Insurance Fraud Awareness - Welcome to

Insurance Fraud Awareness

5.0 Credit Hours ● 73 pages ● 8 Lessons ● 1 Online Final

Insurance Fraud Awareness ● Page 2

Insurance Fraud Awareness Published by Pohs Institute Westbury, New York

Pohs Institute, one of the oldest insurance schools in New York State, was founded in 1921 by Herbert Pohs. Pohs Institute is one of the largest providers of insurance education in New York State, as well as an approved provider in New Jersey, Pennsylvania, Connecticut, Massachusetts, New Hampshire, Maine and Rhode Island. More than 250,000 men and women, eager to pursue a career in the insurance industry, have enrolled in Pohs Institute schools. Pohs Institute provides insurance instruction to large insurance companies and brokerages, as well as banks and financial institutions. The instructors are professional adjunct teachers from the insurance industry with an average of 10 or more years of industry experience. This course will address the following topics:

• An Introduction to Insurance Fraud • Preventing Insurance Fraud • Identifying the Fraudsters • Fraud Within the Insurance Process • Patterns & Indicators of Fraudulent Claims • Fraudulent Claims and the Insurance Industry • The Legal Issues in Insurance Fraud • Consumer Protection and Insurance Fraud This course includes:

• 8 Lessons • 1 Online Final Exam


Disclaimer: The material presented within this course is for informational and educational purposes only. It should not be used to provide guidance to your customers or clients in lieu of competent, certified legal advice. All parties involved in the development of this course shall not be liable for any inappropriate use of this information beyond the purpose stated above. As a student, you should understand that it is your responsibility to adhere to the laws and regulations pertaining to any aspect of this course and the materials presented within.


Table of Contents

I. An Introduction to Insurance Fraud 1

Understanding Insurance Fraud 1 Factors of Insurance Fraud 2 The Cost of Insurance Fraud 3

Ethics and Insurance Fraud 4 Honesty 6 Integrity 6 Respect 6 Trust 7

Responsibility 7 Results of Insurance Fraud 7

To Insurance Companies & Policyholders 7 To the Entire Country 8

II. Preventing Insurance Fraud 9

Operation Restore Trust 10 Making Insurance Fraud a Crime 11

False Advertising 11 Unfair Claims Settlement Practices 12 The Health Insurance Portability and Accountability Act

(HIPAA) 12 The National Insurance Crime Bureau 13

III. Identifying the Fraudsters 15

External Insurance Fraud 15 Con Artists 16 Auto Salvage Fraud 16 Medical Mills 22

Internal Insurance Fraud 23

IV. Fraud Within the Insurance Process 24

Preventing Fraud in the Insurance Agency 24 The Marketing Department & Fraud Prevention 24 The Underwriting Department & Fraud Prevention 25


Concealment, Misrepresentation or Fraud 25 Warranties 25 Contract Fraud vs. Premium Fraud 25

Insurance Fraud and the Claims Department 26 First-Party and Third-Party Claims 26 Claims and Misrepresentation 27 False Swearing 27 Fraud Prevention 28

V. Patterns & Indicators of Fraudulent Claims 29

MORAL Hazard 29 MORALE Hazard 29 Patterns of Insurance Fraud 30

Time of Loss 30 Purchase of an Insurance Policy 31 Circumstances in Claimant’s Life 31 The Claim Papers 31

VI. Fraudulent Claims and the Insurance Industry 33

The Impact on Property and Casualty Lines 33 Homeowners’ Insurance Fraud 34 Arson Fraud 34 Water Damage Fraud 35 Burglary & Theft Fraud 35

Auto Insurance 35 Types of Schemes 36 False Auto Insurance Claim 36 Auto Arson and Auto Theft Fraud 37

Workers’ Compensation Insurance 38 Employer Fraud 40 Medical Provider Fraud 42 Insult Added to Injury 43

Other Bodily Injury Fraud 43 Slip-And-Fall Claims 43

Product Liability Claims 43 Understanding Risk Utility 45 Lost Earnings Claims 45 Legitimate Losses 47 Claims Involving Malingering 48


VII. The Legal Issues in Insurance Fraud 50

Investigating Claims 53 Preventing Fraudulent Acts 54 Auto Insurance Fraud 54 Automobile Loss Exposures 55 Fraudulent Claims 55 Home Insurance Fraud 56 Regulations in P & C Insurance 57 The Law of the Agency 57 The Law of Sales 57 Commercial P&C Insurance Fraud 58 Commercial Policies 58 Business Insurance 59

VIII. Consumer Protection and Insurance Fraud 63

Regulations of the Insurance Companies 64 Categories of Consumer Protection 65 Post-Claim Representation 65 Pre-Claim Representation 65 Consumer Protection Legislation 67 Theories of Recovery 67 Types of Remedies 68 Unfair Practice and Acts 70 The Federal Trade Commissions Act 70 Uniform Deceptive Trade Practices Act 70 Misstatements and Misrepresentations 72 False Information and Advertising 73

Glossary 78


I

Introduction to Insurance Fraud

Understanding Insurance Fraud

The insurance industry in the United States consists of more than 5,000 companies with over

$1.8 trillion in assets. It is broken down into two segments of equal importance:

property/casualty and life/health. The insurance industry is one of the largest and most

interdependent of the United States industries.

It is therefore, by definition, a critical industry in the United States and, as such, falls within the

definition of Tier One in the FBI's Strategic Plan. Insurance fraud has become one of the most

prevalent and costly white-collar crimes. Public concern about the price of insurance and the

solvency of the insurance industry has prompted the insurance industry to conduct both internal

and external reviews of the various insurance cost elements.

According to a published study by the Coalition Against Insurance Fraud (CAIF), fraud is among

the most prominent cost components escalating the costs of insurance. The CAIF has estimated

the annual loss figures relative to insurance fraud (non health insurance) to be approximately $26

billion. Outside of the CAIF figure, the life/disability insurance segment of the industry estimates

that approximately $1.5 billion is lost each year through fraudulent schemes.

Identifying, targeting, and dismantling those individuals, organized groups, and con artists

committing fraud against the insurance industry will accomplish reducing the amount of

economic loss to the insurance industry due to fraud. They will be targeted through national

initiatives in specific insurance industry segments that will bring the crime problem to the

national consciousness.

As we have said, insurance fraud is one of the most costly white-collar crimes in America,

ranking second to tax evasion. In the broadest sense, insurance fraud can encompass any

fraudulent or illegal act that involves the business of insurance. Insurance fraud is:

� any deliberate deception perpetrated against or by an insurance company, agent or

consumer for the purpose of unwarranted financial gain. It occurs during the process of

buying, using, selling and underwriting insurance.


Insurance fraud occurs when someone tries to make money from insurance transactions by

deceiving others. Insurance fraud - including selling insurance without a license, filing fake or

padded claims and making or possessing counterfeit proof-of-insurance cards - is a criminal

offense in most states.

Criminal fraud is defined and may be committed by an individual or several people in a

sophisticated conspiracy. Fraud generally involves elements of theft and dishonesty. It includes

fake accidents & disability, false applications & claims, theft of insurance premium, false

medical billing, arson, and unauthorized insurance companies.

Fraud can be divided into two investigative areas. Claimant and Provider Fraud is fraud

committed against the insurance industry. Insurer Fraud is fraud committed within and by the

insurance industry.

Fraudulent activity committed by applicants for insurance, policyholders, third-party claimants,

or professionals who provide insurance services to claimants is known as external fraud. Fraud

within the insurance industry itself is known as internal fraud. This activity includes bribery of

company officials, misrepresentation of facts by insurance company officers, directors,

employees, agents and brokers for their personal enrichment or to prevent regulators from taking

certain actions, etc.

Factors in Insurance Fraud

Factors of insurance fraud include:

• deliberate lies

• intent for someone else to rely on that lie

• someone relying on the lie

• damages being suffered by the person who relied on that lie

Examples of insurance fraud include:

Agent fraud occurs when a consumer gives money to an insurance agent and receives nothing in

return or receives a product that was not desired.

Unauthorized insurance is the sale of insurance by unlicensed companies.

Fraudulent insurance claims are when a hospital bills a patient's insurance company for

procedures not performed, or a homeowner inflates a claim to cheat the insurance company.

Counterfeit proof-of-insurance cards are sold to people who do not have automotive liability

insurance required by law.


The Cost of Insurance Fraud

There is no doubt that fraud is costing companies, businesses, and individuals, who pay higher

insurance premiums. Insurance provides many benefits to our society. However, these benefits

are not cost free. Premiums for the insured are charged in order to collect the necessary money to

pay the losses of the insured.

Although no precise dollar amount can be determined, some authorities contend that insurance

fraud constitutes a $100-billion-a-year problem. The United States General Accounting Office

has estimated that $1 out of every $7 spent on Medicare is lost to fraud and abuse in one year,

and that Medicare has lost nearly $12 billion to fraudulent or unnecessary claims in a year’s

time.

On Property and Casualty Insurance

An insurance policy is a contract between an individual and the insurance company. The

individual agrees to pay the premium, which is the annual price for the policy, and the insurance

company agrees to pay for the insured’s losses resulting from the events that are covered in the

policy -- a fire, burglary, or a car collision. There is a limit to the amount of money any insurance

policy will cover for a loss, and that is just what it is called -- the policy limit on each covered

risk.

According to the National Insurance Crime Bureau (NICB), a non-profit association that helps

insurance companies and law enforcement agencies combat fraud, it is estimated that fraud costs

the property-casualty insurance industry $20 to $30 billion each year in fraudulent claims.

Consumers pay the tab for these scams, estimated at $200 to $300 each year in additional

insurance premiums.

On Health Insurance

Even the medical industry has been infiltrated with fraud. Fraudulent health insurance claims

have contributed greatly to the increased costs of health care and lower quality health care in

many cases. Today some doctors, hospitals, ambulance services and other medical providers, as

well as lawyers and insurance executives, have allowed greed to win over duty. For example,

some doctors take kickbacks for referring patients to other health care providers; unscrupulous

insurance executives collect insurance premiums and then skip town; and individuals stage car

accidents and collect from insurance companies for medical expenses and hospital stays.


At the top of the list of obstacles to effective fraud fighting is a widespread failure on the part of

insurers, employers, politicians and law enforcement agencies to understand the complex nature

of health care fraud. This is equally true in both the public (Medicare) sector and the private-

sector health insurance industry.

Ethics and Insurance Fraud

While most people would never approve of an act of arson, or of a criminal earning a living from

insurance fraud, many experience little guilt about taking advantage of an insurance company

through fraud.

Reformers who have issued prescriptions for more ethical behavior have relied upon business

schools and religious institutions to imprint increased moral behavior patterns upon individuals.

The executive, in the view of the majority, is supposed to embody the highest standards of

American society and accept responsibility for his actions. He is a professional and his

responsibilities include moral rectitude.

The modern business organizations’ chief executives have functional advisors in areas such as

marketing, production, finance, and public relations. But they have no ready wellspring of advice

on ethical issues. Ethical ramifications crop up in all major business decisions. And they may

very well be just as complex as the issues in other areas. Much of business behavior operates in a

“gray” area in which individuals are unsure whether if they are behaving unethically or not.

Governing ethics coupled with a set of guiding principles form the basis for organizational

integrity. This strategy holds the organization to a higher standard and creates a shared sense of

accountability among employees. The ambiguous situations could spring from cultural

differences, inexperience, the absence of guidelines and laws, or lack of awareness by

employers. Students are not prepared to apply ethical principles in the business world unless they

have been exposed to discussions on how they would respond to morally questionable situations.

Truth exhorts each individual to perform a most difficult task – that of being honest. Indeed, truth

telling is not always easy or advisable. It is often difficult to be honest with someone if there is

some thought that honesty would hurt that person’s feelings, or give that person information with

which he or she may be unable to deal.

If managers and leaders consider business ethics irrelevant, they must take into consideration the

fact that their responsibility is two fold:

� Leaders and decision makers must exemplify ethical behavior and be held

accountable to a higher authority and to the public.


� Leaders of higher education should revise or develop policies for ethical standards

that reflect a rapidly changing technological society.

The profit motive and the quest for power are strong drives that are often coupled with the

prevalent notion that business executives and politicians are expected to cheat, at least from time

to time. That notion is only strengthened by the many reports in the media and by our own

observations of those around us.

In the business world there are always at least three people involved. If an individual is to decide

the people to whom he or she is ethically responsible, he or she could list the people or entities

that a decision will affect. The list could include employees, customers, shareholders in the

company, a supervisor or manager, and suppliers.

Honesty

Honest means “truthful, trustworthy, got by fair means; straight-forward.” Who decides if a sale is made or a service is rendered by fair means? If the individual’s code of ethics is corrupt, there may not be any perimeters around “by fair means” for him or her.

Integrity

Integrity is honesty, incorruptibility, wholeness, entirety, and soundness. So can a professional person be dishonest yet maintain integrity with his clients? It is doubtful. Honesty is one part of integrity. So maybe, yes. Maybe one can maintain a tainted form of integrity. But the vital signs of trust and confidence with the client will be missing.

Respect

This is a two-fold responsibility in the professional circle. To say that one responsibility is more important than another would be impossible, so let us just look at one at a time. There is a triangle of respect in which an individual has the opportunity “to treat with dignity and fairness” persons in the professional circle. There is the agent, the co-workers, and the clients. The dictionary says that respect means, “admiration felt toward a person or thing that has good qualities or achievements, politeness arising from this; attention, consideration. To treat everyone in the same way without being influenced by their importance.”

If an individual’s ethical value system includes a high priority for respect, he or she will realize that respect starts at the moment of an initial encounter. The interest of the client must be in giving clear information, complete facts, and repeating whatever information the client does not understand.


Just because one client needs a small health insurance policy to meet his or her needs does not

mean that the agent can have less respect for that individual than for the client who wants to buy

a large life insurance policy that will give an outstanding commission to the agent who sells it.

Both of these incidents have some items in common. In each the individual is responsible to

build the same type of long-term relationship, because each one needs maintenance. This is the

manner to establish a track record, not only with one’s company but also with one’s clients, and

to eliminate some of the potential for occasions of fraud.

Trust

Trust is one more important ingredient of integrity. Is trust asked for, or is it earned? This may

be the greatest question of the century, but after an agent has been working out on the sales front

for a few weeks, or maybe months, he or she will be able to answer this question with all

intelligence. When an agent is trying to convince a client to trust him or her, the company, or the

product or service that is being offered, it may be the first step to losing a sale or securing a sale.

Trust is earned by meeting the client at his or her point of need. Their point of need may be

different than what the agent thinks their point of need is. The client can be guided to possibly a

better choice as long as he or she does not stray from their point of reference. The trust factor

will still be intact.

