When Opportunity Knocks
Consumers pad claims to get more buck out of the bang.
By Sam King
A recent study by the National Insurance Crime Bureau (NICB) shows an increase in claims related to “opportunistic fraud”—when a policyholder has a legitimate claim but pads it to produce a larger payment. The Insurance Information Institute estimates that insurance fraud accounts for 10% of the property and casualty insurance industry’s incurred losses and loss adjustment expenses, or about $30 billion a year. No statistics are available yet for opportunistic fraud, but it’s noteworthy that claims for hail damage were up 407% in the first quarter of 2009 year over year. Commercial slip and fall claims rose 77%, and fire and arson claims rose 76%. By far, the largest numbers of claims in the first quarter of both 2008 and 2009 were in the staged and caused accidents category. (See chart below.)
Fraud can be committed at different points in the insurance transaction by policyholders, those applying for insurance, third party claimants, and professionals who provide services to claimants. Insurance agents and company employees can also commit insurance fraud. Common frauds include “padding,” which means inflating actual claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents.
Insurance fraud may be classified as “hard” or “soft.” Hard fraud is a deliberate attempt to stage or invent an accident, injury, theft, fire or another type of loss that would be covered under an insurance policy. Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim. A car owner involved in a fender bender who then pads the claim to cover the policy deductible is committing soft fraud. Exaggerating the number or value of items stolen from a home or business is another example.
Soft fraud also occurs when people purposely provide false information to influence the underwriting process in their favor when applying for insurance. To lower insurance premiums or increase the likelihood that the application for insurance will be accepted, people under-report the number of miles driven, misrepresent where a car is garaged, fail to provide an accurate medical history when applying for health insurance, or falsify the number of employees and the nature of their work for workers’ compensation coverage.
Rooting Out and Ratting On Fraud
Consistent due diligence on the part of each claims handler combined with effective teamwork (claim handler, case manager, policyholders, SIU investigators, and vendors) is key to combating fraud. Detecting abnormal claims requires observation of patterns among and behavior of claimants between all claims. Connecting the dots from claim to claim is difficult to achieve, however, because today’s claim professionals are typically handling high volumes of claims and juggling administration tasks to boot. In addition, insurers want to provide policyholders with a high level of customer service that includes rapid processing, maintaining expense control and avoiding bad faith allegations. Claim managers need to balance expense controls and high-quality customer service with the need to root out fraudulent behavior.
There is some help at hand. Fraud deterrent and detection methodologies have improved dramatically over the past five to 10 years. Many insurance carriers have invested in various fraud detection/prevention technologies, such as voice stress analysis, predictive modeling, exception reporting, neural networks or neural computing, link analysis, and database mining. These tools assist adjusters in identifying red flags that indicate the potential for fraud in a given claim or set of similar claims.
When red flag indicators of potential fraud are identified, several options are available. Some insurance companies rely on internal SIUs; some use outside claim specialists. Another option is a private investigative firm, specializing in insurance fraud investigation. If an outside firm is chosen, care should be taken to engage a firm with knowledge and experience in insurance, defense, subrogation and compensability for every type of claim. Some law enforcement background is also helpful.
In an investigation, there must be a complete understanding of who is going to do what and why. A preliminary conference should take place between the claim handler and the assigned investigator. All work should be planned and authorized by the claim handler. This will eliminate costly work that may have no impact on the claim. The investigator should be permitted to follow all logical leads in the case. Frequent communication and file conferencing will allow the claims handler to benefit from the investigator’s experience while maintaining control over the file.
The SIU should analyze the facts, establish a written investigation plan and report suspected fraudulent claims to the appropriate legal authorities. Currently, the laws of 46 states mandate that suspected fraud be reported. State statutes set procedures on when and how insurers and/or designated claims administrators should report suspected fraud activity to the state fraud bureau. Subject to jurisdictional regulations, these reports may also be provided to other state or federal law enforcement agencies and the National Insurance Crime Bureau. States almost always grant insurers or their designated claim administrator immunity from civil prosecution for reporting suspected fraud.
