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By Richard Stutheit
Ten percent of all claims are said to be fraudulent in nature. Recent studies have put the level of fraudulent activity at more than $245 billion annually; with some studies indicating that more than 40 percent of people believe it is okay to misrepresent some aspect of an insurance claim. Given these factors along with ever increasing opportunities for fraud, the ability of the scammer to cover his tracks and the lack of deterrence in the industry at this point there is evidence that the number of fraudulent insurance claims may be closer to the 40 percent figure.
A resurgence in fraud fighting during the last decade has been fueled by state and local mandates to insurers. California, New York, Florida, New Jersey and Illinois are some of the leaders in this effort to provide statutory controls on fraud. The California Department of Insurance is one of many that has mandated each insurance company conducting business in the state to retain a Special Investigative Unit to train, identify, investigate and report suspected fraudulent activity. Prosecution of fraud in the insurance industry is limited by the manpower, resources and extent of the laws identifying specific fraud and fraudulent activities. The lack of resources and the limited success of the industry in fighting fraud has been widely publicized beginning in the early 90s and continuing through the present.
Although many major insurance companies seem to have realized that fraud is prevalent in many of the claims presented, this awareness has not translated into a major deterrence of fraudulent claims activity. The direct lack of real resources prevents timely and thorough detection, investigation and denials. Penalties are not severe enough and are often commuted, even when a prosecutable fraud has been discovered. That fact that this is well known among the community at large contributes to the community’s attitudes about fraud.
Many insurers fail to protect themselves from fraudulent activity by accepting new risks without requiring the insured party to provide real evidence of ownership and legitimate possession of the items to be insured. Further, companies frequently fail to require the insured to warrant, prior to the issuance of the policy, that the facts presented concerning the insured, the acquisition of the property and the value and source of the property are true and correct.
Furthermore, insurers often fail to enforce or provide appropriate surety systems for maintenance of security systems that would lessen the possibility for misrepresentation. Coverage for high value contents should routinely require a monitored central alarm station with contacts at all entry locations and infrared motion detectors to identify all entrance and egress throughout the premises to reduce the risk of loss.
Underwriters need to understand that not all insureds treat their insurers with good faith intentions. All risks must be looked at with the same intense skepticism. With the typical loose underwriting requirements, vague and ambiguous policy wording, and competitive pressure to sell more policies not to mention unscrupulous agents that exist in the industry, it is not surprising that otherwise honest insureds can be tempted to commit fraud by inflating claims or staging losses. These factors along with the limited prosecution and/or minimal penalties that are applied when prosecution does occur make the commission of “just a little fraud” seem more attractive.
Insurance fraud is a white-collar crime that has historically been considered a minor matter. The scope of fraud has ranged from check kiting to corrupt judges, corrupt attorneys and corrupt claims adjusters, all the way to exportation of the criminal scene to other areas.
Claim adjusters who have received kickbacks from contractors and repair vendors for inflating claims have experienced only limited consequences if they were even caught that is. A few have had to pay restitution and spend time in jail; these individuals were usually caught up in fraud rings, however. They were only discovered when individuals turned themselves in after many years of staging losses. The groups were broken up only because of internal conflicts that resulted in a fear of personal bodily harm to individuals who were involved in the scams. They came forward to confess to the criminal activity in an effort to protect themselves.
In the late 80s and early 90s many third party attorneys in California and some east coast states were identified as possible participants in fraud schemes and pressure was put upon them regarding their suspicious claims activities. Many of these attorneys simply folded up shop and moved to other states to continue with their fraudulent activity. This was a direct result of the lack of appropriate legislation to prosecute and the lack manpower to pursue conviction. A number of these attorneys had multi state affiliations with fraudulent activities occurring back and forth between the two jurisdictions. One such attorney, Bruce Bright, was convicted, sentenced to two and a half years in jail and required to pay more than $384,000 in restitution.
Even when fraud and misrepresentation are clear to claims and special investigation personnel, arbitrators and judges often view the fraudulent activity in a different light. They see these activities as mistakes or oversights. These officials often engage in compromise to move the case to closure, a seemingly less painful approach in the short run. However, this method only encourages and contributes to fraudulent activity and a congested court system.
Attorneys who are charged with engaging in fraudulent activity usually receive suspended sentences and are placed on probation. They are sentenced to pay only minimal amounts of restitution. The bar may require them to take specific professional courses or engage in speaking tours to discuss the morality of their activities. They remain active attorneys.
When sanctions are granted against an attorney, the attorney will often use the legal system to fight, running the defense bill to astronomical costs. An attorney caught in this manner may even go to the length of filing for bankruptcy. This, of course, is in clear violation of laws governing sanctions. Such is the case of Richard Hoffman with a $64,000 sanction for pursuing a fictitious claim.
The sophistication level of the insurance fraud that occurs in1996 versus that in 1986or even in 1990 for that matter has changed. The stakes were small in 1986; today, we see smaller claims up to $50,000 as tests. First and third party claimants, armed with modern technology, are covering their tracks well: invoices can be computer generated; photos can be altered via computer graphics; all for the purpose of enhancing insurance claims. Staged and inflated losses are not just perpetrated by individuals. Whole families can be involved in verifying and supporting the claimed loss items.
Companies with major financial losses can be supplied with receipts for purchases and sales from other companies, who may, in fact, have losses themselves. These companies provide receipts for sales that never occurred receipts that are difficult to pinpoint as fraudulent. In fact, the insureds may be buying and selling merchandise to and from themselves with shell corporations. These companies may be set up solely for the purpose of generating “paper” to legitimize a money laundering business, or they may have just set up the whole process for milking the insurance company out of a large sum of money.
Although the company may have suffered a legitimate loss, it may not be insurable. The company may be financially strapped due to economic downturn. Because of the company’s poor financial situation, it may have set up a paper trail to support a loss caused by some natural catastrophe, such as an earthquake or hurricane, a fire or a burglary.
Both the insurance industry as a whole and the individual insurance company must recognize this as an ever-increasing scenario to be dealt with.
If insurance companies don’t do a proper risk assessment up front, they will be faced with an increasing investigative load in the future. Even with successful deterrents and detection, it is important to understand that the initial cost of investigation and litigation may add substantial expense costs to claims handling or may even outweigh the value of the claim.
Where does it all end? The insurance company must add more staff, both to the upfront evaluation or claims and to back door claims control. Three to five years down the road, the insurance industry should have gained a reputation that will discourage fraudulent activity. It is said that man has a certain level of innate avarice. The insurance industry should make certain people know that if one fiddles with an insurance company, he should be prepared to pay the piper.
Richard Stutheit is a supervisor with the Fireman’s Fund Insurance Company.
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