The little-known auditing firm seemingly appeared out of nowhere to revamp the manner in which states, carriers and even independent agents and brokers navigate the unclaimed property landscape. Throughout much of 2011, news stories repeatedly surfaced of how insurers were brought to heel over life insurance monies they had long owed policyholders but had failed to pay.
The changes Verus brought to the unclaimed property world are profound. On the regulatory front, the National Conference of Insurance Legislators (NCOIL) formulated a model law states are looking into adopting; The National Association of Insurance Commissioners (NAIC) formed the NAIC Investigations of Life and Annuity Claims Settlement Task Force and a once little-known tool known as the Social Security Death Master File emerged to stand at the forefront of unclaimed property due diligence.
At the same time, high-profile multi-hundred million dollar settlements by industry behemoths such as American International Group, Prudential, MetLife, Nationwide and Manulife Corp.’s John Hancock have taken place with little resistance from these well-funded giants. While the huge carriers settle, State Attorney Generals have started poking around and class action suits by individuals against insurers seem to position themselves as the next chapter of the unclaimed property saga.
So, who is Verus and how have they been able to bring about these monumental changes? Are they simply a mercenary outfit looking to shake loose change from the insurance industry, as its critics contend? Or is Verus engaged in something more complicated, more nuanced and more profound?
Searching for truth
How could a firm nobody had heard of a few years ago have affected such acute change to the life insurance industry’s biggest carriers? The Waterbury, Conn.-based auditing firm has cemented their position as a tenacious and aggressive force in the unclaimed property realm, making alliances, enemies and money along the way. Verus, whose name is Latin for true or real, draws both praise and cringes from the various parties with whom they interact. The firm and the services that they provide are hailed by states and reticently acknowledged by some of the biggest insurance carriers in the country and the world. But who is the real and true Verus and what have they done to become so revered, reviled and respected in the world of insurance policies as unclaimed property?
James Hartley Jr., co-founder and CEO of Verus, was an attorney with a practice dealing in commercial, securities and consumer litigation when he was involved in a class action lawsuit against Prudential Financial Inc. in the 1990s. He subsequently realized that during the trend of demutualization over the last two decades, insurers were sending money to states because they could not identify policyholders who were entitled, due to the demutualization, to cash, stock or some combination of the two.
Jeffrey Drubner, co-founder and President of Verus, had been working with Hartley on litigation he was handling. Drubner, a former Special Agent with the Federal Bureau of Investigation, had specialized in international organized crime, money laundering and fraud, and found — using publicly available information — that individuals who owned life insurance, many of whom had been dead for years, were not contacted by the insurers during the demutualization process. Several billion dollars wound up not being paid to the owners of the policies and was escheated to the states.
“That was really the ‘aha moment’ when we put that together and said ‘Hey, these people were lost in the demutualization process, many of them are dead and many of them have life insurance, and since they are lost, their beneficiaries haven’t collected,’ ” said Hartley.
Seeing this as an opportunity, Hartley and Drubner formed Verus in late 2007. These lost policyholders — part owners of the company before the demutualization process — were lost before that process even began. But the methods available at the time to identify the lost policyholders were primitive, to say the very least. Verus needed to find out how big of a market was out there. They built their own system to weigh through the mass of names and numbers. Fancying themselves a technology company because of the unique patented system that they built from scratch, they began to carve out a niche for themselves in the world of unclaimed property.
The DMF and criticisms of Verus
To be certain, not all of what Verus does is that clear-cut and harmonious. Verus has been accused of conducting long-term probes (currently up to four years) on insurers without the insurers being warned. Some maintain that it is an uneven playing ground.
At the same time, insurance carriers have been accused of selectively using the Social Security Death Master File (DMF). The DMF is a file that contains information about individuals with Social Security numbers whose deaths were reported to the Social Security Administration from 1962 to the present. Allegations against insurance companies maintain that they utilize the DMF to stop making annuity payments to deceased annuitants but do not check as often to see when life insurance policies should be paid to deceased beneficiaries.
Verus’s technology includes a computer program that matches insurance company files with the Social Security DMF, among other functionality. One argument against Verus is that they have the resources to conduct these long-term probes against what some industry-watchers maintain are audit-fatigued companies, which results in the companies settling on unfavorable terms.