The following constitute critical evidence of fraud and must be documented:
- Lying (written or oral)
- Knowledge (the liar knows that it is a lie)
- Intent (done on purpose to obtain and or deny policy benefits or, in the case of premium fraud, to lower the cost of the insurance policy)
- Material effect (the lie makes a difference, usually monetary).
A suspected fraudulent claim often contains a limited amount of information, but when a substantial amount of data indicating fraud are available, the referring party can submit a “documented referral” to law enforcement. This formal referral will aid a criminal investigation and may be the motivating factor in law enforcement pursuit of the case.
The first part of the report should contain an abbreviated case synopsis and general information that the investigator has on the suspect. Details on the suspect’s history of claims, personal finances, medical records and the like should be included in the report. The investigator should provide a narrative statement on the facts of the case, generally in chronological order and referencing numbered exhibits that support the statement. It should logically take the reader from the beginning of the case through the investigation conducted before concluding with the current status of the fraudulent claim. Relevant documents or other evidence in the insurance policy or claim file, reports of interviews obtained, medical files, property files, photographs, videotapes, DVDs, depositions, examinations under oath, etc. should be catalogued, referenced and provided in the report. In short, a report should contain every fact, good or bad. If the SIU investigator is aware of potential defenses the suspect might assert, those should be included as well. Some data indicating the material cost of the alleged fraud would also be helpful.
Bilking the Cash Cow
In San Diego, police were called to the scene of a car accident where a woman had been hit by another driver. Fortunately, neither she nor her female passenger was injured. Following the accident however, she submitted a claim to her insurance company indicating her mother was also a passenger and had suffered injuries. An investigation revealed she had listed her mother as a passenger so the mother could receive treatment for a pre-existing medical condition.
A couple renting a house in New York City was experiencing financial difficulty and thought they could solve their problems when they saw an Internet article on how to make easy money off their renter’s insurance policy. They arranged for a friend to fall down their interior stairs and say he tripped on torn carpet at the top of the steps. They planned for the friend to sue the couple’s insurance company and then split the settlement with them. An onsite investigation, including an interview of the house’s owner to discuss the torn carpet, revealed the entire house was floored with linoleum and had no carpeting.
An Eye on the Peephole
The best investigative system in the world won’t amount to much if the first line of defense isn’t working in top form. In these days of Bernie Madoff-league financial crime, opportunistic fraud might seem like small potatoes, but small losses can add up. Claim professionals are uniquely situated to be the frontline eyes and ears of the organization.
Taking a few simple steps in every claim can reduce the occurrence of opportunistic fraud. Often, there are glaring indicators that a claim is being padded or an application has been falsified. All a claim handler has to do in many cases is look.
- Check prior police reports for individuals involved in the claim to identify a history of prior injuries, accidents or property loss.
- Conduct a court records check for any civil suits, judgments, liens, marriage/divorce records, criminal action, mortgages, UCC filings, property records, zoning violations and bankruptcies for all parties. Bear in mind that a court records check may include visits to many state, county, local and federal locations to complete a thorough search. The search may not be limited to the county or state where the loss occurred. Instead, it may extend into several surrounding counties or other states. Federal cases, especially bankruptcies, can be filed in another state, particularly where the federal court system is closer than one within the state where the insured and/or claimant resides.
- Request a copy of the insured’s application for insurance to review for any misrepresentations on items such as prior injuries, prior insurance, cancellations or refusals to renew. Determine if the representations are “warranties” and if a “rescission investigation” is warranted.
- Obtain proper authorization and pursue credit reports, medical reports, cellular telephone records, financial records and other records as appropriate. Obtain authorization for release of medical and insurance/claim information.
- Interview the agent and review his or her file (any recent increase in coverage or reviews of policy?).
- Conduct loss-site investigation and vehicle inspection if applicable. Photograph the site and vehicle if applicable. If possible, use photos or diagrams while interviewing neighbors, family and witnesses to see if they can provide information on the pre-loss condition of the property or the previous health of the claimant.
Each step of the initial process can lead the adjuster down a different path and can expose and derail fraud early in the claim process. Follow the evidence and don’t dismiss intuition. By establishing and following basic and best practices for each and every claim, insurers can make themselves unattractive targets for even the most opportunistic fraudsters.