Responsibility

The ethics of responsibility include reporting concerns in the workplace, including violations of

laws or acts of fraud that one sees or knows about. It also includes seeking clarification and

guidance whenever there is doubt as to the course of action that an agent should take. According

to the dictionary to be responsible is to be legally or morally obliged to take care of something or

to carry out a duty; liable to be blamed for loss or failure. It means to have to account for one’s

actions; to be capable of rational conduct; trustworthy, being responsible.

Results of Insurance Fraud

Insurance is affected by fraudulent claims in much the same way as any other business that is the

target of criminals. While some of the claims are humorous, there are cases where the witnesses

are killed. An investigator with one of the country's biggest insurers says that some cases of

fraud are never prosecuted because several justice officials are on the payrolls of the syndicates.

Desperate consumers who need the insurance payout are easy prey for crime syndicates. A client

who confessed to the direct insurer recently that he had made a fraudulent claim proves this

point. When an investigative team confronted the client, he said he had tried but failed to sell his

car for the amount he still owed to the bank so that he could buy two cheaper cars, one for

himself and one for his wife.


He said he had mentioned at work that he would be better off if his car was stolen. Soon

afterwards, someone who offered to “take care” of the vehicle contacted him. A drop-off was

arranged and before he knew it his car was gone. He was told to give the "thieves" a chance to

reach the next town before reporting his car stolen.

Similar cases are reported to insurance companies regularly. In about three months, one

insurance company repudiated 35% of all investigated claims, with an average value of $55,000

per claim, because of suspected fraud.

But while syndicate-driven insurance fraud is on the increase, tough economic conditions still

trigger the majority of fraudulent claims. One insurance manager of a nationally known company

says after fifteen years there is little he has not seen. Insurance fraud has been committed

irrespective of social status, color, creed, or educational degree. There may be people who

normally would not steal an apple off the pavement who are inflating claims. They do so when

money is tight, and it may be as simple as adding a computer and CD collection to their list of

stolen goods.

Arson is just as common. The fire divisions of all insurance companies have suffered huge

claims over the past several years. Opportunists sometimes submit inflated claims shortly before

Christmas when they need money for gifts or they need to take a holiday.

Everyone pays the costs of insurance fraud and corruption by having to pay extra amounts for

insurance, goods, services, and taxes. Insurance fraud threatens the affordability of insurance and

the concept of risk sharing upon which insurance is founded. Insurance fraud such as staged auto

accidents and arson fires kill or injure many people throughout our nation every year.


II

Preventing Insurance Fraud

The insurance industry always has experienced fraudulent claims, but insurance fraud across

North America has grown steadily in recent years. Front-line claims examiners, frustrated on a

daily basis by this phenomenon, are often without the resources or expertise to deal with it. Many

industry members have taken significant corrective steps, but in some states considerable work

remains.

A happy insured or claimant satisfied with the results of his or her claim will never sue the

insurer. Incompetent or inadequate claims personnel force insureds and claimants to lawyers.

Every study performed on claims establishes that claims with an insured or claimant represented

by counsel cost more than those where counsel is not involved. Prompt, effective and

professional claims handling saves money and fulfills the promises made when the insurer sold

the policy.

First-party bad faith suits are still available in most states of the United States. In those states and

countries where the tort of bad faith (TBF) is not the law, one needs only to convince the courts

to create a TBF. Insurers should remove their heads from the sand, look around, and protect

themselves against multiple lawsuits. A cost-effective defense to bad faith claims is a claim staff

filled with insurance claims professionals dedicated to excellence in claims handling. Insurers

have found that insurance claims professionals resolve more claims for less money without the

involvement of counsel for the insured.

Profits, thin as they are, will continue to move rapidly into negative territory. Punitive damages

will deplete reserves. Insurers will quickly question why they are writing insurance. Some will

escape the jurisdictions that have a TBF. Those who remain will either adopt a program requiring

excellence in claims handling from every member of their claims staff, or fail. Insurance is a

business. It must change if it is to survive. It must rethink the firing of experienced claims staff

and reductions in training to save "expense."


Insurance claims professionals are:

♦ People who can read and understand the insurance policies issued by the insurer.

♦ People who understand the promises made by the policy and their obligation, as an

insurer's claims staff, to fulfill the promises made.

They are all competent investigators. They have empathy and recognize the difference between

empathy and sympathy. They understand medicine relating to traumatic injuries and are

sufficiently versed in tort law to deal with lawyers as equals.

An insurer whose claims staff is made up of people who are less than Insurance Claims

Professionals will be destroyed by the new tort of third party bad faith.

Operation Restore Trust

In May 1995, President Clinton launched Operation Restore Trust (ORT) to develop several

innovations in fighting fraud and abuse in Medicare. During a two-year demonstration, ORT

identified:

� $23 in overpayments for every $1 spent looking at home health care, skilled nursing

facilities, and suppliers of durable medical equipment

� 2,700 fraudulent home care providers and entities who were then excluded from doing

business with Medicare and other federal and State health care programs

Medicare has incorporated many of the methods first piloted in ORT to put illegitimate providers

and suppliers out of work. For example, efforts to fight durable medical equipment fraud and

abuse in 1997 have produced the following results:

� convicted fifty-nine suppliers on fraud and abuse charges

� denying $509.7 million in improper payments before they were made

Medicare and its contractors actively work to prevent attempts to defraud Medicare and to support

investigations and prosecutions of such defrauders. The contractors to the HHS Inspector General began

many of the successful law enforcement actions through Medicare contractors and regional office staff

identification of problems and issues, and through referrals.

Making Insurance Fraud a Crime

Model legislation has been developed to combat the problem. Various states can enact provisions

that would make insurance fraud a specific crime with appropriate penalties, including restitution


for victims, or require insurers to commit to specific plans on how they propose to prevent and

detect fraud. These states can even require claims forms and insurance applications to carry a

warning that insurance fraud is illegal and a serious crime; require administrative action against

licensed individuals or businesses - medical providers, lawyers, insurance agents, adjusters,

contractors and body shops - upon conviction of insurance fraud, and provide immunity to

insurers when sharing fraud information with other insurers, fraud investigators, and law

enforcement.

It is also important for various states to enact provisions to establish fully functioning fraud

bureaus in states with moderate or severe problems of insurance fraud. The bureaus should have

subpoena power and fining authority and should work with law enforcement and industry to

investigate fraud.

False Advertising

Insurers who are not authorized to transact business in a specific state are prohibited from

sending advertisements, which are designed to induce that state’s residents to purchase

insurance. These acts were enacted to protect insurance consumers from insurers not authorized

to transact business in their state. These unauthorized insurers may be any insurance company

organized under the laws of another state, as well as any territory of the United States or any

foreign country.

Since anyone who is not so authorized in the first place cannot conduct the business of insurance

within a particular state anyway, the purpose of these acts is to protect insurance consumers from

misrepresentation. No unauthorized insurer may issue any advertisement, estimate, or

illustration, which misrepresents its financial condition, the terms of its policy contracts, benefits,

advantages, dividends, etc. This includes newspaper and magazine ads, radio, television, and all

circulars, pamphlets, letters, flyers, etc. If the insurance commissioner of one state has reason to

believe that an insurer is engaging in this unlawful advertising, in some states he must notify the

insurance supervisory official in the state of that insurer.

Unfair Claims Settlement Practices

There has been a great amount of legislation created to protect insurance consumers with respect

to unfair claims settlement practices. No insurer in any state may engage in unfair claims

settlement practices. Some acts that are prohibited are:

� the failure to acknowledge, with reasonable promptness, appropriate communications

concerning claims

� knowingly misrepresenting to a claimant pertinent facts or policy provisions which relate

to his coverage


� the failure to adopt and implement effective and efficient standards for the prompt

investigation of claims

� not attempting, in good faith, to make a prompt, fair, and equitable settlement of a claim

submitted in which liability is reasonably clear

� compelling policy holders to initiate lawsuits in order to recover amounts due under

policy coverage by offering to settle for an amount substantially less than is ultimately

recovered by the claimant

� the failure to maintain a complete record of all of the complaints received during recent

years or since the date of the last examination by the insurance commissioner, whichever

is shorter. This record must indicate the total number of complaints, their classification

by line of insurance, the nature of each complaint, their disposition, and the time to

process each complaint

� committing any other actions which the state defines as an unfair claim settlement

practice

The Health Insurance Portability and Accountability Act

This law creates minimum federal standards for health care insurance. The main goal of the

legislation is to provide employees with continuous, portable health insurance, and to prevent

insurance companies from denying coverage for individuals with preexisting conditions. The law

mandates test marketing of medical savings accounts, increases health insurance deductions by

the year 2006, and makes long-term care expenses and insurance deductible.

Significant fraud and abuse provisions were included in the Health Insurance Portability and

Accountability Act. This law creates several new criminal offenses with regard to health care

fraud. It also extends the coverage of these laws to all health care programs--not just Medicare

and Medicaid.

The medical community succeeded in convincing the Congress to adopt the "knowing and

willful" standard in the final version of the bill signed into law by President Clinton. The term

"willful" is essential to ensure that inadvertent and accidental conduct are not considered

criminal. The newly created criminal offenses subject to the "knowing and willful" standard

include healthcare fraud, theft or embezzlement, false statements relating to health care matters,

obstruction of criminal investigations of health care offenses and laundering of monetary

instruments.

In addition, the fraud and abuse provisions provide some clarification on the civil monetary

penalties imposed. The law increases the existing $2,000 penalty to $10,000 for each day the

prohibited relationship occurs and also imposes a $10,000 penalty for each item or transaction

(that is, each incident of incorrect coding).


This law also clarifies existing law and specifically spells out that incorrect coding can be

subjected to civil penalties. It states that a civil penalty can be assessed for a claim that the

Secretary of the Department of Health and Human Services determines is for a medical or other

item or service that the person knows or should know was not provided as claimed.

The National Insurance Crime Bureau (NICB)

Armed with new technology and analytical and forecasting skills, the National Insurance Crime

Bureau (NICB) will help insurers go beyond managing potentially fraudulent claims to

predicting when and where fraud will occur before it happens.

It is information that can be used to anticipate fraud before it becomes a loss. And these benefits

lead to a not only better bottom line for any particular organization, but also less insurance crime

on the streets of America.

A NICB department will be responsible for delivering strategic information on existing patterns

and emerging trends of criminal activity that will help companies plan strategies and allocate

resources. At the same time, the department's tactical information products will deliver

information regarding a specific criminal event that can assist a company's investigations.

Multi-claim, multi-carrier investigations of major criminal activity, in cooperation with insurers

and law enforcement, are the top priority of the NICB's criminal investigation support services.

Through a realignment of field operations, companies can work more closely with a more

focused agent task force specializing in multi-claim, multi-carrier cases.

NICB also will be devoting more investigative resources to a port and border interdiction

program designed to stop stolen vehicles from leaving the country rather than allotting those

resources to recovery efforts from foreign soil. Training programs for insurers, law enforcement,

regulators and NICB staff are another core function. If we do not continue to stay on the leading

edge of training, we will slip behind the criminal enterprises as they devise new ways to defraud

insurance companies and the American public.


III

Identifying the Fraudsters

External fraud includes any fraudulent activity committed by applicants for insurance,

policyholders, third-party claimants, or professionals who provide insurance services to

claimants. These fraudulent activities include inflating or "padding" actual claims and fraudulent

inducements to issue fraudulent policies and/or establish a lower premium rate.

Internal fraud refers to fraud within the insurance industry itself. This activity includes bribery

of company officials, misrepresentation of facts by insurance company officers, directors,

employees, agents and brokers for their personal enrichment or to prevent regulators from taking

certain actions, etc.

External Insurance Fraud

Individuals and/or organized groups who defraud the insurance industry through a myriad of

sophisticated fraudulent schemes commit the most blatant type of external fraud. The most

egregious of these schemes involve staged automobile accident rings and the filing of multiple

fraudulent accident claims involving bogus or non-existent property damage. These schemes

may also include the corruption of an insurance company employee; typically an insurance

claims adjustor, to ensure the payment of the bogus claims. Upon payment, the parties involved

split the resultant proceeds.

Losses from fraud caused by managers and executives are sixteen times greater than those caused by non-managerial employees. Losses caused by men were four times those caused by women. Losses caused by perpetrators sixty and older were twenty-eight times those caused by perpetrators twenty years of age or younger. Losses caused by perpetrators with post-graduate degrees were more than five times greater than those caused by high school graduates. Characteristics of occupational fraud perpetrators could be as follows, if analyzing the perpetrators by position in the organization, gender, age, marital status, and education. The data indicates that non-managerial employees committed about 58% of the reported fraud and abuse cases, while managers committed 30% and owners and executives committed 12%. However, the median losses caused by non-managerial employees were significantly lower than those caused by managers and executives.

Con Artists


Often the perpetrators are white-collar professionals operating from medical centers, law offices,

auto repair shops, or even the house next door. With the cooperation of the insurance industry,

through the receipt of criminal referrals from industry intelligence, the FBI will target individuals

and/or organizations committing internal/external insurance fraud.

The FBI will then be able to initiate and conduct traditional investigations as well as utilize

sophisticated investigative techniques to apprehend the perpetrators. As a future goal, the FBI

will pursue the implementation of a mandatory criminal referral system of suspected fraudulent

activity.

The FBI will ensure the successful prosecution of these individuals to the fullest extent of the

law, often forcing their removal from the insurance industry and thus eliminating them from the

crime problem.

The FBI, in concert with the National Association of Insurance Commissioners (NAIC), is

attempting to identify the top echelon con artists who are defrauding the insurance industry.

Once identified, these con artists will be targeted in proactive investigations utilizing

sophisticated investigative techniques in an effort to neutralize their efforts prior to their criminal

activities becoming a larger, more egregious problem within the industry.

Auto Salvage Fraud

As a result of their efforts to salvage more cash from a crash, insurers have given risen to a little-

known industry that sells poorly repaired cars to unsuspecting consumers. When a car or truck

has been so badly damaged in an accident that an insurance company declares it a total loss, it

usually means the labor and parts required for proper repair would cost too much, given the

vehicle's worth. The public might think that would put severely damaged vehicles on a one-way

trip to the junkyard for parts or scrap.

Instead, hundreds of thousands of these wrecks get right back on the road. Insurance companies,

which own the piles of twisted metal after they pay off a total-loss claim, have discovered they

can get more money for the bang-ups if they sell the wrecks at salvage auctions. The practice has

fostered a thriving industry that rebuilds severely damaged vehicles--craftily enough to hide their

traumatic pasts yet cheaply enough to turn a sizable profit.

This shadow auto industry now annually beats, bends, and bangs out as many as 400,000 rebuilt

wrecks that are five or fewer model-years old, according to surveys, and no authority keeps track

of the total. That represents 3% of the 13 million used vehicles sold in that model-year group in

2001. But the number looms large, because rebuilt wrecks, like all used vehicles, are not subject

to federal safety standards.


