stick to exam budgets, the ACLI said.

“In addition, vendor compensation should not be based on contingencies or incentives,” the ACLI said. “Such arrangements could lead to limitless exams at company expense. In fact, some states expressly prohibit such contingency fee arrangements.”

In North Dakota, Keiser said, insurance regulators decided against participating in the new wave of audits, in part because of concerns about the contingency fee approach.

NCOIL is still at the early stages of discussing the contract auditor approach, Keiser says. “We’re monitoring it very closely,” he said.

Bruce Ramge, the Nebraska insurance director and chairman of the Market Conduct Examination Standards Working Group at the NAIC, said use of contingency fee arrangements is rare at state insurance departments.

Existing NAIC standards for hiring vendors should give insurance regulators the tools they need to handle any questions that might arise in this area, Ramge said.

Ramge said he has not heard of any insurance company complaints about the new unclaimed property audits.

Companies should speak up if there any problems, he said.

“Most, if not all, departments are going to want things done in a professional manner,” Ramge said.

Jundt, who used to hire and manage contract unclaimed property auditors herself, said contract auditors receiving a contingency fee may sometimes be too quick to identify unclaimed property as unclaimed property. Another risk is the possibility that a contract auditor will use threats of lawsuits or other punitive action to get the attention of an uncooperative insurer.

“I’ve heard the term ‘bounty hunter’ used,” Jundt said.

If anyone is going to make any threats, it should be a state official, not a contract auditor, Jundt said.

J. Robert Hunter, insurance director at the Consumer Federation of America, Washington, and a former Texas insurance commissioner, said he believes the challenge for an agency hiring contract auditors or other vendors is finding vendors who are truly independent from the insurance companies.

When insurance companies complain, “it’s usually because somebody they’ve hired is tough,” Hunter said. “If they’d hire somebody that would give away the store to the insurance industry, you’d never hear a peep.”

And some within the insurance industry itself may have pennies in this jar: Washington state officials note in their insurance unclaimed property guide that unclaimed property rules apply to agent commissions as well as to consumers’ insurance policies.

“Agent commissions are abandoned after three years unless the agent is an employee of the company,” Washington state officials say. “Employee commissioners are abandoned after one year.”

Some of the common insurance company unclaimed property errors that Washington state sees include “ceasing or reducing renewal commission in violation of the agreement with the agent” and “imposing the current contract procedures on agents covered under older agreements.”