Andrew, Iniki, and Northridge – Natural Disasters and the Dilemma Posed to Industry

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By Nikki Frey

DISASTERS

Hurricane Andrew, Hurricane Iniki and the Northridge earthquake were three of the biggest disasters in this century, and they all happened within the last few years.  Between these and the Los Angeles riots, the Laguna fires and the Mississippi river floods, the insurance industry’s claims’ offices have had a full plate.

Insurers need to be sensitive toward good faith handling of claims for catastrophe victims, but it is well known that massive disasters overload insurance claims personnel.  The fact is that company adjustment staffs are under enormous pressure to settle losses quickly and alleviate the hardships of their policyholders, and the situation can be easily exploited by those seeking to perpetrate fraud.

Catastrophe-related fraud and abuse primarily falls into three categories: insurance claim-related fraud, property repair-related fraud and fraud associated with claims and loss-related processes.  Each category may involve bribery, kickbacks, misrepresentation, concealment, forgery and theft.

Andrew, Iniki and Northridge came virtually upon the heels of one another, overwhelming many companies with the sheer volume of claims.  “Is there a trend here?” asks Mike McKee, West Coast Training Director for the National Insurance Crime Bureau (NICB).  “In this little bit of time we’ve lived, we can’t measure whether this is a change in the climate or something that happens regularly every few centuries.  We don’t know if there was a major earthquake in California 200 years ago.  That is of great concern to the insurance industry.”

In company with the escalation in the intensity of natural disasters is the fraud issue facing insurers.  “Is fraud any more frequent in catastrophes?” asks McKee.  “I don’t know.  Any kind of insurance crime is difficult to measure because you’re trying to quantify a negative.  You only know how much you find.  You don’t know how much you lose.”

Insurance fraud is a crime of opportunity.  Most legitimate claims are submitted within six weeks of a catastrophe.  After that, the percentage of suspicious claims escalates sharply.  In fact, fraudulent claims are still turning up from Hurricane Andrew, despite the passage of time.

Bob Chambers, Property Manager at NICB, notes, “Part of the problem after a disaster is that you’ve got a thousand people lined up out there whose lives have been ruined.  They have nowhere to live…they’re basket cases.  So you’ve got a bunch of upset claimants in dire need.  You can’t really say ‘Do you have a better proof of purchase?’

“The insurance companies are pretty eager to try to get their policyholders back in the shape they were before a catastrophe.  Those people who are impacted by catastrophes are undergoing stress that you and I just can’t believe.”  Such claimants look to the insurance industry for assistance in putting their lives back in order—not for endless questions and demands for substantiating receipts and proofs of purchase.

Added to this pressure are media scrutiny and the public relations problem.  The need to keep up a good PR image may seriously hamper the company’s ability to look for fraud.

ENTITLEMENT SOCIETY

A well known California attorney’s TV ad trumpets “I’ll fight the insurance company for you.”  And every time it airs, there is a captive audience devouring the message.

Some Americans have a fondness for “beating the system.”   Our population has developed into an entitlement society, where many feel they have a right to be taken care of.  They believe, simply stated, it is their due, and large organizations, like insurance companies, are viewed as enemies to be confronted.

Surveys conducted by the Insurance Research Council indicate that society’s attitude toward insurance fraud is pretty liberal.  “The same person whose conscience would bite him if he tendered a $5 bill at the grocery and got change for a twenty, wouldn’t feel the least bit hesitant about padding an insurance claim.”

Several weeks following a disaster, after people have had more time to think about it as well as to compare notes with friends and neighbors, some claimants may come up with extra items they say were lost or other claims exaggerations.

Chambers reports that one common scheme is dislocation allowance (temporary living expenses) where claimants present outrageous receipts for temporary housing.  “In addition,” he says, “the prices for rentals go up immediately.  What would previously have rented for $1200 a month, all of a sudden is renting for $2400 or $3600.  You do have the inflation angle there.”

The larger companies, the ones that take the biggest hits, bring in a Catastrophe Action Team (CAT).  After the Northridge earthquake, hundreds of adjusters were brought in from all over the country.  “These people have never been in Los Angeles before,” Chambers observes.  “So if somebody makes a claim that a telephone pole fell on their Rolls Royce, the unfamiliar adjuster would not realize that in that particular area, you would not park a Rolls Royce out in the driveway or that all of the utilities are underground … common sense things.  Additionally, the CAT team’s instructions are ‘get in there, pay these claims, and get out.’  Usually the companies are very generous when they do that.”