Insurers say that once they sell the vehicle to a salvage yard, there is very little they can do to

influence the process. The Highway Loss Data Institute (HLDI), a leading highway-safety

institute funded by the insurance industry, and several other data providers hold key information

that could help reveal the scope of the problem. But industry officials say they cannot release

their data, citing confidentiality concerns and contractual prohibitions. As a result, the full extent

of this murky enterprise is largely unknown.

Surveys show that 20% of vehicles that were damaged severely enough to be "totaled"--that is,

labeled by an insurer as not worth repairing--after fatal accidents in the U.S. from 1993 through

1999 were rebuilt, reregistered, and put right back on the road.

Investigations have revealed that there is no way for consumers to know for sure the history of a

used vehicle. States have widely differing laws concerning rebuilding practices and damage

disclosure, and critical oversight is lacking in most states. It is not uncommon for rebuilt wrecks

to hopscotch from state to state, receiving new titles "washed" of any hint of past problems.

Overall, 30% of vehicles that had been totaled after a fatal accident and then put back on the road

with a title that disclosed the damage had that disclosure subsequently removed. Consumers

should especially steer clear of newer-model vehicles that have been totaled and rebuilt, unless a

trusted mechanic can vouch for the repairs. The damage is usually severe, which can encourage

rebuilders to skimp on repairs to make a profit.

Incomplete Title Disclosure

Used-car buyers have always had to be wary of unscrupulous individuals fobbing off a "cream

puff" previously creamed in an accident. In all states except Wyoming and the District of

Columbia, the used car's certificate of title is supposed to tell about severe accident damage. But

title disclosure is incomplete. Accident disclosure is required only if damage exceeds typically

70% or more of the vehicle's pre-accident book value or the insurer declares the vehicle a total

loss. Lesser damage is not disclosed on the title.

In most cases, when an insurance company declares a total loss, it pays off the policyholder's

claim and takes title to the vehicle. Often, the insurer must then apply for a different type of title

for that vehicle, one generically known as "salvage," though different states use other

designations, including "junk," "unrebuildable," "scrap," and "parts only." Whatever it is called,

a salvage title's key distinction is that it declares the wreck not worth repairing, as far as the

insurer is concerned, and does not allow the vehicle to be operated on public roads.

At this point, the wreck itself usually sits at a salvage auction company, which often obtains the

salvage title and handles other paperwork as agent for the insurer. From here, the car or truck

might be sold to a dismantler for parts, a scrap processor, or a rebuilder or used-car dealer who

works with a rebuilder to put the vehicle back together.


In any event, the salvage title is transferred from the insurer to the buyer. If the wreck is rebuilt,

it must regain a type of title that allows it to again operate on public roads. That is almost easier

done than said because the majority of states require no special inspection of rebuilt wrecks.

When inspection is required, it is often cursory, industry experts say.

When a new title is issued for a rebuilt wreck, disclosure about prior damage leaves much to be

desired. Every state uses different designations and methods of notice. The lack of uniform

titling is made worse by the fact that states cannot easily share information with one another. The

National Motor Vehicle Title Information System, a computerized database designed to connect

all state motor vehicle departments, may alleviate the problem, but it has been bogged down in

development and may not be fully operational for several years.

Diminished Book Value

Salvage disclosure leaves another mark on a vehicle: It diminishes book value--even if the car or

truck is rebuilt as good as new. If the title does not divulge the accident, a vehicle can be sold for

its regular book value. But if the damage becomes known, book value diminishes dramatically.

At best, a vehicle that has had a salvage title would be worth half its Blue Book value, even after

repair.

The Safety Issue

Rebuilders have been around for as long as there have been car accidents. And many do high-

quality work. But a different group of rebuilders elbowed their way into salvage auction yards in

the 1990s. These rebuilders were on the prowl for quick, high profits. They are sometimes called

“backyarders” and they often have neither the expertise nor the equipment to do the job right.

It is possible to make repairs to a vehicle that had been involved in a severe crash in such a way

that the resulting vehicle has a structure that is similar to a vehicle that has not crashed. But if it

is not properly repaired, the safety performance of the original product could be compromised.

To understand how easily safety can be shortchanged, we have to consider new-car design and

development. Today's unibody vehicles are engineered as a single crash-protection unit. All

individual components are aligned to work together to one end:

� That the passengers can survive the crash energy created when 3,000 to 5,000 pounds of

machinery rapidly decelerates from 55, 35, or 20 mph to zero with minimal injury.


New vehicles must comply with federal safety standards. To test and refine their design,

automakers conduct up to 100 crashes using fifty or more prototypes that cost $300,000 to

$800,000 each. By contrast, the rebuilding industry is subject to almost none of that rigor.

Rebuilding Shortcuts If rebuilders replace all damaged parts, the level of safety should be the same, because the repairer would be simply replicating the original safety engineering. That, however, can be expensive, so even reputable mechanics take shortcuts. Experienced hands can do that without shortchanging safety. The problem comes when inexperienced rebuilders whose primary goal is to make some fast money make such repairs. By so doing, they can create a vehicle very different from the one built and tested extensively by the original manufacturer.

Potential problem areas include:

Sectioning. Instead of replacing a damaged critical structural component with a new one,

rebuilders cut out only the damaged section and splice in a new piece. Experts warn that

sectioning must be performed only by a properly trained technician, because it requires the use of

accepted procedures, and must maintain the vehicle's "original energy management

characteristics intact to ensure the proper functioning of passenger safety devices.

Bending, banging, cutting, or welding. Pry bars, hammers, and welding torches provide

cheaper fixes than replacement with a whole new part. The problem is that when high-strength

steel alloys are torched, some lose their strength and rigidity while others lose their flexibility. If

the rigidity of the metal changes, the crash pulse that the air-bag sensor has to feel may change

and the air bag may fire too soon or too late.

Clipping. This procedure involves cutting two smashed vehicles of the same make and model in

half and welding the undamaged half of one to the undamaged half of the other. Again, clipping

can be done in a safe manner, provided it is done properly. But without federal safety standards

and government inspections, the field is wide open for carelessness and inferior work.

Cheating on air bags. Air bags are expensive; so many lower-cost vehicles get totaled because

of air-bag deployment. Rebuilders can save thousands by forgetting the air bags. There are cars

out there right now that had air bags deployed and were rebuilt and never had a new bag put in.

Alternatively, rebuilders can use recycled air bags, which are cheaper than factory-fresh

replacements. The Insurance Institute for Highway Safety (IIHS) recommends against recycled

air bags because of the risk that they may come from the hundreds to thousands of cars that are

flooded each year. The air-bag system's electronic diagnostics cannot check whether the module

itself, the folded air bag, gets damp or wet. If it does get wet, that can impede the way the air bag

unfolds.


Not replacing safety belts. The most effective piece of safety equipment is also the most easily

overlooked by a rebuilder and used-car buyer. Belts protect passengers and help them gradually

decelerate by stretching, which permanently damages the belt. The belt retractors have metal

spikes that become permanently damaged as well, as they bite into the belt to hold the load

constant. Belts and retractors should be replaced after a frontal crash at speeds of 15 mph or

higher or if the belts are frayed or their fibers have been partially melted together by friction.

Internal corrosion. Sloppy welds or failure to apply zinc-based undercoating--though generous

undercoating is a favorite cover-up for shoddy workmanship--can create this. But the biggest

corrosion problems start with vehicles that have been submerged above the doorsill in

floodwaters--especially salt water--that invade the sensitive electronic components in the

dashboard and engine. Air-bag sensors and electronics can be harmed as well.

Flood cars can be properly restored, but it takes about 75 hours to strip the car down to its shell,

replace all electronics, wash the upholstery, and dry up and protect wiring and connections.

Because much of that work can be left undone and undetected, other collision repairers and

experts recommend that consumers avoid flood vehicles.

With no standards and no inspections, there is no way to know whether a rebuilt car is safe.

Repairers say they can rebuild these cars from the ground up, and they can make them safe, but

the facts remain that we cannot know for sure unless they are inspected, and the majority of

states have no inspection.

Rebuilding Regulations

Insurers should support meaningful legislation to regulate rebuilding, and Congress and states

should require the following:

� Claims reporting. Since accident damage is the first event that leads to all other problems

involving rebuilt vehicles, insurers should be required to report to state motor-vehicle

authorities the vehicle identification number of every vehicle that is totaled or that

sustains frame or flood damage.

� Release of claim data. To provide consumers with the best information about past

accidents, federal legislation should require insurers and their data-service vendors to

make their existing accident and total-loss databases available to motor vehicle

departments--for a fee, if need be--so that authorities from all 50 states and consumers

can check whether a vehicle has been totaled or sustained major damage.

� Safety inspections. Every vehicle that has suffered frame damage or that has been totaled

and rebuilt should be required to be inspected for the quality of its repairs.

� Uniform titling. Congress should establish uniform titling standards in all states regarding

rebuilt vehicles.


Medical Mills

Medical mills are made up of co-conspirators, often medical professionals and lawyers who

unethically bill customers and insurance companies. Doctors involved in these mills might

overcharge for their services or bill patients for services that were not provided.

A medical mill consists of medical professionals, at times working with legal professionals and

recruiters, who rip off patients and insurance companies through unethical and fraudulent billing

practices. The degrees of fraudulent involvement in a medical mill often depend on the amount

of risk a medical professional is willing to take.

As an accident victim, be aware of lawyers who solicit you immediately after the accident. Also watch out for lawyers who require you to see a specific doctor they personally recommend. Be equally cautious with doctors who want to give what seems to be an excessive amount of tests and medication.

These medical professionals purposely overcharge for services not rendered, solicit workers to

file fraudulent or exaggerated claims and file standardized (or "boilerplated") diagnoses and bills.

A medical provider, independently or conspiring with the claimant, bills the insurers for

nonexistent or highly exaggerated medical treatments. Dishonest lawyers then initiate

negotiations on settlements based upon these fraudulent or exaggerated medical claims. Some

medical mills may also use "runners" or "cappers" to recruit clients and solicit workers to file

fraudulent or exaggerated claims.

Internal Insurance Fraud

The most blatant type of internal insurance fraud is the creation of a company using overvalued, fictitious, and/or fraudulent rental assets to generate insurance premiums. Con artists who create these companies utilize sophisticated schemes for verification of fraudulent financial statements submitted to the state insurance regulatory body to hide the true nature of the fictitious assets. These schemes include:

• CPA/accountant payoffs leading to false opinion statements

• engagement of offshore accountants for the preparation of fraudulent financial statements

• establishment of an account with a securities brokerage firm with "deposited funds" from

an offshore bank owned by the fraudsters — the funds are fictitious but are verified

through correspondence with the offshore subject-owned bank. Internal fraud also includes premium diversion schemes perpetrated by insurance company employees, officers, directors, and/or owners whereby the money collected from policyholders is diverted to their own personal benefit.


This is usually done to the detriment of the policyholders because the policyholders are not actually insured (the premiums have been diverted and no insurance coverage is in effect); and/or subsequent claims by policyholders are not paid because of a lack of assets due to various premium diversion schemes.

Another type of internal fraud involves surety bond fraud. Private developers and governmental entities require contractors to post surety bonds before they award a construction contract. Large contractors with prior experience have little difficulty acquiring adequate bonding. The problem occurs with small or new contractors having little or no work history. Existing bonding companies are often reluctant to accept new customers, which creates a demand for insurance companies willing to accept these unknown risks. The con artists form insurance companies for the sole purpose of writing hard-to-place surety bonds, demanding higher premiums, regardless of proper underwriting, until a major claim puts them out of business.


IV

Fraud Within the Insurance Process

Preventing Fraud in the Insurance Agency

Insurance fraud schemes take place at different times in the life of the policy. This chapter will

look at those times and how the insurance agency can help fight against such schemes.

The Marketing Department and Fraud Prevention

Insurance fraud prevention and detection began with the insurance producer who sells the

insurance policy. He usually has the first contact with the insurance risk. An agent may be

defined as a person who represents and acts in behalf of another person in dealing with third

persons. The person who is represented by the agent is called the principal. The agent is always

subject to the control of the principal he represents.

In selling, the company is the principal, the salesman is the agent, and the customer is the third

party. As the principal, the company has the legal right to enter into valid contracts. When the

company hires the salesman, it empowers him to take the place of the company in its business

transactions with third persons. The contract that results from the salesman’s actions as an agent

is binding on the principal and the third party. The agent is the go-between who brings the

contracting parties together.

The authorization of the salesman by the company may be either written or implied, but in either

case the salesman binds the company by his acts. The company is responsible for what the agent

does as long as the agent is acting within the limits of the power that the company has given him.

When the salesman exceeds his authority, the third party may hold him personally liable for any

injury that results.

The Underwriting Department & Fraud Prevention

Underwriters are responsible for evaluating and accepting or rejecting the insurance applications

submitted by producers. Underwriters are usually the second ones to encounter insurance fraud

schemes. Successful underwriters remain especially alert to the possibilities that moral hazards

may be associated with a risk.


Concealment, Misrepresentation or Fraud

Fraud occurs when a person knowingly or intentionally conceals, misrepresents, and makes a

false statement to either deny or obtain workers' compensation benefits or insurance coverage, or

otherwise profit from the deceit. The key to conviction is proving in court that the

misrepresentation or concealment occurred knowingly or intentionally.

“Material misrepresentation," as it pertains to insurance contracts, is an untrue fact, which affects

the risk undertaken by the insurer. Thus, the insured's misrepresentation must be shown to have

caused a substantial increase in the risk insured against, and would have, if the

misrepresentations were known by the insurer, caused a rejection of the application.

Warranties

A warranty by an insurance applicant is the applicant’s guarantee that the facts are true, as stated,

and the promise to fulfill certain conditions to keep the contract effective will be kept.

Contract Fraud vs. Premium Fraud

Misstatements in a policy application that are made to induce the insurance company to enter

into the contract are referred to as contract fraud.

Misrepresentations that induce the insurance company to charge a lower premium are premium

fraud or rate evasion.

Insurance Fraud and the Claims Department

First-Party and Third-Party Claims

An insurer dedicated to claims excellence should expect its claims professionals to investigate

each claim thoroughly with a view to pay the indemnity the insurer promised. For example, an

insurance claims professional faced with a third-party liability claim, like an automobile

accident, is required by the insurer that employs him or her to do no less than the following:

• Contact the insured no later than 24 hours from the time of notice and schedule an

appointment to commence the investigation of the reported loss.

• Before meeting with the insured, read the wording of the policy issued to the insured and

any special endorsements or modifications to the policy.

• Obtain a copy of the application submitted by the insured.


• Meet with the insured immediately but no later than 48 hours after the notice of loss. At

the first meeting determine:

o If a determination is made from the interview of the insured, witnesses and

claimant that the insured is exposed to liability to the claimants the claims

professional should immediately:

� Gain control of the claimant by offering a no-strings advance payment.

� Show empathy to the claimant and offer help.

