Causes of Overpayments
Understanding the root causes of overpayments will help identify potential overpayments and recovery strategies. Let’s look at three of the most common causes of overpayments.
- Most financial entities identify deaths by scrubbing the Social Security Administration Death Master File (DMF). The DMF traditionally provided comprehensive data for identifying deceased Americans, but 2011 amendments to the reporting structure, while intended to address privacy concerns, resulted in the removal of many records, making the DMF significantly less reliable. As a result, companies that rely exclusively on the DMF miss relevant deaths and, in particular, deaths of minors.
- Overpayments can also occur because of the purposes behind many life-contingent annuities, which typically result from the settlement of a significant personal injury claim. Thus, payments are directed to a conservator, guardian, or trust rather than the payees themselves. Although any life-contingent payments should stop upon the death of the measuring life, often the annuity owner/issuer is not notified of the death in a timely manner, if ever.
- Administrative errors in connection with beneficiary changes, monthly versus quarterly payments, redirection of payment streams to care trusts or third-party administrators, or other simple input errors occur and can result in duplicative payments.
Strategies for Identifying Overpayments
Now that we understand some of the causes giving rise to overpayments, let’s turn to strategies for identifying overpayments.
- Review currently paid life-contingent annuity contracts for indicia of overpayment: deviation from expected mortality rates; survival significantly beyond rated or expected ages (e.g., payees that are 100+ years old); payments made to a guardian, conservator, or trustee for an extended period beyond the payee reaching the age of majority; inadequate or no response to requests for current information; and return of mail directed to the measuring life, but checks continue to be cashed and/or direct deposits are accepted.
- Companies can also expand the scope of their review of relevant deaths to include public records, social media searches, private investigations, and the National Death Index (NDI) if permissible for their entity.
- Evaluate the human and automated elements of administrative processes to minimize the likelihood of administrative errors.
Strategies for Recovering Overpayments
Oops! An overpayment has been discovered. Now what?
- Where an overpayment occurs via ACH and is identified within five days, the National Automated Clearing House Association (NACHA) rules permit a reclamation to occur. Where the overpayment is identified quickly, reclamations are the fastest and most direct mechanism to recover the overpaid funds.
- Offensive strategies, including litigation to recover funds retained by an estate or relative after the death of an annuitant, often result in the recovery of tens or even hundreds of thousands of dollars of overpaid funds. Through strategic pursuit of the funds, companies can achieve full recovery of the overpayment, plus fees, costs, and interest incurred, and even punitive damages where appropriate.
Jessica E. Loesing is an associate at Faegre Drinker Biddle & Reath LLP in Philadelphia, Pennsylvania.