TALL TALES

Two Iranian brothers from Beverly Hills ran the largest disaster fraud scheme in U.S. history, teaching people how to submit bogus disaster loan applications and tax returns to the Small Business Administration following the 1992 Los Angeles riots, the 1993 wildfires and the 1994 earthquake.  The Javidzad brothers are alleged to be responsible for over $7 million in bogus loan paper.

Many houses that were not covered by earthquake insurance conveniently catch on fire the day after the quake—everyone has fire insurance.  Other coverage can be falsified.  For example, a carrier will get a call from an insured who says, “The earthquake hit, split my house wide open.  I got $20,000 worth of crystal.  It didn’t get broken, but I put it in my car to take it to my mother’s to keep because my house couldn’t be secured.  I stopped at Denny’s for breakfast and somebody stole all the crystal.”

Or water damage.  “I wasn’t covered for earthquake; but I didn’t have a roof the morning after the quake, and it rained.”

In Florida, the damage from Hurricane Andrew was so substantial that there were no street signs, no house numbers, and mail boxes were blown away.  People painted “State Farm” or “Allstate” on the side of their house.  Adjustors drove through, saw the damaged houses, and wrote out checks.  In some cases, it was a renter collecting from the homeowner policy.

When Andrew destroyed a satellite dish, its owner charged his neighbors $25 each to move it down the street so they could each claim it.  There was also the case of the broken china that was put into a blanket, then moved house to house and opened up to be shown to each company adjuster. The solution here is to secure the remains so they can’t be reused.

One claimant said that during an earthquake his baby grand piano was destroyed, sofa ruined, dining room suite crushed, and his grandfather clock fell over.  The adjuster took a piece of graph paper and drew it out; it couldn’t possibly have all fit into the one room.

Another problem is a large claim for crystal or fine art where a claimant was doing business out of his house.  Rather than having the more expensive business coverage, he had homeowner’s coverage.

Catastrophe time is opportunity time for some creative claimants.  Take the case of the State Farm insured who reported that the Northridge quake caused a miniature tsunami wave to slosh out of his swimming pool and roll under his home and into his garage where his baseball card collection was stored in boxes.  When he made the claim, his story was that he’d already thrown the damaged cards away—all 22 thousand of them.  Value? $1.9 million!  When claims officials requested receipts, the claim was quickly withdrawn.

Contractor fraud is another issue, with some insurance adjusters working in collusion with contractors to build up claims.  In many instances, repair costs are computed including the very best materials, but when it comes time to do the job, shoddier products are used.  Sometimes it is only the contractor who is aware of this exchange and the illicit profits are solely his own.  Still other times, there is a split in effect between the contractor and the public adjuster.  And other times, the split arrangement includes the policyholder as well.

Bob Chambers noted, “The Oakland fire was one of the best examples: you have a little one-story, three-bedroom house sitting there, but when the claim comes in, the same house is suddenly a gigantic three-story mansion.  Some of those are still being litigated.”

Unfortunately, natural disasters provide a ripe atmosphere for insider fraud schemes.  Unethical claims examiners have been known to accept kickbacks from contractors in exchange for sending them business.  In other situations, an adjuster might approve payment for work not done, work that is inferior or work done which bettered the insured at the expense of the insurance company.

Unethical contractors have been discovered performing no-charge remodeling work on adjuster’s homes, extending no-pay loans, paying for fancy vacations and offering other bribes.

There are also large sums of money to be made by less-than-ethical attorneys.  Blatant advertisements, often disbursed as handbills in quake ravaged areas, proclaim, “Let us get you an extra $50,000!”  The attorney then bases his fee on a percentage of the additional claims payout.

SUPPLEMENTAL CLAIMS

The supplemental claims that come in after a disaster are probably what hurt the most.  “Gee whiz, I remember my Persian rug was damaged and I threw it away.  Here’s a receipt for it.  Please pay me, and if you don’t, I’ll sue.”  The insurance companies don’t like to be sued, especially in Los Angeles, because of the reputation for large jury awards.

A year after the Northridge earthquake, medical bills are suddenly starting to show up.  “I forgot to mention that at 4:30 in the morning, we had twenty people over playing cards at the house when it fell in and they were all injured.”  The further away from the disaster, the more fraud is involved—after they’ve had time to realize how big their deductible is, and see how their neighbors “ripped off” the insurance company.

Earthquake coverage is often purchased immediately after a quake.  Then, in some cases, two months later there’s an aftershock and the policyholder will say, “Look at all this damage,” when it actually resulted from the first quake.  In fact, this is one of the reasons that some companies have a moratorium on writing new coverage after a disaster.

Problems with damage appearing on a later claim can be averted by documenting all items of loss reported by policyholders, even if the items are not covered.