� Advise the claimant that he or she has a right to obtain an attorney, if he or

she wants, at any time before the running of the statute of limitations, but

if a lawyer is hired immediately, the claims professional probably cannot

make advance payments.

� Ascertain that the claimant knows when the statute of limitations will run,

and confirm that fact in writing.

Once the injuries have resolved, sit down in person with the claimant and negotiate a fair and

reasonable settlement of all injuries received. Explain in detail, confirmed by a written

explanation, the effect of a release of all claims; so that there is no question that once signed, no

further money will flow to the claimant.

Keep close contact with the claimant, no more than once every thirty days, to determine whether

his injuries are resolving. Confirm that the claimant understands how the offer of settlement is

calculated. Make clear to him that he can keep 100% of any settlement reached. Evaluate

treatment to claimant and, if appropriate, pay the medical bills and out-of-pocket expenses of the

claimant immediately.

Explain to the claimant that the claims professional is patient and the offer of settlement will

remain open for a reasonable time so that he can obtain the advice and counsel of an attorney.

Claims and Misrepresentation

Careful and cost-effective verification of applications targeting material misrepresentations

should be a standard practice by all insurance companies. This will help eliminate application

fraud to a great degree. This practice also should be communicated to applicants to dispel any

possible notion that insurers do not check applications thoroughly. Claim submissions should be

scrutinized for evidence of potential fraud and investigated accordingly.

Company anti-fraud activities should be widely publicized so consumers know the risk of

committing fraud on application and/or claims and are aware of what insurers are doing to

protect their customers from the cost of this crime. Diligent efforts need to be undertaken to

uncover situations where anti-fraud efforts have led to reduced rates for consumers. Such cause-

and-effect relationship needs to be publicized as broadly as possible to convince consumers that

they will benefit from anti-fraud efforts.


In assessing which claims practices engender the most customer satisfaction; companies should

consider the potential positive implications for attitudes about insurance fraud. The claims

process should be viewed as an opportunity to build credibility with insureds, which likely will

help to lower their tolerance for fraud. The insurance industry should explore the feasibility of a

reward system to encourage the reporting of fraud.

False Swearing

When an insured knowingly and willfully overestimates the value of the property in his proof of

loss with the intention of deceiving an insurer, such overvaluation may allow the insurer to avoid

the policy and defeat any right of the insured to recover thereon. The insured's knowledge of the

overvaluation is not necessary in order to work a forfeiture of this right under the policy. It is

sufficient if he swears with disregard to the truth. In other words, a reckless overvaluation of the

property claimed equally voids the policy.

On the other hand, Courts generally hold that the term "fraud or false swearing," as used in a fire

insurance policy, does not refer to unintentional error. Thus, the rights of the insured are in no

way prejudiced by overvaluation of property, which the insured inadvertently and innocently

made in his proof of loss.

Fraud Prevention

To avoid claims of bad faith, to avoid punitive damages, to avoid losses, and to make a profit,

insurers must maintain claim staffs that are dedicated to excellence in claims handling. That

means that they will make sure that doing the following satisfies every promise made in every

policy:

� Insurers must only hire insurance claims professionals.

� Insurers must train the claims staff to be insurance claims professionals.

� Insurers must require that the claims staff treat every insured with good faith and fair

dealing.

� Insurers must demand excellence in claims handling from the claims staff.

The insurance industry for the last fifteen years has decimated the number of insurance claims

professionals for insurers to hire. If any experienced claims professionals exist in the insurer's

staff, the insurer must cherish and nurture them.

If none are available, the insurer has no option but to train its people. Those who treat all

insureds and claimants with good faith and fair dealing and provide excellence in claims

handling are honored with increases in earnings. The insurer must immediately eliminate those

who do not provide excellence in claims handling from the claims staff.


Once the claims person has all of the tools needed to analyze, investigate, adjust and settle

insurance claims, the insurer must demand that the claims person provide excellence in claims

service. To provide such service the claims person who wants to become an insurance claims

professional must apply all of the skills daily and in each contact with the insured or claimant.


V

Patterns and Indicators of Fraudulent

Claims

The insurance agent should remember that most people are honest, and most claims are legitimate. Every

claim should be handled with the attitude that it deserves to be paid unless it happens to be proven

otherwise.

MORAL Hazard

Moral hazard is a condition that exists when a person may intentionally try to cause a loss or may

exaggerate a loss that has occurred. Nobody knows for sure how many car or building fires may

be started intentionally by people who would rather have the insurance money than the car or

building.

More common are exaggerated or inflated claims. An insured may claim that four things were

lost rather than the actual three, or that the items were worth more than their actual value. In

liability situations, third-party claimants often exaggerate their personal injuries and property

damage, and sympathetic physicians, lawyers, auto body shops, and contractors may support

these exaggerations and drive up the cost of claims.

MORALE Hazard

Morale hazard is a condition that exists when a person is less careful because of the existence of

insurance. Morale hazard does not involve an intent to cause or exaggerate a loss. Instead, the

insured becomes careless about potential losses because insurance is available. Leaving the keys

in an unlocked car or allowing fire hazards to remain uncorrected are examples of morale hazard.

Morale hazard results in additional losses that drive up the costs of insurance because of injuries

and damage that could have been prevented.

Fraud detection performance indicators are highly misleading. If the amount of detected fraud

increases, it may be interpreted either as the result of improvements in the organization's

detection system, or as an increase in the underlying incidence of fraud. This ambiguity pervades

much of the typical organization's fraud-reporting.


In addition, many organizations are unclear about the merits of preventive or reactive strategies

and about how to best integrate different approaches into their policies. Some insurance

companies measure their fraud-control effectiveness based on their ability to achieve "record

recoveries," while others give priority to deterring fraud up front and regard chasing lost cash

after the fact as fruitless.

Patterns of Insurance Fraud

Understanding insurance fraud indicators is vital. Fraud indicators should never be used as the

legal basis for denying a claim – that should only be done based on the law, the evidence, and the

facts. Rather, the real value of fraud indicators is to identify suspected fraudulent claims so that

investigative resources can be targeted on the most deserving cases.

Experts have observed through the years that there are certain patterns that are common to

fraudulent claims, and certain fraud indicators exist within these patterns. Insurance fraud crimes

do not always fit these patterns, but the claim professional needs to be aware of them and the

possibility of them occurring.

Time of Loss

Studies have shown that insurance fraud has frequently taken place relatively shortly after

property, casualty and health insurance policies have been purchased.

Fraud perpetrators have usually attempted to minimize the risk of being caught in the act, so they

have often been very careful about when they performed their crimes.

Unusual conditions or circumstances do not automatically label a claim fraudulent. Sometimes

claims are made for highly unusual accidents or occurrences that actually happened. Sometimes

something unusual about the claim will cause the claim handler to pause and take a closer look at

the case.

Purchase of an Insurance Policy

Circumstances surrounding the insurance policy have also been known to indicate elements of

potential fraud. For example, studies show that individuals who have committed insurance fraud

frequently were strangers who simply walked into the producer’s office one day, plunked down

some money and asked to buy insurance. They were not pre-qualified or solicited by the

producer.


Circumstances in Claimant’s Life

Life Style ~ Another common pattern is the insured’s or other claimant’s lifestyle, which has

characteristics that differ somewhat from the average.

Address ~ Unusual circumstances surrounding insureds’ or other claimants’ addresses can also

present fraud possibility factors.

Telephone ~ Fraud perpetrators have also give false telephone information.

Employment or Own Business ~ People have succumbed to the temptation to commit insurance

fraud in order to alleviate the money problems that stem from their employment, career or

business problems.

Attitude and Demeanor ~ The attitude and demeanor of insureds or other claimants and

witnesses toward others has sometimes suggested the need for further investigations of claims.

The Claim Papers

The contents of claim papers, such as legal documents, bills, and receipts, have sometimes

created doubts in the claim handler’s mind about the legitimacy of the claim.

Receipts and Invoices

In some situations, receipts and invoices that are submitted as proof of claims do not look quite

right; there is something about them that generates distrust. Other times, the lack of receipts or

invoices has represented fraud indicators.

Statements

The statements that insureds, other claimants, and witnesses have made or purposely have not

made have sometimes led claim handlers to suspect fraud.

The Claimant’s Attorney

Sometimes, facts that are learned about or from claimants’ attorneys have set off suspicions that

need to be investigated.


VI

Fraudulent Claims & the Insurance Industry

Insurance fraud is an attempt to obtain money from insurance companies by arranging a loss or

accident or falsifying information on applications for insurance claims. Fraud can range from

large, organized operations involving hundreds of thousands of dollars to an otherwise honest

individual who overstates a legitimate claim. In most of its forms, insurance fraud is a felony.

When caught, prosecuted and found guilty, most fraud perpetrators are required to make

restitution and jail time is also commonly imposed.

Quantifying the extent of insurance fraud is difficult because much of it goes undetected. Private

passenger auto insurance and Workers’ Compensation are believed to be most susceptible from

the property/casualty (P/C) insurance standpoint. Health insurance is also subject to a high

incidence of fraud.

The Impact on Property and Casualty Lines

In today's changing business climate, property and casualty insurance companies need to take

advantage of every opportunity to manage their claims experience. Many insurance investigation

professionals are a key resource for the industry in this critical area by performing claims

reviews and assessments, providing fraud prevention and detection services, and delivering fraud

education and training programs to the insurance community.

Many insurance claims filed are overstated. An overstatement of a claim may occur as a result of

an innocent misunderstanding, a misinterpretation of the terms of the policy, or a deliberate

attempt to deceive the insurer. The insured may take the view that the claim, as initially filed, is

an opening bargaining position that will invariably be subject to negotiations. For these reasons,

insurers recognize the need to analyze suspicious, significant or complicated claims.

Insurance fraud is recognized as a major problem for the industry. It has been estimated that

fraud costs, in some places property and casualty insurers between $1 billion and $2 billion each

year--a staggering 10% to 20% of all insurance claims. Claims fraud affects not only the

insurance industry, but also all consumers who ultimately pay for fraudulent claims through

higher premiums. The ability of the industry to pass along the costs of insurance fraud through

major premium increases in the future may be limited. By understanding the risks of fraud and

knowing where and how claims fraud occurs, it is possible to reduce losses from fraud.


Homeowners’ Insurance Fraud

Homeowners’ insurance fraud is committed whenever a person knowingly submits a claim under

a homeowner’s policy for more than the actual loss sustained. In short, it is lying about an

insurance claim. It is a crime. It is also a crime to use false, incomplete or misleading

information--such as a receipt, repair estimate, statement of loss, legal deposition, or even a

photo--to support such a claim. It is even a crime to help someone else prepare false

documentation to support a false claim. And it does not really matter whether the claim is paid or

not. It is still a crime.

Arson Fraud

Arson fraud is insurance fraud is committed by property owners who deliberately destroy or

damage their property by fire for the purpose of collecting from their insurance companies. The

motive for this act is profit and individuals who find themselves in difficult financial positions,

such as high debt, possible foreclosure or bankruptcy, usually commit it.

The typical arson fraud involves an individual or a conspirator setting fire to their home, business

or automobile. The intent is to collect insurance money to pay off a loan or mortgage balance,

which may be in excess of the value of the property.

Business owners also commit arson fraud for the same reasons as individuals. However, business

owners are often more savvy than individuals when it comes to arson fraud and the monetary

impact is greater. They sometimes hire professional arsonists to perform the act. In addition, they

are more adept at perpetrating more elaborate schemes such as claiming damage to inventory that

did not exist or was removed from the building before the fire was set.

Water Damage Fraud

In June of 2002, some individuals were arrested and indicted for scamming insurers out of $5

million by intentionally flooding their homes and filing mold and water damage insurance

claims. Investigators said that the individuals involved had purchased homes with full insurance

coverage.

Water hoses or damaged existing water lines inside the houses were intentionally used to flood

the interiors. The water lines would be repaired before an adjuster arrived. Attempts were made

to obtain the full policy limits of the insurance coverage along with additional living expenses.

Those arrested faced charges of money laundering, mail fraud, conspiracy and monetary

transactions with criminally derived property, and if found guilty, they could face up to 20 years

in prison and substantial fines.


Burglary & Theft Fraud

Generally burglary and theft fraud schemes have been staged events, and often, they have

centered on padded appraised values of personal property. A property owner falsely reports items

stolen or exaggerates the values of items taken in a burglary to collect insurance money.

Auto Insurance Fraud

Auto insurance fraud is an enormous problem in the United States -- one that costs some states

millions of dollars each and every year. Unfortunately, many people do not realize the severity of

this crime. There exists a mistaken perception that this type of fraud is somehow harmless and

acceptable. All people are victims of this illegal activity, paying in the form of higher insurance

premiums -- hundreds of dollars more than they would otherwise be.

Fraud can come in many different sizes and varieties, all of which are costly to each driver. It can

be as simple as misrepresenting facts on insurance applications and inflating insurance claims or

as serious as staging accidents and submitting claim forms for injuries or damage that never

occurred.

Achieving success depends on public awareness of the problem and willingness to assist our

efforts. Under some states’ Insurance Law, licensees of the Insurance Department (such as

insurers, agents, and brokers) are required to report any suspected fraudulent acts to the

Department’s Insurance Fraud Bureau.

Types of Schemes

Here are some commonly used fraud definitions/schemes in accidents that are caused

intentionally or they have never happened:

Cappers and/or Runners ~ Third-party middlemen who recruit insurance defrauders (such as

drivers and passengers) and befriend legitimate accident victims for medical mills.

Padding ~ Intentionally inflating or exaggerating a claim.

Swoop and Squat ~ Two vehicles work as a team to set up an accident. While driving, one

vehicle pulls in front of victim and the other along side, blocking the victim in. The lead car

stops short causing the victim to rear-end him. The car that pulled up along side serves as a block

to prevent victim from taking evasive action. Lead car alleges that someone cut him off.


Drive Down ~ As an unsuspecting driver tries to merge into traffic, the suspect driver yields,

waving innocent driver on. As the innocent driver merges, suspect driver intentionally collides

with victim and denies giving him the right of way.

Start and Stop ~ Stopped in the same lane of traffic, claimant's vehicle is positioned directly in

front of victim's vehicle. The claimant starts to move forward, as does the victim behind him. For

no reason, the claimant vehicle suddenly stops short causing the victim to rear-end him.

Jump In ~ A claimant who was not in vehicle at time of loss, but nevertheless, submits a claim

for bodily injury.

False Auto Insurance Claim

Auto insurance fraud is committed whenever someone intentionally lies to an insurance company

about a claim involving their car insurance. In some states, it is a felony to submit a false auto

insurance claim. It is a criminal act to use untrue or misleading documentation to support a false

claim. This includes faked, falsified or exaggerated receipts, bills, estimates, test results, or any

evidence of injury, loss or expense. It is even a crime to assist someone else in submitting or

documenting a false claim.

