DMF Audits are in the Rearview Mirror … Now What?

After almost a decade of frustration, the dust has finally settled on the era of life insurance/annuity unclaimed property regulation by audit. Not without pain, though, as many endured multi-state, multi-year audit processes to accomplish what many states later adopted into statute — a semi-annual requirement to search the death master file or similar database and find fuzzy or exact matches to the carrier’s policyholder databases. That does not mean insurers will not continue to find past due unclaimed property, however, either by acquiring the unclaimed property of a target, uncashed vendor payments or agent commissions. Below are some ways to avoid an unclaimed property audit moving forward.

Do Due Diligence

One of the more overlooked opportunities to ensure unclaimed property compliance occurs during an acquisition. If acquiring a company’s assets and liabilities, an insurer can unwittingly be acquiring the past-due unclaimed property liabilities of the target. What compounds this risk is that in some cases the accounting records of the target are not kept for very long after the acquisition has closed, which means it is more difficult to demonstrate to an auditor that an item is not unclaimed property. Vetting a target’s unclaimed property compliance procedures and reporting history should be a part of the due diligence process during an acquisition.

Keep Your Records

One of the most infuriating aspects of an unclaimed property examination is the presumption that the mere issuance of a check or a credit balance shifts the burden to a company to demonstrate that the voided check or written off credit balance is not unclaimed property. Therefore, the best antidote to an unclaimed property audit is good accounting records with the maintained ability to research the resolution of a voided check or written off balance (i.e., system notes). While insurers are accustomed to keeping policy records for long periods of time, general ledger document retention policies should be adjusted (where economically feasible) to keep records for 15-20 years — the standard look-back for most states’ unclaimed property examinations. In some cases, keeping accounting records for that long is not economically feasible in comparison to the risk, but with increased electronic storage capabilities companies should, at a minimum, revise document retention policies to keep records longer than the typical seven years.

File a VDA

If you discover past-due unclaimed property, consider proactively filing a voluntary disclosure. Many jurisdictions have formal or informal voluntary disclosure agreement (VDA) programs designed for all types of companies, including insurance carriers. These VDA programs typically waive interest and penalties and allow companies to file past-due unclaimed property with limited potential ramifications. Not all VDA programs are the same in terms of expectations on enrollees. If you identify past-due unclaimed property, search the state’s website to which the property is owed (generally the last known address of the rightful owner) for voluntary compliance options. The potential risks of entering into a VDA program are minimal, and in fact terminate a state’s right to audit in most cases. However, importantly, for the more formal programs you may be required to self-review property types and entities beyond the property type you self-identified and wish to report/remit.*

While the dark days of DMF examinations appear to be over, insurers should be proactive to avoid the unclaimed property audit trap moving forward.

*Faegre Drinker has been administering Delaware’s VDA program since 2012, and many carriers (as well as thousands of other companies) have elected to enter the Delaware program to clean up past-due unclaimed property or simply to avoid the messy audits that marked the previous decade. You can find information regarding Delaware’s program at http://vda.delaware.gov. Recently Faegre Drinker was engaged by the states of Missouri, Florida and North Dakota to similarly provide a pathway for companies to come into compliance voluntarily, efficiently and in a business-friendly manner. While our engagement by these states likely creates a conflict of interest in terms of assisting a company with filing a VDA, our team of unclaimed property professionals would be happy to provide guidance and assistance in helping you navigate the unclaimed property world.