ANOTHER KIND OF FRAUD

Immediately after a natural disaster strikes, the soldiers of the Federal Emergency Management Agency (FEMA) step in and begin writing claims checks.  FEMA is equivalent to The Big Brother Insurance Company, and quickly doles out individual and family grants for needs apparent on the heels of a disaster—housing, etc.  Well over $8 billion has been handed out since 1992.  Two other agencies handing out disaster relief money are the Small Business Administration ($4.1 billion in 1994 alone) and the US Department of Agriculture, which stuffed the flooded Midwest farmers’ pockets with $1.6 billion.

The Federal agencies estimate fraud payouts at $346 million, but they may have identified only a minuscule portion of the overall problem.

One fraud ring in Los Angeles, broken in early 1995, was allegedly responsible for nearly 150 phony SBA loans.  The losses included Los Angeles riot damage to businesses that never existed — and others that did exist, but that had vastly inflated their claimed damages.  In that case alone, there is $30 million missing … probably forever.

FIGHTING FRAUD

But no matter what the specific scam is, disaster officials agree that the applicant’s word must be taken in the midst of a natural emergency.  The immediate needs of the honest majority must not be overshadowed by the schemes perpetrated by the dishonest minority.

One avenue of defense is to educate the public.  “What we’ve been trying to do,” says NICB’s McKee, “is to spread the word that what these people are doing is taking money out of their own pockets.”

Public awareness is even more important than prosecution in deterring fraud.  For example, the decline in cigarette smoking in recent years was not due to people’s fear of being arrested.  They stopped because it became socially unacceptable.

McKee presented a fraud forum at the NICB Partnership Conference in Chicago earlier this year.  “Before a catastrophe,” he says, “you have to chart SIU action and its connection to CAT teams.  After a catastrophe, it’s too late.”

Most companies have Special Investigative Units (SIU) trained to look for the red flags in different fraudulent situations.  The insurance industry funds the NICB, which is in the process of organizing an all-claims database.  This will permit access to “hits”—multiple claimants, multiple claims.  A common way to perpetrate fraud is by having multiple policies, especially for staged accidents.

Information is another weapon in the war on insurance crime.  Through the NICB information services, fraud detection has marched beyond a paper trail of claim forms.  With 250 million records in their database, their usefulness is second only to innate curiosity.  The most efficient way to take advantage of the NICB’s database is the NICB Data Base Services (NDBS) program, providing search access with replies by fax, mail, or printed from the user’s terminal.  Users can also add property and casualty referrals directly online into the data base.  For more information on the program, contact Don Love at (708) 430-5685.

GROWTH INDUSTRY

“There’s an effort being put forth,” says McKee.  “We’re doing a good job at our headquarters in Chicago in putting out the word and you see a lot more publicity on what a drain fraud is.  We try to advocate taking a defensive stand, but when we have the next catastrophe, they’re going to get the catastrophe teams in from retired and unemployed adjusters, and they’re going to settle as fast as they can.  We try to educate in quarterly meetings, but the people we’re educating are not the same as the ones doing the adjusting after a catastrophe.  We have to convince the executive level, because their motivation is to pay the claims.”

New legislation is also an integral part of the equation.  Disaster fraud cases currently carry a maximum penalty of $250,000 in fines and five years in prison, perhaps not enough of a deterrent for the megabucks available to the slick schemer.  And the sentences handed down to the few who are eventually apprehended and convicted are sending out, if anything, the message to “Try it!  It’s worth the chance!”

Only a few of the first 31 earthquake fraud cases prosecuted resulted in any jail time for those convicted.  Most were sentenced only to probation and community service.  The stiffest sentence was six months jail time and the highest fine levied was $10,000.  What message does that send to the streets?

No one can predict when the next natural disaster will hit—or where.  No one can state, beyond a wild guess, how much the next disaster will cost the insurance industry.  What can be stated with certainty, however, is that the floodgates will once again be opened to opportunist fraudsters.  While insurers never circulate memos ordering their employees to close their eyes to fraud in catastrophe claims, most industry professionals will acknowledge that special investigation efforts are relaxed during these times to a level that is almost nonexistent.

America collectively watches the insurance industry in the days and weeks following disasters.  The media is quick to pounce on any story that points towards company wrongdoing.  And one teeny-tiny negative story, even one containing more fiction than truth, can have a paralyzing effect on future marketing efforts of the charged company.  Are insurers afraid of the power of the media?  You bet your sweet elbow they are.

A lot can be done—and is being done—to combat insurance fraud, aptly referred to as the “growth industry” of the 90s.  And while there are no magical problem-solving answers, perhaps the surest method of combat lies in education—both of the companies and of the public they serve.

Nikki Frey is a free-lance artist, writer and photographer.  She lives and works in Los Angeles

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