Five of the most common ways of committing auto insurance fraud are:

False Parts Claims ~ Auto parts are removed, hidden and then reported stolen. After the

insurance is paid, the parts are reinstalled.

Owner Dumping ~ A car is falsely reported stolen. The owner then collects a claim payment

from the insurance company while the car parts are sold to salvage yards and auto shops.

Abandoned Vehicles ~ A car is left on the street or in a parking lot in the hopes it will be stolen

or destroyed. The owner then reports the vehicle stolen to the police and collects from the

insurance company.

Salvage Switches ~ the vehicle identification number tag is taken from a junked car and

switched to a similar make and model that an owner has fraudulently reported stolen. With the

false number in place, the car is then re-registered in another state and sold.

Staged Auto Accidents ~ an auto accident is staged, usually in some kind of conspiracy between

the owner of the car, doctors, and lawyers, to falsify a claim and collect from the insurance

company. The vast majority of the fraud reports are for staged automobile accidents. "Staged

accident" is a catch all term for many types of fraudulent automobile claims perpetrated against

insurers. Four most common scenarios are


• caused accidents

• staged accidents

• paper accidents

• multiple policies

Auto Arson and Auto Theft Fraud

Auto arson and theft are often part of the same scheme. Arson is a leading cause of vehicle fires.

Someone pouring gasoline or kerosene on the seats and carpeting usually starts these fires. The

arsonist, who is either the owner of the automobile or has been hired by the owner, then throws a

lighted match into the vehicles.

Then the owner reports the fire to his insurance company saying that the vehicle caught on fire

for no apparent reason. Facts tell us that accidental fires generally occur in the wiring, fuel lines,

fuel filter, fuel pump, or carburetor. Newer model cars rarely catch fire due to a wiring problem.

Insured have fraudulently reported their vehicle stolen or vandalized in order to collect on

insurance. Staged burglaries range from the entire burglary being staged to simple inflation of a

claim for a legitimate burglary.

Workers’ Compensation Insurance

Businesses without standard workers' compensation insurance forfeit almost all their defenses

against lawsuits and may face unlimited liability if sued by injured employees. However, the

field of workers’ compensation insurance has been fertile for insurance fraud perpetrators.

Workers’ compensation fraud has primarily involved illegitimate or exaggerated claims and

premium fraud where payroll or job classifications have been falsified.

Each state has individually enacted workers’ compensation laws that provide employees the right

to collect from their employers for injury, disability or death that arises out of their employment

and is sustained in the course of employment.

There are five types of fraud commonly found in the workers' compensation system:

• injured worker benefit fraud

• insurance carrier fraud

• employer premium fraud

• health care provider fraud

• attorney fraud


Insurance carriers use several clues to identify a potential workers' compensation fraud case

including:

• when the injury occurred

• past history of workers' compensation claims

• frequent change of doctors

• employer classification codes not consistent with the duties normally associated with

the employer's type of business

• multiple businesses located at the same address

• duplicate medical billings

• health care providers attempting to bill an injured worker for medical services

provided on a workers' compensation claim

• incorrect information on attorney bills or duplicate billing

An estimated 25% of the general population knows someone that has committed workers'

compensation fraud:

• someone that has faked an injury or exaggerated symptoms in order to have time off

work with pay

• someone that was injured at home, but claimed it was work-related in order to receive

benefits

• someone receiving benefits and working a second job without claiming the income

• someone who has employees but not the proper workers' compensation insurance

coverage

• an employer misreporting payroll to keep the cost of premiums low

Dramatic increases in workers' compensation premiums throughout the late 1980s and early

1990s fueled unsubstantiated charges that costs were high in part because workers abused the

system, fraudulently collecting benefits for faked injuries or remaining on benefits far longer

than their recovery required.

These huge numbers grabbed the attention of the public and policyholders. The presumption in

the press and in the state houses was that fraud was rampant and that most workers'

compensation fraud was claimant fraud. Since that time, more than half of the states have passed

legislation on workers' compensation fraud, with most of the laws directed primarily at

claimants.

Thirty-three states currently have active workers' compensation insurance fraud units, any of

them geared to fighting claimant fraud. In every state, some claimant fraud has been discovered;

publicity about these cases has created a deterrent for workers who might contemplate fraudulent

claims. But it has also created an atmosphere that some describe as the unwarranted and

anecdotal vilification of the work force.


In its extensive investigation of workers' compensation fraud, one survey concluded that the

perception that workers are cashing in by faking or exaggerating injuries has created a climate of

mistrust in which every person who is injured and files a claim can become the subject of

suspicion by insurance adjusters, doctors and industry lawyers.

Perhaps most importantly, the fixation on claimant fraud has distracted policymakers,

enforcement agencies, and the public from growing evidence of the real problem:

� millions of dollars in employer and provider fraud

Few experts believe that claimant fraud is a major cost driver in workers' compensation. But

some estimates suggest that fraud accounted for 25% of all employers' workers' compensation

costs and 10% of the claims.

According to surveys some insurance companies saw fraud as a way to explain why premiums

were soaring, and politicians and the media jumped on the bandwagon. While some insurance

companies claim one out of three workers lie about their injuries, the actual number of fraud

cases sent to prosecutors is less than 1 out of 100, or less than 1%.

Employer Fraud

Premium collection is fundamental to the operation of workers' compensation, but amidst the

often-sensational stories of cheating employees it is easy to lose sight of the other major element

of fraud in the industry:

o premium evasion by employers

In late 1990s the NSW government conducted an amnesty on underpayment, which revealed a

significant problem. The crackdown produced a $15 million improvement in compliance.

Investigations have found many companies who have no workers' compensation insurance

whatsoever and many others who under-insure by false declaration of wage levels or by

providing misleading information concerning their industry classification. Premium levels are

generally calculated as a percentage of total wages and are also influenced by the type of

industry an employer is competing in.

Surveys have revealed that the level of non-compliance with correct premium payment in the

building industry is between 30%-60%. A lot of effort is being made around the country to

combat financial difficulties by reducing workers' benefits, but if everybody paid the correct

premium, there would be sufficient revenue to adopt a different approach. Workers have been


fined for fraud, but little has been done against employers who are committing unprecedented

corporate crime.

Premium fraud includes a number of schemes used by employers to reduce the workers'

compensation insurance premiums by underreporting payroll, misclassifying employees'

occupations and misrepresenting their claims experience. According to the National Council on

Compensation, the most common frauds include:

� Underreporting payroll. Employers reduce their premiums by not reporting parts of the

work force, paying workers off the books or creating a companion corporation to hide a

portion of the employees.

� Declaring independent contractors. Employers avoid premium payments for employees

by classifying them as independent contractors even though they are legally employees.

� Misclassifying workers. Employers intentionally misrepresent the work employees do to

put them in less hazardous occupational categories and reduce their premiums.

� Misrepresenting claims experience. Employers hide previous claims by classifying

employees as independent contractors or leased employees or creating a new company on

paper.

In addition to premium fraud, employers often fail to purchase workers' compensation insurance,

despite state laws mandating that they do so. There are also reports of employers:

• instructing injured workers to seek treatment under group health insurance rather than

workers' compensation

• discouraging workers from filing workers' compensation claims

• firing workers who file claims

The key to fighting workers’ compensation fraud is for employers to focus on prompt

rehabilitation and return to work.

Medical Provider Fraud

Workers' compensation fraud also occurs among medical providers. These forms of fraud evolve

as the nature of medical care changes over time. Outright fraud occurs when providers bill for

treatments that never occurred or were blatantly unnecessary. Some of the newer forms of

medical provider fraud include kickbacks from specialists and other treatment providers to

referring physicians, and provider up-coding, where provider charges exceed the scheduled

amount. Providers also shift from the less expensive, all-inclusive patient report to supplemental

reports, which add evaluations and incur separate charges.


Medical provider schemes include:

• creative billing - billing for services not performed

• self-referrals - medical providers who inappropriately refer a patient to a clinic or

laboratory in which the provider has an interest

• upcoding - billing for a more expensive treatment than the one performed

• unbundling - performing a single service but billing it as a series of separate

procedures

• product switching - a pharmacy or other provider bills for one type of product but

dispenses a cheaper version, such as a generic drug

Newer forms of fraud and abuse occurring under managed care arrangements include:

• underutilization - doctors receiving a fixed fee per patient may not provide a

sufficient level of treatment

• overutilization - unnecessary treatments or tests given to justify higher patient fees in

a new contract year

• kickbacks - incentives for patient referrals

• internal fraud - providers collude with the medical plan or insurance company to

defraud the employer through a number of schemes

Insult Added to Injury

Because of the assumption of widespread claimant fraud, injured workers who file a workers'

compensation claim may be subjected to insulting questions and treated as malingerers and

cheats. Under the auspices of "fraud prevention," they may face endless questioning and

unnecessary medical examinations. They may be subjected to constant video surveillance by

private investors hired to follow their every move. Their employer may refuse to provide light

duty work, or take retaliatory actions against them when they return to work. If they look for

another job, their application may be screened for prior workers' compensation claims.

Although some of these tactics are used in legitimate attempts to investigate questionable claims,

they have also become part of a broad employer attempt to intimidate workers from filing

workers' compensation claims. Under the pretext of controlling what has been falsely presented

as rampant claimant fraud, injured workers are discouraged from exercising their legitimate

rights to workers' compensation benefits.


Other Bodily Injury Fraud

Estimates tell us that about one-third of all bodily injury claims contain some type of fraud.

Property insurance covers damage to, or theft of possessions, and liability or casualty insurance

pays for a legal responsibility to other people for property damage or bodily injury losses.

Slip-And-Fall Claims

Fraud indicators in fraudulent slip-and-fall claims have usually been the same as those of other

claims involving medical fraud. A popular slip-and-fall accident scheme that con artists have

often used in stores is when at least one of the con artists was a “witness” to another con artist’s

fall.

Product Liability Claims

Product liability is one of the fastest growing exposures that manufacturers and retailers are

facing in today's market and is making consumer products more expensive to make, due to

excessive litigation and state and federal law requirements. Insurance professionals have seen

claims that could have been avoided if the manufacturer or business had proper warnings on their

product.

As a result, insurance companies have paid out huge amounts to indemnify the damaged party.

This is passed on to the manufacturer in terms of higher premiums or by more exclusions in a

policy that does not adequately protect the manufacturers or retail merchant. Often times, the

manufacturer self-insures their products because they cannot find an insurance carrier to insure

their product.

Litigating product liability claims are also on the rise and are causing manufacturers/ retailers to

pay higher insurance premiums to make and market their products. Higher premiums directly

affect companies’ profits and investments where the savings in a reduction in premiums could be

used to promote company’s products and services. Self-insured companies save on premiums but

are still prey for litigants who may believe their products are unsafe for consumer use.

There are generally three types of products defects a company is faced within today's markets:

• manufacturing or production flaws

• design defects

• defective warnings or instructions

Manufacturers are not the only ones subject to product liability exposure. The consumer often

brings retailers into a lawsuit for alleged negligence also.


The age and intelligence of the buyer will have some influence upon whether there is a duty to

warn. If a retailer is aware or has reason to know that, because of intelligence, the buyer is not

aware of the danger of the product, the retailer is required to warn the consumer of the danger.

When the retailer or contractor assembles, or both assemble and install the manufacturer's

product, the retailer (or contractor) is under a duty to the purchaser to exercise care in doing so.

This would mean that the retailer would have to follow the manufacturer's assembly instructions

or installation instructions.

More important, the retailer would be required to test and inspect the product to assure the

product is safe in its assembly. Further consideration is established when a manufacturer or

assembler markets without adequate warnings. The reseller is subject to liability, without

negligence, in selling the product that lacks the manufacturer's adequate warning. Thus, those in

the market sales chain that are subsequent to a sale by the manufacturer, could be liable, without

negligence, for the manufacturer's failure to provide adequate warnings.

Understanding Risk Utility

Risk-utility can be understood as being essentially the same as risk benefit. The issue is phrased

in terms of whether the cost of making a safer product is greater or less than the risk or danger

from the product in its present condition.

Another way of identifying risk-utility is the risk vs. cost or burden. In other words, is the risk of

danger greater than the cost or burden of eliminating the danger? If it is, the product is defective.

If the burden of eliminating the danger is greater than the risk of the danger, then the product's

benefit or utility outweighs its danger and therefore the product is not defective.

Understanding risk-utility can greatly benefit a company in understanding the exposure they are

faced within manufacturing their product and services. Such considerations to be concerned

about are:

• the usefulness and desirability of the product

• the likelihood and probable seriousness of injury from the product

• the availability of a substitute product that would meet the same need and be safe

• the manufacturer's ability to eliminate the danger without impairing usefulness or

making the product too expensive

• the user's ability to avoid the danger

• the user's anticipated awareness of the danger

• the feasibility on the part of the manufacturer of spreading the risk of loss by pricing

or insurance


Lost Earnings Claims

The days and hours that the injured employee is unable to function at work, which means the

money he may have lost, is added up. This constitutes one of the most important elements of

damages, namely lost wages. Usually the insured should not view his time away from work

because of an injury strictly as lost time and earnings, but rather as lost earning capacity. In

many instances he can claim his lost time and earnings, even if he has no actual loss of money,

such as when his salary is paid because he has taken sick leave, or because of an accident and

health policy that is available to him, or because of some other similar arrangement.

Two basic questions need to be answered.

� Did the injury necessitate a change of job or employment?

� Did the injury allow the employee to get back to work but only on a part time basis?

If the answer to one or both of these two questions is "yes," the employee should ask his

employer to document these facts on the employer’s letterhead. The proof of either will

absolutely give his claim more value.

Documentation for the Employee

If someone else regularly employs the insured, he should ask his supervisor, boss, or the person

in charge of such matters to write a letter for him on company stationery. This letter should

include:

• his name

• position

• rate of pay

• the number of hours he normally works

• the number of days, and/or weeks, he missed because of the accident

The employee should be ready to discuss the following with the insurance adjuster:

� if his work demands heavy labor and/or lifting

� if he lost any vacation time or sick leave

� any loss of future earning capacity

� if he was absent from one or more important business meetings

� if he was unable to make appointments with important or potential customers

� if he had an opportunity for an interview that had led to a better job


The self-employed person should be sure to collect for the cost of any additional help he had to

hire while he was undergoing medical treatment and recuperating. He should be ready to discuss:

� if his work demands heavy labor or lifting

� how many hours he normally works each day and week

� his average income per week

� if his business lost money while he was laid up, and how much

To substantiate his claim he should consider presenting to the adjuster

� whatever documents will prove a loss in billing or services

� a calendar showing appointments he had to cancel

� letters or documents proving business meetings he had to cancel

Legitimate Losses

• Commissions and overtime are legitimate losses the insured can claim.

• Employees should collect for the gross wages they lost, not the net.

• If the employee has to take sick leave or vacation pay during the period he missed from work, it must be considered.

• Employees are entitled to be compensated for work opportunities of which they may not have been able to take advantage because of injuries.

