Broken Trust Between Insurers and Independent Claims Professionals
No area or person involved in the insurance claims process is immune from fraud.
Insurance fraud is big business in the U.S. and costs an estimated $30 billion a year. We know from experience that the typical cast of characters committing fraud includes dishonest policyholders, third-party claimants, and professionals who provide services or equipment.
Independent claims professionals usually aren’t part of that list. However, a recent civil case for an insurance company involved an independent claims professional who intentionally inflated benefits owed as a result of several claims at a fast-food restaurant in Southern California.
The details of the case are telling. Following a fire at the restaurant, a claim was submitted to the insurer for damages and lost business income. An insurance claims professional from a prominent company was assigned to prepare an estimate of damage repair. Over the next few months, three additional claims were submitted for the restaurant for water loss, theft, and vandalism, with each being assigned to the same claims professional. In all four instances, the claims professional worked with the same third-party repair contractor to prepare damage repair estimates.
The insurer paid the first three claims but questioned the final claim based on duplication of costs submitted as part of the original fire loss. A review of the claims showed that the true repair costs were substantially lower than the amounts proffered by the independent claims professional and paid by the insurer. The review also revealed that the claims professional and contractor had created artificial delays and prolonged the rebuilding process, leading to lost business income. A lawsuit followed.
Delving into the case, it was apparent that the claims professional had gotten complacent when handling the contractor estimates since they had worked together for years. But as the litigation unfolded, the evidence supported the inference that the claims professional had colluded with the contractor.
At trial, it was shown that the independent claims professional had knowingly falsified the damages to maximize policy benefits, including manipulating software estimates to make it appear that the artificially high contractor estimates were reasonable. He also reported items as damaged that were intact, submitted high subcontractor bids when lower-priced work had already been performed, and accepted kickbacks from the contractor, including gifts and no-cost remodeling to his home.
The judge agreed with the arguments that the claims professional had defrauded the insurer and that his employer was negligent in failing to supervise him, stating that the claims professional “acted as though he was unaccountable, and, in fact, it appears that he was.” Together, they breached their duty of care to the insurer, and the claims professional and his employer were found liable to the insurer for more than $250,000 in overpaid policy benefits.
This case shows that no area or person involved in the insurance claims process is immune from fraud. Insurance companies must be aware of what not only their insureds are doing, but also their trusted advisors. Consider the following tips to help prevent a similar situation:
- Don’t be lulled into a false sense of security or have blind trust in advisors. People can fall on tough times, making them financially vulnerable.
- Watch out for estimates from contractors and claims professionals generated “independently” by software programs where the amounts are close together. For example, in this case, estimates nearing $200,000 were within $2,000 of each other. Experience dictates that estimates from two separate contractors are not usually that close.
- For major subcontractors, consider requesting copies of sub bids or estimates so you can verify that numbers being plugged in by the contractor and claims professional are adequate. Backup documentation is key.
- Ask for photographs of the damage so you can observe what is being discussed. Also, make a site visit if possible.
- Watch out for duplication of losses or possible problems that could occur when there are multiple losses at one location.
This unique case has the potential to cause ripple effects in the industry because disputes between insurers and independent claims professionals are typically resolved quickly and quietly. In this instance, the claims professional adamantly refused throughout the litigation to admit what he had done, despite being caught red-handed.
Traditionally, there has been great trust between insurers and their independent claims professionals, who serve as the eyes and ears of insurance companies when working with contractors or construction consultants. However, this is no longer the case. Insurers must keep close tabs because there are people who will take advantage of that trust. As President Ronald Reagan said, “Trust, but verify.”