WATERBURY, Ct. (Legal Newsline) - Despite the constant controversy that surrounds life insurance policies and unclaimed property laws, James Hartley Jr., co-founder and chief executive officer of Verus Financial LLC, takes pride in the changes his company instilled in the industry.
Since 2007, Verus, a privately-held auditing firm based in Waterbury, Ct., has worked with 45 states - all but New York, Connecticut, New Mexico, Hawaii and Kansas - and the District of Columbia in efforts to reunite beneficiaries with abandoned life insurance benefits. So far, more than $1 billion has been turned over for those beneficiaries.
"A beneficiary may or may not know that his or her loved one had insurance," Hartley said. "When you think about it, someone takes out insurance when their children are young, they live until they're 70, they never tell their children about the policy.
"It's turned over to a state like Florida, and they put it on their website. So that particular son or daughter may not know their mom or dad had a life insurance policy, but they know their name and when they search the website, they see something there. That happens all the time."
However, even as Hartley and other auditors tout their work, some in the life insurance industry suggest that their process lacks consistency and uniformity. They argue that auditors hold insurance companies to their own standards, while states choose to overlook valid legal and business concerns. Verus, one of the first auditors to foray into the unclaimed property arena, often receives the bulk of this criticism.
Hartley contends that he helped found Verus in order to address major concerns in the life insurance industry. He practiced as a lawyer in commercial, securities and consumer litigation and worked with Jeffrey Drubner, a former FBI agent who investigated international organized crime, fraud and money laundering.
In the early 2000s, Drubner developed an interest in demutualization. As part of that process, large mutual life insurance companies like John Hancock and Prudential transitioned into publicly traded stock companies. They needed to provide policyholders with payouts, but when they couldn't locate the majority of them, they turned their money over to the states.
Drubner questioned what happened to these policyholders, realizing that if they died and their deaths went unnoticed, their life insurance policy benefits also went unpaid. He designed algorithm-based software that enabled life insurance companies to run the Social Security Administration's Death Master File against their blocks of business to identify deceased policyholders and potential beneficiaries.
In Drubner's opinion, this process became more effective than life insurance companies waiting for policies to reach maturity ages of more than 100 years old before turning them over as unclaimed property.
"The insurance companies, because of our audits, have agreed to do these searches, and in many instances, to perform them in the future," said Drubner, president of Verus. "Even companies that aren't under audit, or aren't under agreement yet but under audit, are starting to look for and pay beneficiaries. It's having a very positive effect on the marketplace and also on the beneficiaries."
However, Marlys Bergstrom, an attorney in the Atlanta office of Sutherland Asbill & Brennan, who focuses on insurance, unclaimed property compliance and audit defense, sees Verus' process from a different perspective.
Bergstrom, who formerly served as the audit director for Verus in Atlanta and New York, contends that state unclaimed property statutes and state insurance commissioners have never required use of the Death Master File. Even though auditors promote its accuracy, she argues that it carries over state records' errors in Social Security numbers, last names and birth dates. Plus, not all states list their information in the database.
"What are the companies supposed to do when there isn't uniformity?" Bergstrom said. "The way they run the matches in Alabama is different than in Kentucky. It's tough for them to try to implement these new processes."
Mary Jane Wilson-Bilik, a partner in the Washington, D.C. office of Sutherland Asbill & Brennan LLP, who also works with insurance companies on unclaimed property issues, adds that auditors expect insurance companies to provide data on policyholders from 20 years ago. She said this presents another problem, because insurance companies have never been required to keep records going back that far.
"The auditors demanded the information on every life insurance policy or annuity contract that a life insurance company had ever written, ran it against this DMF file and had the company prove that, in fact, they didn't owe something based on their matches," Wilson-Bilik said.
She adds that auditors receive 10 to 12 percent of all unclaimed property they turn over, which could lead to "a lot of creative ways to state that something was unclaimed."
"The administrators are allowing these auditors to run these fuzzy matches, and there has never been a public hearing or any due process around the use of these algorithms," Wilson-Bilik said. "There has been no opportunity for the industry to comment back and say there are flaws here. That's what's really, really wrong about this process."
When asked about such criticism, Hartley explains that Verus isn't doing anything other than identifying someone who has died and a policy that should be paid out to a beneficiary. Without the help of his firm, that beneficiary's money would remain with the insurance company.
"Our goal in every audit is to work cooperatively with the company and identify with the company what money belongs to someone else," Hartley said. "It ought to be paid to that person or turned over to the state. We're not here to make problems for companies. We want them to continue to do business."
Drubner agrees that Verus serves an important purpose, just like other private firms that provide services to government agencies. In its case, Verus makes the unclaimed property process more efficient for both states and life insurance companies by coordinating one audit instead of 46 separate ones, he said.
He adds that while they do charge a fee for their audits, it comes from the states and not from any individual property owner's money.
After addressing unclaimed property issues in the life insurance industry, Verus wants to use its technology to solve other problems for state and federal governments. The firm will continue its focus on unclaimed property, but also branch into other areas related to data collection.
"We are working in several other industries, essentially doing the same stuff we've done in the life insurance industry, which is shine the light on the problem, come up with realistic, industry-wide solutions that make sure the flow of money goes where it should go - to its rightful owners," Drubner said.
Verus touts its work redirecting unclaimed property; Critics say billion dollar 'industry' is flawed