Insureds and other claimants have often lost earnings as a result of their bodily injuries. Fraud

perpetrators of these types of claims have often used imaginative ploys.

Claims Involving Malingering

Malingering is the intentional faking of physical or psychological illness or symptoms in order to

gain medication, get disability payments, or miss work. Malingering is intentional production of

false or exaggerated symptoms motivated by external incentives, such as obtaining compensation

or drugs, avoiding work or military duty, or evading criminal prosecution. It is not considered a

mental illness. Malingering is deliberate behavior for a known external purpose. It is not

considered a form of mental illness or psychopathology, although it can occur in the context of

other mental illnesses.

The agent should strongly suspect malingering in the presence of any combination of the

following:

• a situation in which an attorney refers a patient

• a patient is seeking compensation for injury


• marked discrepancy between the claimed distress and the objective findings

• lack of cooperation during evaluation and in complying with prescribed treatment

• presence of an antisocial personality disorder

Malingering often is associated with an antisocial personality disorder and a histrionic

personality. Prolonged direct observation can reveal evidence of malingering because it is

difficult for the person who is malingering to maintain consistency with the false or exaggerated

claims for extended periods.

The person who is malingering usually lacks knowledge of the nuances of the feigned disorder.

For example, someone complaining of carpal tunnel syndrome may be referred to occupational

therapy, where the person who is malingering would be unable to predict the effect of true carpal

tunnel syndrome on tasks in the wood shop.

Prolonged interview and examination of a person suspected of a malingering disorder may

induce fatigue and diminish the ability of the person who is malingering to maintain the

deception. Rapid firing of questions increases the likelihood of contradictory or inconsistent

responses. Asking leading questions may induce the person to endorse symptoms of a different

illness. Questions about improbable symptoms may yield positive responses. However, because

some of these techniques may induce similar responses in some patients with genuine psychiatric

disorders, exercise caution in reaching a conclusion of malingering.

Persons malingering psychotic disorders often exaggerate hallucinations and delusions but

cannot mimic formal thought disorders. They usually cannot feign blunted affect, concrete

thinking, or impaired interpersonal relatedness. They frequently assume that dense amnesia and

disorientation are features of psychosis. It should be noted that these descriptions also might

apply to some patients with genuine psychiatric disorders. For example, individuals with a

delusional disorder can have unshakable beliefs and bizarre ideas without formal thought

disorder or affective blunting.

The most common goals of people who malinger in the ER are obtaining drugs and shelter. In

the clinic or office, the most common goal is financial compensation.


VII

The Legal Issues in Insurance Fraud

Insurance fraud is one of the most costly white-collar crimes in America, ranking second to tax evasion. According to the National Insurance Crime Bureau (NICB), 10% of property and casualty insurance claims are fraudulent. Insurance fraud is a crime and includes:

� Submitting false applications for insurance

� Making false or inflated insurance claims

� Paying for referrals of insurance claimants to lawyers and health care

providers

Thousands of individuals know firsthand the financial harm that insurance fraud can inflict.

These victims include people whose car insurance premiums were stolen by outlaw agents,

employees left with worthless health insurance, businesses that purchased bogus workers'

compensation coverage and doctors whose search for lower medical malpractice insurance rates

led them to fictitious offshore companies. Many more individuals become victims indirectly

when claim fraud drives up their insurance premiums. Dollars paid by insurance companies for

fraudulent claims increase the "loss" statistics used in determining future rates.

Fighting insurance fraud is most states’ highest priority. The most important job is to detect fraud

and stop it with license revocations, cease-and-desist orders and criminal prosecutions of those

who commit it. The individual state’s insurance department investigates suspected fraud cases,

refers perpetrators to local district attorneys and the U.S. Attorney for prosecution and, when

asked, furnishes trained attorneys to assist as special prosecutors.

Conviction can result in imprisonment, fines, and loss of professional licenses. Insurance fraud

occurs in virtually all types of insurance, including automobile, worker's compensation,

disability, healthcare, life and homeowner's. Some people think the victims are the insurance

companies. In reality, the victims are all of us who must pay higher insurance premiums and

higher costs for goods and health care as a result of fraud.

Insurance fraud is an attempt to obtain money from insurance companies by arranging a loss or

accident or falsifying information on applications for insurance claims. When caught,

prosecuted and found guilty, most fraud perpetrators are required to make restitution and jail

time is also commonly imposed.

The most common types of insurance fraud can be divided into these categories:


• false claims for injuries

• arson for profit

• false or intentional auto theft

• physical damage

Investigating Claims

Investigating fraudulent insurance claims creates many challenges for adjusters and

investigators. Those who are intent on filing improper claims are often creative in their approach

and claims presentation. Fraudsters may aggressively defend the claim and will often be

prepared to deal with all inquires. The claimant may also be armed with his or her own advisors

to provide support. Thus, the insurer will want to be prepared to respond with appropriate

resources and expertise.

Insurance companies need to assemble a team of investigators including accountants or possibly

former police officers who have commercial crime investigation experience.

The best claims analysis will be next to worthless if it is not properly and clearly communicated

within the required time frame. Both written reports of fraudulent claims and a testimony in

court or arbitration hearings are important to explain complex analysis and issues in simple,

jargon-free language. It is necessary to have reports tailored to the facts of the case and

delivered quickly within the time limits agreed upon.

Extensive fraud investigation and claims review experience, combined with insurance industry

expertise, allows the insurance professions to advise on the proactive steps that can be taken to

detect, reduce and prevent insurance fraud among their staff, when processing policy application

and policy claims. It is recognized that an insurer needs procedures in place to deter improper

claims, highlight suspicious or questionable claims, conduct prompt and thorough investigations

into the claim, and provide an appropriate response based on the results of the investigation.

International insurance fraud is a serious and growing phenomena. Criminals realize that cross-

border investigations are more difficult to coordinate and conduct.

Preventing Fraudulent Acts

There are many approaches that can be adopted by insurers to minimize the risk of fraudulent

claims. This way the insurers can take steps to prevent the occurrence of insurance fraud. The

fraud-fighting approaches best suited to a company will depend upon the organization, the

control systems in place, overall objectives and the organization's culture. It is always necessary


to review and consider the costs and associated benefits of a fraud prevention plan prior to

implementation.

Inflating medical claims, falsifying facts on an insurance application and staging auto accidents

are some of the most common types of fraud. Although fraud encompasses all aspects of the

insurance business, a large portion of it is associated with auto insurance claims.

Auto Insurance Fraud

Auto insurance fraud is an enormous problem in the United States; one that costs some states

millions of dollars each and every year. Unfortunately, many people do not realize the severity of

this crime. There exists a mistaken perception that this type of fraud is somehow harmless and

acceptable. In reality, though, all people are the victims of this illegal activity, paying in the form

of higher insurance premiums that are hundreds of dollars more than they would otherwise be.

Fraud can come in many different sizes and varieties, all of which are costly to each driver. It can

be as simple as misrepresenting facts on insurance applications and inflating insurance claims or

as serious as staging accidents and submitting claim forms for injuries or damage that never

occurred.

Under some states’ Insurance Law, licensees of the Insurance Department are required to report

any suspected fraudulent acts to the Department’s Insurance Fraud Bureau.

Automobile Loss Exposures

Automobile loss exposures include both property exposures and liability exposures. The

property exposures have three elements.

� The Item Subject to Loss ~ The item subject to loss is one or more automobiles in

which the organization has a financial interest. The property loss exposures posed by

ownership of mobile equipment can be insured under inland marine policies.

� The Cause of Loss ~ The mobility of automobiles means that they are more likely than

fixed property to be damaged or destroyed by certain causes of loss. An example is the

collision of automobiles with one another or with other objects. This is an exposure

unique to motor vehicles. Also for the reason of self-propelling, autos are easier to steal

than property of similar size and weight that does not move under its own power. But this

factor can also make them less liable for other types of loss. Automobiles may also be

subject to many of the same causes of loss that can damage property at a fixed location,

such as hail, windstorm, fire, vandalism, and aircraft.


� The Financial Impact of the Loss ~ The main consequences of damage to or destruction

of an automobile are decreases or losses of the automobile’s value, and the loss of use of

the automobile until it can be repaired or replaced. Auto Physical damage insurance,

available under the business auto, garage, and trucker’s forms, can be used to cover

damage or destruction of an auto. Usually the insurer pays the cost of repairing the

vehicle or its actual cash value, whichever is less. If a covered automobile is disabled by

a covered cause of loss, the insurer will reimburse the insured, up to a stated limit, for the

cost to rent a substitute vehicle. Consequently, the insured can continue operations and

avoid loss of income.

Fraudulent Claims

Auto insurance fraud is committed whenever someone intentionally lies to an insurance company

about a claim involving their car insurance. In some states, it is a felony to submit a false auto

insurance claim. It is a criminal act to use untrue or misleading documentation to support a false

claim. This includes faked, falsified or exaggerated receipts, bills, estimates, test results, or any

evidence of injury, loss or expense. It is even a crime to assist someone else in submitting or

documenting a false claim.

The vast majority of the fraud reports received by the Claimant and Provider Fraud Section are

for staged automobile accidents. "Staged accident" is a catch all term for many types of

fraudulent automobile claims perpetrated against insurers.

Another common type of fraud report the Claimant and Provider Fraud Section receives is for

staged burglaries. These range from the entire burglary being staged to simple inflation of a

claim for a legitimate burglary. In both types of claims the insured will normally claim numerous

items worth thousands of dollars that they did not own and/or did not lose in the burglary.

Home Insurance Fraud

For most people, their home is their single most valuable possession and their only investment.

Homeowners insurance protects one’s investment as well as household possessions. If an

individual suddenly loses his or her home due to fire disaster, or the contents are damaged or

stolen, one would not be able to afford to replace everything at once. If someone is sued because

of injury or damages caused on his or her property, the cost of defending that suit could run into

thousands of dollars of legal fees regardless of the outcome of the suit.

If an individual owns a condominium, the condo association probably has a master policy, which

insures all the property and the common areas that are collectively owned by the owners. These

policies usually cover the actual structure of the home, so one needs to purchase this coverage

separately. However, the association policy does not cover personal property or the legal


responsibility of each owner, and it may not cover improvement that the owner makes inside his

or her unit.

If an individual wants insurance for a peril that is not named in the homeowner’s policy, he or

she can often buy the extra coverage in the form of something called a floater. The floater can be

a separate policy or an additional endorsement to the homeowner’s policy.

Regulations in P&C Fraud

The Law of the Agency

From the legal perspective, the salesman is considered to be the agent of the company for which

he works. An agent may be defined as a person who represents and acts in behalf of another

person in dealing with third persons. The person who is represented by the agent is called the

principal. The agent is always subject to the control of the principal he represents.

In selling, the company is the principal, the salesman is the agent, and the customer is the third

party. As the principal, the company has the legal right to enter into valid contracts. When the

company hires the salesman, it empowers him to take the place of the company in its business

transactions with third persons. The contract that results from the salesman’s actions as an agent

is binding on the principal and the third party. The agent is the go-between who brings the

contracting parties together.

The authorization of the salesman by the company may be either written or implied, but in either

case the salesman binds the company by his acts. The company is responsible for what the agent

does as long as the agent is acting within the limits of the power that the company has given him.

When the salesman exceeds his authority, the third party may hold him personally liable for any

injury that results.

Thus, in order to act as an agent of his company within the bounds of the law, the salesman must

know what the limits of his authority are and he must stay within those limits. He should also

know that he couldn’t delegate or assign his authority to another person without specific

permission from the company.

The Law of Sales

Knowledge of the law of sales will help the salesman to determine when the transfer of

ownership takes place. Because of the variety of business transactions involved in buying and

selling, a special set of rules has been developed governing the transfer of ownership. These

rules have been brought together in the Uniform Commercial Code, which has been adopted by

forty-nine of the fifty states.


A sales contract is an agreement that has as its purpose the immediate transfer of ownership,

whereas a contract to sell is an agreement in which the parties agree that transfer of ownership

will take place some time in the future.

Sometimes, merchandise is lost, damaged, or destroyed. In such cases, it is necessary to know

when ownership was transferred from seller to buyer in order to determine who is responsible for

the loss. For example, suppose a person buys an oil painting and says that he will return the next

day with his car to pick it up. If that painting is damaged or destroyed before he picks it up, the

buyer is responsible. However, if the buyer had said that he would buy the painting when he

moved into his new apartment the following month, whatever happens to the painting until that

time is the responsibility of the seller.

Commercial P&C Insurance Fraud

Commercial Policies

Commercial insurance is insurance against the failure of a business undertaking or commercial

enterprise to return a given amount of business or profit, to the exclusion of credit guaranty and

other specific branches of guaranty insurance. Thus, an undertaking by an individual furnishing

materials for a voting contest might make the case that if sales were not increased by the contest

so that a small percentage would equal the amount paid for the materials, he would pay the

difference in cash. This could be considered a contract of commercial insurance, and not of a

guaranty.

Commercial property owners, both those operating a business on their property and those leasing

property to another entity, may purchase policies that protect the building and associated

structures. A property owner's policy will not protect tenants from loss. Business owners who

lease their property may buy policies that protect the building's contents, such as machinery,

furniture and stored or displayed merchandise.

Different types of commercial property insurance policies protect against different dangers,

called "risks," "causes of loss" or "perils." Commercial property policies are not standardized in

some states. Insurance companies are free to use their own policies, subject to approval by the

particular state’s Commissioner of Insurance. Policies must contain reasonable coverages and

meet all requirements set out by law. Insurers' ability to offer different commercial policies

allows them to tailor their products to fit the needs of particular businesses. The availability of

multiple policies encourages a competitive market.

Commercial property policies available generally fall into three categories:


• Basic form -- covers common perils, such as damage caused by fire, lightning,

windstorm, vehicles, aircraft and civil commotion.

• Broad form -- covers basic perils while adding others, such as water damage, collapse,

glass breakage, weight of snow, ice or sleet, and sprinkler leakage.

• Special form -- covers any cause of loss except those specifically excluded, such as

flood, earth movement, war, nuclear disaster, wear and tear, insects and vermin.

Many commercial property insurance consumers buy additional coverage.

• Liability policies protect against the cost of a lawsuit and possible judgment.

• Business interruption coverage reimburses the policyholder for business income lost

when a covered cause of loss damages or destroys a building or its contents.

• Extra expense coverage pays the added amount an insured must spend after a loss to

resume business operations as quickly as possible.

Business Insurance

Business interruption insurance is designed to protect the prospective earnings of the insured

business. It is also designed to do for the insured, in the event of a loss, what the business would

have done for itself if an interruption in the operation of the business had not occurred.

Thus, business interruption insurance is designed to indemnify the insured business against

losses arising from its inability to continue the normal operations and functions of the business.