Mary Jo Hudson, an attorney with Bailey Cavalieri, LLC in Columbus, Ohio, and the former director of the Ohio Department of Insurance, feels that what Verus has done is find a gaping hole in the due process that is unclaimed property. She notes that, “It is very difficult to challenge the actions of these unclaimed property regulators.” Hudson feels that this is unchartered territory to a certain extent. She makes the distinction between unclaimed property audits and other market conduct examinations conducted by the states by saying that most other market conduct examinations happen in “real time,” as opposed to Verus looking into policies that are years old. She feels that not just Verus, but unclaimed property auditors in general, have abused the holes in a law that really does not define a statute of limitations, stating: “They have advanced some wrong legal theories of recovery and they have pressed for settlements through some pretty aggressive audit tactics. What it really amounts to is these unclaimed life benefits are being paid to the states early.”
Hudson says that current state laws allow carriers to wait until limiting age, which is age 100. She feels that carriers have their work cut out to challenge this on a state-to-state basis and she stands by the fact that the DMF in and of itself has never been defined as a regulatory expectation. “It’s really putting a gun to the head of the industry and saying ‘Why aren’t you doing this? Do this now,’ without ever defining this in any policy standard that the insurance departments have put out.”
The National Conference of Insurance Legislators adopted a resolution in November of 2011 supporting a model law dealing with unclaimed property policies, although the original model law was inconsistent with unclaimed property laws and unfair claims practices law. The original law was then amended and unanimously re-adopted in July of 2012. The Unclaimed Life Insurance Benefits Act, as it is called, requires a comparison between in-force life insurance policies and retained asset accounts against the DMF on a semi-annual basis. The act serves as a model law for state legislation. Kentucky was the first state to adopt a law based on the model in April of last year, with Maryland, New York and Alabama following.
Valerie Jundt, Managing Director of Keane Unclaimed Property, and a former state unclaimed property administrator and Executive Director of the National Association of Unclaimed Property Administrators said that the dormancy period for holding the funds before reporting them to the states has been changing over the years, from as high as 20 years now down to five or three years in most states.
One criticism is that the state regulators through Verus are demanding the funds before the dormancy period has fully expired. “Verus has been able to uncover certain circumstances where certain carriers were aware of a person being deceased and made no effort to locate the beneficiary. And that is when they can be compelled to take action,” Jundt said. Use of the DMF to identify deceased insureds allows insurance companies to identify unclaimed policies while avoiding the need to look into every individual policy file to determine whether the insurance company had notice of the death and what steps were taken to attempt to find and pay the beneficiary.
This is where the legality of the current unclaimed property environment can be interpreted as being ambiguous.
“If you are going to create an expectation and a mandate for use of the DMF (in particular, among those carriers that have never used the DMF), is it right and fair to do that retroactively?” Jundt rhetorically asked. But from a public policy perspective, she cautioned that the states may have expectations with regard to insurers that exceed the requirements of the law from a customer service perspective.
Hartley feels that the one criticism that is wholly incorrect is that this is a money grab by the states facilitated by Verus. “That has never been the case,” Hartley said. Life insurance operates under the assumption that an individual is going to one day die and a beneficiary is going to get that money. Verus feels that all they are doing is ensuring that insurance products operate like they are designed to and that they are helping the insurers keep the promises made to their now deceased customers.
How it works, in a nutshell: Verus finds the money and turns it over to the states, taking their 10.5 percent cut. “If you think about it critically, states really want to give this money back. Most unclaimed property departments are under Treasurers or Controllers, and what is better for an elected or appointed public official than to turn money back to the people they swore an oath to serve?”
And, Verus maintains, now is a great economic time for people to be getting money back.
Drubner feels that there are clear facts on the table that can quiet their critics: States give over half of the funds they receive on any given year back (although some states give more and some states give less), which nullifies the accusation that this is a money grab. Moreover, this 50 percent figure is more impressive when one realizes that while policies are escheated to the states in groups of thousands, each policy payment must be returned one beneficiary at a time — an exponentially more time-consuming process. Drubner’s second point is that unclaimed property directors’ performance is not judged by how much money they take in, but rather by the percentage of money they return against the percentage they collect.
“Either this money is not yours and belongs to your customer or it doesn’t. This isn’t some Ouija Board where we have to decide if this is unclaimed property. It’s a binary determination. That is just fair pool.”
Partnering with states
When Verus began pitching their services to states, critics of the company stated that they were acting in a mercenary nature, approaching cash-hungry states and proposing that the states let them do the digging to find unclaimed life insurance policies, which were, at the time, sitting in insurance companies’ coffers. In 2007, many states were indeed cash-hungry and, legally, these policies needed to be turned over to the states who would then in turn work to identify the beneficiaries of the policies.
