Copyright held by The John Cooke Fraud Report. Reprint rights are granted with attribution to The John Cooke Fraud Report with a link to this website.
By Russell B. Merlette
Insurance companies tend to be very departmentalized. It is often the case that the claims handlers and personnel cannot spell U-N-D-E-R-W-R-I-T-E-R, much less have any inkling of what an underwriter really does. Unfortunately for both sides, the situation is too often a mirror image, with the underwriter having limited understanding of the claims function as well.
A good example is a file discovered by an auditor who was reviewing a large book of assigned risk business for a national carrier. The California policy had been issued to a gentleman by the name of Tuan Nguyen and covered liability and uninsured motorists. The limits of liability, as is standard in California, were $20,000 per person and $40,000 per accident. The loss report indicated that Binh Nguyen, the brother of the insured, had borrowed a car from a friend—an uninsured car—and had run into the rear of another automobile. Binh had no vehicle of his own, so the claim had been presented on a “resident relative” basis to Tuan’s company. The injuries to the passengers in the other car were severe enough that the full $40,000 was extended to settle the claims presented by the five occupants.
This particular auditor (okay, I confess, it was me) had a fair amount of background and experience in underwriting and always made it a point to review the claims file and the underwriting file together. In the case of the Nguyen policy, two very interesting things were noted on the audit report that went to the Executive VP of claims.
1. The file was rife with unrecognized fraud. It had been handled by a somewhat junior claims representative whose handling authority was limited to $10,000 per line of coverage. Since none of the five claimants received an amount beyond the rep’s authority, and because the file was over two years old, the actual money was long gone. The handler had not picked up on the obvious red flags: all claimants had the same attorney, the same doctor and nearly identical medical reports. The accident had all of the markings of a “swoop and squat,” with each of the allegedly injured claimants exiting the vehicle holding his neck. Beyond that, reading the file was like reading a red flag list on auto accidents published by the NICB.
2. The underwriting file contained the original application—and right there on the face of the application was the information relative to who lived in the house with our insured, Tuan Nguyen. Not only was Binh listed (and shown as not licensed to drive), but another brother, Hung, was shown as a driver with his own 1985 Ford, as was a sister, Cam, also with her own insured automobile.
Catch the implications?
The coverage had been extended to cover the accident because a resident relative of Tuan Nguyen was driving a non-owned vehicle that was uninsured.
But what about Hung’s policy? And what about Cam’s policy? They were both members of the same household and they both also carried automobile coverage. The bottom line was that our assigned risk policy was only theoretically responsible for one-third of the settlement.
Subrogation was out of the question for two reasons. First, the file was long dead, having been settled over two years previously, and we’d had access to the information on the siblings from the onset of the claim. Second, we had paid a limits settlement on a file that had all the earmarks of a blatant fraud. How could we then approach the two other companies and ask them each to give us $15,000 on a file that, except for the lack of fraud training received by the claims representative, did not deserve a dime of settlement money?
In short, $45,000 down the tubes.
Let’s go over a few more examples of the clues that can be gleaned from a review of the underwriting file.
How about this one: Andrew Brown is the insured. He lives with a roommate in a so-so area of town and shows his employment as counter-help at the local McDonalds. The insured vehicle is 18 years old and he carries only liability. Three months into the policy, Brown deletes his old car and adds a late model Mercedes 450 SL—and full coverage. No lienholder is shown. Two weeks after that, guess what, he reports the Mercedes as stolen. Duh…
Did Brown win the lottery?
Did his McDonald’s wages suddenly escalate? Did some friendly bank loan him the money to buy the SL and not care about being listed as the lienholder? Or, did something smell like shark bait?
Or how about this one:
Mildred Cleveland is 76 years old and insures a 1972 Plymouth compact. One day she just happens to add a second vehicle, a late-model Corvette. The application indicates she lives alone and the VIN on her Plymouth reveals that it’s equipped with an automatic transmission. The claims report says that Mildred’s grandson, Todd Cleveland, just happened to take the stick-shift Corvette out for a one-time spin and cracked it up. Oh surprise!
This is another area of fraud that is often overlooked. Underwriting fraud. IF the investigation shows that dear sweet Granny has attested that she is the 100-percent driver of the Corvette, and IF it is determined that Granny has never owned a stick-shift in her life and indeed has no idea how to drive one, and IF grandson Todd has been showing up at his workplace every day in Granny’s ‘Vette, it doesn’t even make a bit of difference if she went so far as to put her own name on the title. It’s a pure and simple case of misrepresentation, and based on the information contained in the underwriting file, coverage can conceivably be denied.
Now that the point, hopefully, has been made, let’s take this one step further. Another tool that we too often overlook is the agent.
The agent? A tool? How so?
The agent of record, the person who fills out the original application for coverage, can prove to be another valuable resource of information. He keeps an agency file, and that, too, can hold valuable tools. (I confess, I was an agent for a number of years, too. Just couldn’t seem to stick around in any one job for more than a dozen years…)
Let’s take the case of Lucifer Jones, an unemployed gentleman who purchased coverage on his 15-year-old Mazda. When he reports an accident three weeks after the inception of the policy, the wise claims adjuster or SIU representative will look at the underwriting file—and do a quick once-over of the agent’s file. In the case of Mr. Jones, the underwriting file didn’t offer any clues. But the agent’s file contained a highly interesting tidbit of information. Good old Lucifer, despite being unemployed and having no history with the agent (he was a walk-in), had paid $630 CASH for a semi-annual policy. A copy of the receipt was right there in the agents file. Hoo boy…
In a state with an uninsured motorist ratio of 1-in-4, unemployed Lucifer was either a darn good citizen, who was not only responsible when it came to buying insurance, but just happened to have a large amount of cash on hand to pay up his policy—or — there are a few special questions that need to be asked.
Or, how about Susie A. Ringaling. She purchased a policy on her 5-year-old Toyota and rear-ended another car about six weeks after the inception date. Again, while the underwriting file was nonproductive, the agent’s file contained a handwritten memo that showed Susie was referred by her friend Harvey Hopperstien, another client of the agent’s. And a quick check of the Hopperstien file revealed that good old Harvey just happened to live at the same address as the driver of the car that Susie ran into. What a startling coincidence!
To sum it all up, the underwriting file and the agency file are tools in the fraud fighting arsenal. In this day and age of a new-scam-a-minute, there is no weapon that we can afford to overlook.
Take an underwriter to lunch. Pick his brain as you pick your menu item. Get in your car and go visit the agent—or assign the task to your area investigator. You truly never know what you’ll discover, but the possibility always remains that it may be the necessary link to trip up an otherwise undetectable fraudster.
And a small caveat before I sign off. The examples used above apply to automobile coverages, but the underlying message contained in these lines does not start—or end—with auto claims/contracts. It makes sense to use all available resources in any line of coverage.
Russell B. Merlette is the pen name of one of the industry’s more versatile investigators. He spends his spare time looking under rocks and exploring nooks and crannies.
© Copyright 1996 Alikim Media