Coverage is triggered by the total or partial suspension of business operations due to the loss,

loss of use, or damage to all or part of the buildings, plant, machinery, equipment, or other

personal property thereof, as the result of a covered cause of loss.

Coverage is generally provided for the "period of restoration," which is usually considered to be

the period which would be required to rebuild, repair or replace the damaged property at the

described premises with reasonable speed and similar quality. It usually commences with the

date of such damage or destruction and it is not usually limited by the date of expiration of the

policy.

A rider or endorsement to a commercial property insurance policy generally provides business

interruption coverage. The coverage typically provides that the insurer is not liable except for

losses caused directly by a covered cause of loss, i.e., a hazard or peril insured against as a matter

of contract. Moreover, actual profits and business expenses covered by the policy are usually

determined in a manner which gives due consideration for the character of the business along

with the manner in which it conducts its business activities.


Fraudulent Schemes Against Businesses

Insurance fraud schemes often target businesses and professional people because the victims

need insurance to stay in business and large commercial policies generate large premiums.

Historically, these schemes have concentrated on types of business insurance that are particularly

expensive or hard to find in legitimate insurance markets. At various times, these have included:

• workers' compensation

• medical malpractice insurance

• commercial general liability

• performance bonds for contractors

• automobile liability insurance for truckers

By far the most common schemes involve unauthorized insurance -- the sale of policies by

companies not licensed in a particular state. These often are offshore companies, chartered by

Caribbean or Pacific island nations that cannot regulate them effectively. The companies may

have impressive sounding names and authentic-looking policy forms.

Fictitious or unlicensed offshore companies have defrauded individuals by selling them bogus

medical malpractice, commercial general liability, contractors' performance bonds and trucker's

liability insurance. The big selling points were cheap premiums and/or lax underwriting

standards. Policyholders ran a tremendous risk that their claims -- or liability claims against them

-- would not be paid.

Fraudulent Claims

Any indication that the business is having financial difficulties or has immediate need for funds

is definitely a reason to suspect fraud in a claim or application for a claim. Other reasons could

be deteriorated or outmoded facilities when the business is in a bad location or deteriorating

neighborhood, or when machinery, production equipment or inventory is obsolete or

unmarketable.

Other reasons that should be investigated are:

• unusual presence of combustible material on the premises

• presence of multiple fires, accelerants

• evidence that valuable property was recently removed from the premises or relocated

to a safer place within the premises

• poor economic climate for particular business

• any departure from long-standing routine (failure to activate alarm system; shut-down

of sprinkler system; discharge of security guard)


• no evidence of unlawful entry or evidence of unlawful entry appears to have been

manufactured

• principals in business have history of business failures

• property is over-insured

• real property is heavily mortgaged

• business personal property secures multiple and substantial debts

• unusual handling of combustible materials normally present on the premises

• recent history of late payments or default on loans

• recent expansion of business facilities which caused insured to incur substantial debt;

other over-extension

• overlapping ownership of related businesses with inventory moving readily between

businesses without adequate documentation

• radically differing accounts of accident or manner in which loss occurred, including

inconsistent reports from the same person

• damaged property discarded or not readily available for inspection

Fraud occurs when a person knowingly or intentionally conceals, misrepresents, and makes a

false statement to either deny or obtain workers' compensation benefits or insurance coverage, or

otherwise profit from the deceit. The key to conviction is proving in court that the

misrepresentation or concealment occurred knowingly or intentionally.

“Material misrepresentation," as it pertains to insurance contracts, is an untrue fact, which affects the risk undertaken by the insurer. Thus, the insured's misrepresentation must be shown to have caused a substantial increase in the risk insured against, and would have, if the misrepresentations were known by the insurer, caused a rejection of the application.

Some courts have concluded that an insurance applicant has a duty to act in good faith, and that an insurer is entitled to truthful responses so that it may determine whether the applicant meets its underwriting criteria. Nevertheless, a good faith mistake does not excuse a material misrepresentation on an insurance application and does not preclude an insurer from rescinding a policy under some states’ law.

Any omission or concealment that is injurious to another or that allows a person to take

unconscionable advantage of another may constitute criminal fraud. In Anglo-American legal

systems, this latter type of fraud may be treated as deceit, subject to action in civil rather than

criminal law.


VIII

Consumer Protection and Insurance Fraud

Although most businesses operate in a fair and legal manner, thousands of people lose money

every year due to unscrupulous business practices and consumer fraud. When making

commercial transactions, it is important for consumers to be aware and informed of any rights

they may have. Before 1850, insurance companies operated with very little form of regulatory

supervision. Their charters defined the powers of these insurers, and insurance consumers were

basically at the mercy of the insurers to be treated fairly.

With the increase of insurers in our country during this time came unethical and unprincipled

practices by some insurance companies and their agents or representatives. Sometimes after

policies were sold, the insurers refused to pay losses to their clients on the grounds that they were

not licensed to do business in a particular state. Some insurers who were authorized to business

in various states simply refused to meet their obligations. Therefore as the number of insurance

companies grew, so did the need for regulation.

Regulations of the Insurance Companies

Various states began enacting legislation intended to hold insurance companies responsible for

their acts, as well as for the acts of their agents, who served as legal representatives of their

companies. This was known as the agency system.

Establishing the agency system was one of the first real attempts at insurance consumer

protection. Even in light of the poor reviews of the insurance industry, the prevailing view was

that the states, rather than the federal government, should continue to be responsible for fair

competition, fair insurance practices, and for the public protection of the affairs of insurance

consumers.

The United States Supreme Court repeatedly held that the regulation of insurance was not within

the power of the federal government. This was due to insurance not being recognized as

commerce. However, in 1944, as a result of United States v. South-Eastern Underwriters

Association, insurance was held to be commerce and subject to federal regulation.


Legislation of the insurance industry was not a major legislative subject. However, the 1980s

saw new trends in the industry when new and exciting products were brought into the market. In

fact the entire financial services industry was revolutionized during the 1980s. Banks began to

offer discount brokerage services in addition to their more traditional savings products.

Brokerage firms began to sell insurance, bank certificates of deposits, and even residential real

estate. Insurance company products were considered to be relatively staid and boring until

insurers began to offer mutual funds and other investment products in order to compete in the

financial services industry for investment dollars.

Today, insurance companies offer consumers a wide assortment of savings and investment

products which are tied to their life insurance policies. These products offer real potential and

growth possibilities to consumers. The purchasers of these interest sensitive policies assume

much of the risk through variable interest rates.

However, when these interest-sensitive products were first introduced, not only did they

revolutionize the industry, the proliferation of these new products also brought increased

regulation. The insurance industry began to grow even more complex. With the tort system

taking a more aggressive path, the industry began to buckle.

The insurance industry, being market driven, had no choice but to offer short-term money market

investments within their insurance policies. As interest rates continued to rise, this became

common. Policy owners often borrowed at the lower interest rate guaranteed in their insurance

contracts in order to invest the money at higher rates of return available from other financial

institutions. Naturally, the outward flow of these funds was devastating to insurance companies’

portfolios.

If there were no form of regulation, legislated or self-policing, there would undoubtedly be

unprincipled and unethical insurers who would surrender to capturing present profits without the

consideration of long-term solvency. Most insurance contracts are written for the benefit of third

parties. Although they receive protection, third parties typically do not readily know the name of

the carrier or its financial condition. Their positions would be considerably weakened without

some form of regulation.

As a result of the regulation to date and the desire on the part of the industry to maintain a high

level of integrity, the insurance industry has historically preserved a high level of solvency and

principle.

Categories of Consumer Protection

The need for insurance consumer protection is often divided into two categories:


Post-Claim Representation

Consumers have access to post-claim representation by way of the state bar, once they have a

claim. There are laws enacted to protect insurance consumers, and there are certain remedies

available to them in the event they have been treated unfairly.

Pre-Claim Representation

Consumers have had little or no representation with respect to important issues that arise prior to

the handling of a claim. Such issues are rule-making, ratemaking, and policy formation. Some

states have independent state agencies or consumer-based groups, which represent insurance

consumer issues and the consumers themselves as a class.

These groups often assess the impact of insurance rates, rules, and policy formation on

consumers. They are advocates for insurance consumers. Typically, they hold strong power as

lobbyists, and they monitor insurance legislation. Without these organizations, consumers as a

group could not adequately be represented in matters that directly affect them. These

organizations have been involved in such areas as:

• requiring insurers to offer installment payment plans for premiums

• requiring policies to be in easily understood language

• proposing rule changes which prohibit discrimination against drivers with no prior

insurance

• requiring a toll-free number on policies for consumers to make complaints

• bilingual policy forms

Other areas of consumer protection covered by such advocate groups are public education --

distributing literature on insurance topics, offering newsletters that inform consumers and

legislators, and public speaking to community groups.

Rule-Making

Rule making is critical to consumers in the area of claims. Rules can prohibit unfair claim

settlement practices. They can also create other issues, which enhance the ability of the consumer

to obtain a fast and fair payment of a claim. Rules can contain definitions and statutory

interpretations that remove any doubt concerning claim coverage.


Policy Formation

The most important consideration concerning any claim is the policy itself. A claim must be

made within the limitations of the insurance policy contract. Consumers need a strong advocate

acting on their behalf with respect to insurance policy contracts. Barring this, only the insurance

industry would have input concerning which coverages are included in policies. Without this

capable representation, there would be a serious disparity of power between the insurance

industry and those it serves.

Consumer advocate groups ensure access to representation for consumers who do not have the

financial incentive to participate on an individual basis. Since they represent consumers as a

class, they can address the comprehensive problems, which cannot be solved when dealing with

individual claims.

Industry Abuses

Another factor to be considered in discussing the need for insurance consumer protection is that

of industry abuses which ultimately harm consumers. Even though the insurers directly pay

fraudulent and inflated claims, the claimant and other consumers, by means of increased

insurance rates, end up paying for them in reality.

In order for the insurance system to operate safely and soundly, claims must be made

legitimately for the full amount of damages -- no more and no less. Insurance consumers

themselves have a responsibility to do their part to see that this happens, and consumer advocacy

groups address this issue.

Customer Protection Legislation

The intent of consumer protection legislation is generally to protect consumers against unfair or

deceptive practices and to provide relief to consumers through efficient and economical

procedures in order to secure this protection.

In order to secure this relief, liability on the part of the insurer usually must be found. If an

insurance consumer maintains an action against an insurer, it must be based upon one of the

following theories of recovery.

Theories of Recovery

Breach of contract ~ Breach of contract is a fundamental element of contract law. It is the

foundation of most disputes. If the policy provides for coverage, which is not granted, a suit may


be brought for breach of contract. The failure to pay policy benefits is firmly established as the

insurers’ liability for unfair insurance practices. The rules for interpreting insurance policy

contracts always favor the insured. The main principles for construing a policy contract in favor

of the insured are:

• An insurance policy is always construed against the insurance company.

• Ambiguous or unclear clauses are always construed in favor of the insured.

• Ambiguous policies are always interpreted to provide, rather than to deny, coverage.

• An insurance policy is considered “patently ambiguous” when it may be subject to more

than one “reasonable” interpretation.

• When a policy provision is capable of more than one reasonable construction, a court

must adopt the construction that favors coverage.

• Once the insured offers a reasonable interpretation of the policy, any contrary

interpretation is not permitted and is consequently rejected.

• No limitations or exclusions are implied into any policy contract.

The Breach of the Duty of Good Faith and Fair Dealing ~ There is inherently the duty of good

faith and fair dealing concerning all insurance policies. This duty is breached if the insurer denies

or delays payment of a claim without a reasonable basis for doing so. The duty of good faith and

fair dealing is also breached if the insurer fails to determine whether there is a reasonable basis

for the claim. There is a cause of action by an insurance consumer if there is no reasonable basis

for denying benefits or delaying payment of a claim.

Negligence ~ the breach of the duty of good faith and fair dealing is often construed as

negligence if the insurer fails to perform its duty.

Fraud ~ Fraud may be used as a theory of recovery. In order for the element of fraud to be

present, there must be a material representation that is false, and the maker of the representation

must know it to be false. Or, the maker of the representation must make it recklessly, without

any knowledge of the truth. The maker of the representation must also make it with the intention

that it should be acted on by the other party. The other party must rely upon it, and this party

must suffer some resulting injury.

Deceptive Trade Practices ~ Deceptive trade practices are frequently used as a theory of

recovery. The grounds for recovery under deceptive trade practices are such things as:

• false, misleading, or deceptive acts or practices

• the breach of express or implied warranty

• any unconscionable act

• any unfair practice or act


Unfair Insurance Practices ~ the unfair insurance practices theory of recovery is very broad in

its scope. Engaging in these practices or acts often falls under the provisions of unfair

competition and unfair practices or under the provisions of unfair claim settlement practices.

Untimely Claim Payment or Claim Denial ~ the untimely payment of a claim or the unfair denial

of a claim is clearly grounds for recovery. An insurer must comply with certain time limits when

paying or denying a claim. If these deadlines are not met and liability is found, the insurer is

typically subjected to a penalty and attorneys’ fees, in addition having to pay the amount of the

claim.

Types of Remedies

Generally, any remedies provided for by the various states’ legislative actions are in addition to

other procedures or remedies that are provided by other laws. If a consumer brings an action

under some other statute, this does not preclude him from also using the various insurance

consumer protection laws. Any attempts to circumvent these consumer protection acts are

usually rendered void.

When a consumer brings an action against an insurer for unfair practices, there are various

remedies available to him. Typically, these are:

The amount of actual damages ~ Actual damages are those losses which the consumer can

substantiate as being a result of the unfair practice. Many states provide for an additional award

of a multiplier, for example, three times the first $500 of actual damages. Actual damages may

be such things as cost of repair, diminished value, mental anguish, out-of-pocket expense, loss of

bargain, interest or finance charges, and consequential economic loss.

A countersuit by the defendant may offset actual damages. For example, a consumer plaintiff

may be awarded $500 in actual damages plus three times the first $500 of actual damages, for a

total of $2,000. However, a countersuit by the insurer in the amount of $1,000 may somehow

offset his award. His net recovery would be $1,000. Under most consumer protection statutes,

even if there is no net recovery as a result of a setoff, the consumer is still entitled to attorneys’

fees.

Incentive damages ~ Most states typically provide for incentive damages. If the violation is

committed knowingly, the Court may award incentive damages, typically up to three to five times

the amount of actual damages. Incentive damages usually apply to amounts in excess of $1,000.

In the above case, even if the insurer were found to have knowingly committed the act, the

consumer would not be awarded additional incentive damages, since his initial award was only

$500. Most states provide for some kind of incentive damages to be paid to the consumer if

knowing conduct is involved.


If personal injury or death results as a consequence of the insurer’s unfair practice, the multiplier

used to calculate the incentive damages is usually increased. Many statutes provide the incentive

damages to be a minimum amount, such as $200,000. So, if the incentive damages multiplier

were six on a $20,000 claim because knowing conduct was involved, the consumer would

recover the minimum recovery of $200,000, rather $120,000 (six times his actual damages of

$20,000).

