Insurance Fraud and Perceptions of the Truth
Claim denials and fraud litigation are viewed by human beings on a spectrum of tolerance.
Insurance fraud not only has been clearly defined but also has been the subject of many compendiously written statutes and court decisions. However, insurance fraud is not always easily identified.
The purpose here is to provide some straightforward, practical observations regarding fraud in the claims process. These observations will, however, be couched inside a simple disclaimer: While the difficulty in identifying fraudulent insurance claims is related to the extent to which a policyholder will go in an effort to conceal fraud, claim denials and fraud litigation are viewed by human beings on a spectrum of tolerance. In short, each of us has a different perception and tolerance of insurance companies, simple mistakes, exaggeration, cheating, and fraud. Generally, we will reference first-party property claims and analogous facts, but most, if not all, of what is discussed here applies to any and all first-party claims.
Pennsylvania’s insurance fraud statute has effectively defined insurance fraud as providing information to an insurer that is “false, incomplete, or misleading,” with the intent to deceive. There is no mechanism built into this statute for fraud by degrees. There is no allowance for “small” or “soft fraud,” nor is there a refuge for the criminal guilty of fraud, though the specific fraud may have been part of an otherwise legitimate claim. However, because there is some tolerance for so-called soft fraud, insurance claims professionals must consider the topic more closely.
Misrepresentations made by an insured in the presentation of a claim “may involve complete fabrications of losses [hard fraud] or relatively small exaggerations [soft fraud],” according to Sharon Tennyson, associate professor in the department of policy analysis and management at Cornell University. Tennyson notes that, while it may be clear that hard fraud constitutes insurance fraud, soft fraud has been labeled within a seemingly “gray area of abuse or unethical behavior.”
This so-called gray area, often categorized by an insured’s exaggeration of an otherwise legitimate claim, leaves many insurance professionals to question whether or not the soft fraud negates the entire, otherwise legitimate claim. Although commonly referred to as soft fraud or a gray area, an insured’s exaggeration constitutes insurance fraud and is a valid basis to deny coverage, provided that there are some indicia of intent to mislead the insurer.
The overarching issues then remain how to ascertain whether or not your policyholder meant to defraud and revealing the proof of the insured’s intent to mislead the insurer. That proof may be direct, or it may be circumstantial. Regardless, it must be provable if it is to be the basis for an ultimate claim denial or a legal defense.
In Shechter v. Shechter, the Supreme Court of Pennsylvania noted that fraud “is never proclaimed from the housetops, nor is it done otherwise than surreptitiously with every effort usually made to conceal the truth of what is being done. So fraud can rarely, if ever, be shown by direct proof. It must necessarily be largely inferred from the surrounding circumstances.” That same court, however, stated that fraud consists of anything calculated to deceive, whether by single act or combination, or by suppression of truth or suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture.
Other courts have found that exaggerations by an insured, if offered as mere opinion or innocent overvaluation, constitute honest mistakes and do not contain the level of intent necessary to show insurance fraud.
Some courts have provided guidance with rulings that address the issue, though the facts of each claim warrant close scrutiny. While the majority of jurisdictions have ruled that fraud bars recovery in total on a first-party claim, a minority have concluded that a fraudulent submission in part of a claim will prevent recovery only from the portion of the claim that was fraudulent, while allowing recovery under other coverages.
Where does a claims professional turn for clear guidance regarding the evaluation of an honest mistake versus the intent to deceive, especially when the appearance of a questionable claim may be occurring with some frequency?
Your first resource is to consider the assorted red flags associated with the type of claim being investigated. The National Insurance Crime Bureau (NICB) publishes excellent checklists of potential red flags associated with various claim types that allow adjusters and investigators to assess whether or not a claim warrants additional investigation. In fact, it is certainly worth noting that some courts have stated that an insurer has a defense against bad faith allegations when it demonstrates the existence of certain red flags that prompted additional investigation. The checklists should not be considered the end of any reasonable investigation, but they are valuable to any adjuster or investigator.
Your next, most valuable resource resides in the specific facts of each claim. Once those facts have been identified and explored, an analysis of whether or not there is intent to commit fraud may be best completed. Whether that intent is inferred from thousands of financial documents and the conclusion of a forensic accountant or deduced from the submission of a single fabricated document, it must be specifically identified. When intent is clear and provable, even those willing to tolerate degrees of fraud are hard-pressed to refuse a detailed investigation and an objective, reasonable claim denial.
In sum, there is a fine line that separates exaggeration from fraud, and that line exists not in a statute or case law but, rather, in the subjective perception of the involved claims professional, policyholder, judge, or juror. As Frank Lloyd Wright once said, “The truth is more important than the facts.” While identifying fraud requires proof, objective red flags and the use of experts will assist any claims professional in the determination of the facts. But one truth regarding claims investigation is that each of us perceives the truth through our own lens.