Walter Graham, the chief of the Florida Bureau of Unclaimed Property which operates within the Florida Department of Financial Services (DFS), heard about Verus right after its formation in 2007, and feels that Florida itself and most other states simply do not have the manpower to do what Verus does. The entire audit staff in the state of Florida for unclaimed property is five people. And although Walter speaks highly of the competency of his staff, they do not have the capability to examine extremely large companies. “You just can’t audit something the size of this with five people. It just can’t happen,” Graham said. The 10.5 percent that Verus receives from any unclaimed property that goes to the state is well worth it, according to Graham, although he cautions that the money is not an expenditure for the states in the traditional sense of the word because it is derived from the amount that is remitted. The states then work to find the legal owners of the unclaimed property, who get 100 percent of what is there. So, the actual audit fee is not felt until the unclaimed property is claimed by the owner.
Verus openly feels that they are providing a valuable service for the states and they should be compensated for that service. There has been some sensationalism in the press regarding Verus that is simply manufactured; the term “deputized” has been thrown around, evoking a Wild West type of law enforcement where Verus has been awarded the powers of judge, jury and executioner. Verus is a private company and though they have been armed with state police powers in certain instances in order to conduct audits, they are just an audit company. Contrary to what some industry players believe, Verus does not feel that they have been deputized by the states. “We have to work under the authority and at the close direction of our state clients. We can’t do anything we want to do on our own; everything we do, we get specific permission to do,” Drubner said.
Since 2007, Verus has been successful in entering into contractual agreements with states. Their first contract was with Massachusetts in 2008, and as of early 2013, they were representing 46 states across the country. What started with Hartley, Drubner, Caroline Marshall (Verus General Counsel) and Charles Hellman (Vice President and Managing Director) has grown to over 60 people over the last six years and will continue to grow as needed.
A contentious relationship?
“No company is going to raise their hands and say, ‘Please let us be audited,’ but under the circumstances, it has really been an impressive thing to see,” said Walter Graham in regards to the perceived contention between Verus and the insurance carriers that are being examined.
Graham conceded that initially, at least in the case of Florida, there was some pushback on the part of the carriers. However, as the carriers and Verus were forced to establish working relationships, he said, “As a person inside of this and watching it very closely, I have been impressed by both Verus and the insurance companies. Especially in regards to the cooperation and willingness we have had from the insurance companies — because they could make this very difficult if they wanted to — but they are in the business of helping people, and we are trying to help them help people.”
Some of the largest insurance companies in the country have entered into settlements with the states as a result of Verus’s auditing activities including American International Group, Prudential Financial Inc., MetLife, Nationwide and Maulife Financial Corp.’s John Hancock unit. Only Nationwide agreed to comment for this article saying, “After fully cooperating with this process we look forward to fulfilling the terms of the agreement and moving forward with this matter resolved.” One prominent company who wished not be named said that they did not necessarily disagree with what Verus was doing, and acknowledged that it did not take a lot of work on Verus’s part to get them to work together.
Hartley concurs: “You know, when we finally sit down across the table with people from the carriers, we both have the same goal, and every company we have met with has said, ‘We want to find those peoples’ beneficiaries,’ and it just takes us putting the process in place, which is what we do quite frankly to make sure those beneficiaries get paid.”
Drubner concurs that things are not as combative as they are imagined to be. He insists that out of the hundreds of thousands of properties they have processed, they have not had a single dispute with any one of the companies. (Disputes could include questioning over whether the insured is actually deceased with a benefit still owed or not, among other things.)
Once Verus is sitting in the room with the decision-makers from the carrier being audited it is very amicable and both parties are just concerned with resolving the issue in a quick and efficient manner. “We don’t invent insureds that are not dead. Either they are or they are not, and either their beneficiaries have been paid in full or they haven’t. That is all we want to do. And once we get companies to that point, we work great together,” Drubner said.
Verus did acknowledge that getting companies to that point can sometimes be difficult, which they think is partly due to a fear of the unknown. This is obviously a new a process to the industry, and overcoming that hurdle for carriers is the most difficult piece.
Things to come
So, what is next for Verus? One may assume that its business model has a built-in lifespan, as the trend over the last six years has been for carriers to enter into agreements fairly quickly. How long will it be before Verus is in all 50 states and has spurred carriers of all sizes to proactively organize their operations in order to avoid unclaimed property issues?
But, Verus considers itself a technology company to a certain extent, and its patented platform will certainly not sit in Waterbury collecting dust, should the day arrive when the wave of unclaimed property retreats from the world of life insurance as quickly as it crashed upon its shores.
Eventually, the hunt for unclaimed life insurance will end. It will be a matter of years, but Verus has already begun to look at some other places it can go within unclaimed property.
Regardless of what the future holds for Verus, it has shaped the future of unclaimed property in the life insurance industry in this country, and its presence will continue to be felt for years to come.
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