Restoring unlawfully acquired real or personal money or property ~ If it is shown that the

insurer acquired money as a result of his unfair practices, most states issue orders requiring the

insurer to restore (by means of refund or return) the unfairly acquired money or property.

Any other relief the Court deems proper ~ In most states, the Court may appoint a receiver to

look after the practices of an insurer. The Court may decide to revoke the license or certificate

authorizing business in the state. The Court may also sequester assets. These orders do not come

unless a judgment against the insurer has not been satisfied, typically after three months of the

final judgment. The cost of this receivership is assessed against the defendant insurer.

Court costs ~ Court costs incurred by the consumer plaintiff may be recovered in most states, if

he prevails in his case.

Reasonable and necessary attorneys’ fees ~ Most states provide for the award of attorneys’ fees

to the consumer. These fees are expressed by a percentage of the recovery.

Unfair Practices and Acts

The Federal Trade Commission Act

Both the federal law and the law of virtually every state include statutes that prohibit the use of

deceptive or unfair trade methods of doing business. One of the first of these laws passed was the

Federal Trade Commission Act, enacted in 1914. As originally written, the law forbade only

"unfair methods of competition and commerce." The statute was designed to supplement the then

recently enacted Sherman and Clayton antitrust acts.

In 1938, the law was amended to also prohibit unfair and defective acts or practices in

commerce. This change was designed to make those consumers injured by unfair trade practices

protected by the law in the same way that merchants and manufacturers had been protected by

the original enactment. The Federal Trade Commission (FTC), the principal federal agency

protecting consumer interests, now mostly enforces the law.


Uniform Deceptive Trade Practices Act

In addition, most states have now adopted either the Uniform Deceptive Trade Practices Act or

their own similar laws. These laws protect consumers and other businesses in much the same

way as the FTC Act. The Uniform Deceptive Trade Practices Act provides that a person or

business has engaged in an illegal deceptive trade practice when the business or person does any

of the following:

• passes off goods or services as those of another

• causes likelihood of confusion or misunderstanding as to the source or approval of

goods or services; or an affiliation with or certification by someone else

• uses deceptive representations or designations of the geographic source of the goods

or service

• represents that goods or services have sponsorship, approval, characteristics,

ingredients, uses or benefits that they don't have, or that a person has some

sponsorship, approval or connections that he or she does not

• represents that the goods are original or new when they are not

• represents that goods or services are of a particular standard, quality or grade, or of a

particular style or model, when they are not

• disparages the goods, services or business of someone else by false or misleading

representations

• advertises goods or services with no intent to sell them as advertised or that supplies

needed to meet reasonable demand (unless the advertisement discloses a supply

limitation)

• makes false or misleading statements of fact concerning the reasons for or the

existence of price reduction

• engages in any other conduct which similarly creates a likelihood of confusion or of

misunderstanding

The legislation for regulating unfair or deceptive acts or practices is very broad in its scope. The

rules apply not only to individuals, but also to corporations, associations, partnerships, insurers,

and any other legal entity, which is engaged in the business of insurance. This includes agents,

brokers, adjusters, life insurance counselors, etc.

In order to avoid a cause of action, agents and insurers should not engage in any unfair method

of competition or in any unfair or deceptive act or practice while conducting the business of

insurance.

In addition to creating causes of actions for consumers, the statutes also provide for punishment

to the insurance companies who engage in this unfair conduct. Typically, the state insurance

commissioner may investigate insurers to ensure compliance.


If there is thought to be unfair or deceptive acts or practices by an insurer, in most states, the

commissioner must first provide a statement of charges to the insurer, when he has reason to

believe the insurer is not in compliance. Next, he gives notice of a hearing. In most states, this

is a show cause hearing. In a show cause hearing, the insurer has the burden of showing why the

appropriate regulatory agency or board should not order a Cease and Desist Order.

If the insurer fails to meet this burden, the state commissioner will usually issue a formal Cease

and Desist Order to the insurer. A Cease and Desist order directs the insurer to cease and desist

from engaging further in the method, which served as the basis of the complaint.

Any insurer who violates the terms of the Cease and Desist Order is subject to various civil

penalties or administrative penalties. Civil penalties are fines. Administrative penalties are such

things as an injunction from conducting further business or the suspension or loss of a license.

Although civil penalties vary among the states, they are typically $1,000 per violation, and there

are usually -provisions that the civil penalty not exceed a certain amount--for example$5,000

total.

Further, most state insurance commissioners may restrain the insurer by means of a temporary

restraining order, a temporary injunction, or a permanent injunction.

Most state commissioners have the authority to order the insurer to make restitution, not only to the

consumer victim, but also to all policyholders who are similarly situated. The insurer may be required to

refund all premiums, minus policy benefits, to its policyholders.

The following practices are considered unfair methods of conducting the business of insurance:

Misstatements and Misrepresentation

Consumers are protected against misstatements and misrepresentation concerning policy

contracts. Making an estimate or illustration which portrays the terms of any insurance policy in

a false or misleading way, is a violation of most insurance laws. Also prohibited is the

misrepresentation of the terms of any policy in any way. This may include benefits, advantages,

terms, etc.

Likewise, the misrepresentation of policy dividends may not be made. This includes dividends previously paid on similar policies, as well as misleading statements with respect to policies, which are the subject of a sale. There may be no misleading representation concerning the financial condition of any insurer or the legal reserve system upon which the insurer operates.

Also prohibited is using any name or title of a policy (or class of policies) which may distort the

true nature of the policy. Insurers are prohibited from inducing any policy holder to lapse, forfeit,


or surrender his insurance policy in any way--for example, for the purpose of cashing in one

policy and purchasing another only to benefit the agent’s commission or quota.

The statement of incorrect or misleading comparisons of policy contracts is sometimes called

twisting in the insurance industry. By twisting, an agent might attempt to convince a

policyholder to cancel a policy that he currently holds in order to purchase the policy the agent is

selling. Twisting can cause significant losses, especially if the policy canceled is a whole life

policy.

False Information and Advertising

Although the wording of the statutes may not be the same, states protect insurance consumers by

prohibiting false information in advertising. Publishing, disseminating, circulating or placing

before the public in any way, directly or indirectly, circulars, pamphlets, newspapers, magazines,

or other publications which contain misleading statements, is prohibited. This applies also to

such things as brochures, letters, posters, etc. Further, untrue, deceptive, or misleading

statements may not be made over any radio or television station.

Defamation

Defamation violations occur when false statements, made directly or indirectly, are intended to

injure anyone engaged in the business of insurance. “Directly or indirectly” refers not only to

statements made as verbal assertions, but also to pamphlets, circulars, articles, literature, etc. No

assertions or statements may be made which are false, maliciously critical, or derogatory to the

financial condition of the insurer.

Boycott, Coercion, and Intimidation

It is unlawful in most states to enter into any agreement to commit an act of boycott, coercion, or

intimidation, which would result in a monopoly or in the unreasonable restraint of the insurance

business.

False Financial Statements

These restrictions on insurers are very clear. Insurers are prohibited from misrepresenting the

financial condition of any insurer (the insurer itself or another insurer) with the intent to deceive.

Filing with any supervisor or public official or making, publishing, disseminating, or

circulating a false statement concerning the financial condition with the intent to deceive is

prohibited.


These types of misrepresentation include making false entries into any book, report, or statement

with the intent to deceive an agent or examiner who has been appointed to examine these affairs.

Similarly, purposely omitting such a material fact on any book, report, or statement is also

prohibited.

Deceptive Name or Symbol

In most states, insurers are prohibited from the use, display, publication, circulation, or

distribution of any name, symbol, slogan, or device which is the same or greatly similar to a

name adopted and already in use

Stock Operations and Advisory Board Contract

It is a violation of most state statutes to deliver or to permit agents to issue company stock, other

capital stock, benefit certificates, shares in a corporation, securities, or other special board

contracts and promise returns and profits as an inducement to insurance. No one may issue these

instruments and guarantee dividends or proceeds as an incentive. However, participating

insurance is excluded from this category.

Unfair Discrimination

Again, this issue is a clear one. Unfair discrimination between individuals of the same class and

equal expectation of life in the rates charged for any contract by insurers is prohibited. This

applies to life insurance, life annuities, dividends, other benefits payable by these contracts and

to any terms and conditions of the insurance policy contract. Also, there may be no unfair

discrimination between individuals with respect to the amount of premiums, policy fees, and

rates charged for accident and health insurance.

Rebates

It is prohibited in most states to offer to pay or rebate premiums, to provide bonuses or the

abatement of premiums, or to allow special favors or advantages concerning dividends or

benefits related to an insurance policy, annuity, or other contract associated with any stock, bond,

or security of any insurance company. This applies to all life insurance, life annuities, accident

insurance, or health insurance.

A rebate is considered a giving, either directly or indirectly, as an inducement for an advantage

for special favors, other than what is specified in the policy contract. Rebates also refer to any


giving, selling, or purchasing as an inducement to the insurance. This may include such things

as stocks, bonds, securities, or other dividends not specified in the contract.

So, an insurance agent is prohibited from returning part of his commission or from offering some

other form of payment in order to bring about the purchase of the insurance. Further, an agent

may not purchase goods from an insurance applicant as part of an exchange for the purchase of

an insurance policy contract.

The justification behind these statutes is that if a rebate were given, one policyholder would have

an unfair advantage over others in similar situations that do not receive the benefit of the rebate,

thereby conducting an act of unfair discrimination.

However, there are some practices, which fall outside the definition of discrimination or rebates.

These include:

� The practice of paying bonuses to policyholders or otherwise abating their premiums.

This may be done in whole or in part from the surplus accumulated from nonparticipating

insurance. This practice is fair, assuming that these bonuses or abatements are fair and

equitable to policyholders and that the practice is in the best interest of the company and

of the policyholders.

� The practice of making allowances to policy holders who have continuously, for some

specified period of time, made their premium payments directly to an office of the insurer

in an amount which is fairly represented as a savings in collection expense. Such a

practice is not considered unfair.

� The practice of readjusting the premiums for a group insurance policy, based on its loss

or expense experience. This may be done, however, only at the end of the first or

subsequent policy years and may be made retroactive only for the respective policy year.

All insurance consumers are consumers first of all. They are insurance consumers second. They

are protected by the various laws, which protect consumers in general. Then, if their complaint is

insurance related, consumers are further protected by the insurance codes of the various states.

Government regulation surrounds nearly every consumer product and service. This includes

insurance policies or products and the services that are offered by the insurance companies.

Under consumer protection laws, where there is the grant of power to the consumer for a

statutory injunction, there is inherently the power to widely correct the wrong, thereby protecting

everyone, not just the consumer plaintiff.

Consumer statutes, including those in the insurance industry, are one sided--that is, they are

obviously enacted to protect consumers. For example, whenever there is confusion or ambiguity

over a contract, the issue is decided against the insurer. Whenever there are questions with

respect to coverage, the issue is decided in favor of the policyholder.


The objectives of these consumer statutes are to encourage conscientious businessmen, service

providers, sellers, and others to compete more favorably. In the case of the insurance industry,

companies are required to conform to certain disclosure practices and specific claim settlement

obligations. Further, agents and brokers are required to exhibit certain ethical behavior.

Insurers are subject to the various pieces of legislation enacted within their own states. Often,

though not always, these state statues are modeled after federal legislation. For example, there

are federal laws of the Consumer Protection Act, which regulate consumer practices. Then there

are state laws, which draw from this legislation. The individual states call their statutes by

varying names; however, their intent is the same.

Both the federal and the state governments are given considerable powers concerning the

inspection and the overseeing functions of consumer laws. These levels of government have the

power to require and standardize disclosures. These standardized disclosures allow consumers to

compare goods, services, securities, life insurance policies, etc.

At the federal level, our Congress has declared that the business of insurance and every one

engaged in it is subject to the laws enacted by the states in which the insurer may solicit

business. The authority provided here is in addition to any existing powers of the states.


Glossary

Churning ~ Churning occurs when a broker engages in excessive trading in a customer’s

investment account. A broker churns an investment account in an attempt to generate

commissions.

Coercion ~ An unfair trade practice which occurs when someone in the insurance business

applies a physical or mental force to persuade another to transact insurance.

Collusion ~ this is an agreement, usually secret, between two or more persons to defraud or

deprive another or others of their property or rights.

Commingling ~ this is an illegal practice which occurs when an agent mixes personal funds with

the insured's or insurer's funds.

Conversion ~ This can be wrongful use of property by one in lawful possession of it, or change

of one policy form to another, usually without evidence of insurability. This usually refers to

Life or Health Insurance contracts.

Fraudulent Insurance ~ This is when someone knowingly and with intent to defraud or deceive

presents, causes to be presented, or prepares with knowledge or belief that it will be presented to

an insurer, Board of Claims, Special Fund, or any agent thereof, any written or oral statement as

part of, or in support of, a claim for payment or other benefit pursuant to an insurance policy or

from a “self-insurer” as defined by KRS Chapter 342, knowing that the statement contains any

false, incomplete, or misleading information concerning any fact or thing material to a claim.

Fraudulent Statements ~ Fraudulent statements are the third broad category of occupational

fraud. These statements, in order to meet the definition of occupational fraud, must bring direct

or indirect financial benefit to the employee. Although all fraud involves "fraudulent statements,"

this category is limited to two sub-categories: fraudulent financial statements and all others.

Fraudulent statements accounted for about 5% of all occupational fraud cases.

Ghost Patients ~ There are doctors who work more than 24 hours a day and doctors who continue to treat patients after they're dead. In New York, investigators found corrupt podiatrists who issued prescriptions for orthopedic shoes to corrupt patients who took the prescriptions to corrupt shoe stores, where they exchanged them for sneakers, high heels, and loafers. Nearly $30 million in insurance money vanished.

Home Health Care ~ This rich field for the plow of fraud includes overfilling, billing for

services not rendered, kickbacks, the use of untrained personnel, and the delivery of unnecessary

equipment, such as the ever-popular wheelchair, to people who don't need it.


Malicious Mischief ~ similar to vandalism, it is purposely damaging the rights or property of

another.

Malinger ~ this means to feign a disability for the purpose of continuing to collect benefits

longer than actually necessary.

Misrepresentation and Omissions ~ A broker may be liable to a customer if that broker misrepresents material facts or fails to disclose material facts to the investor in the sale or recommendation of an investment.

Negligence ~ Negligence is conduct which falls below the "legal standard" established to protect

others against unreasonable risk of harm. For an act to be negligent, the actor may not intend the

consequence of his conduct but a "reasonable person" in his position would have anticipated

those consequences and taken "reasonable" precautions to guard against them.

Occupational Fraud and Abuse ~ this encompasses a wide variety of conduct by employees,

managers, and principals of organizations ranging from pilferage to sophisticated investment

swindles. Common violations include asset misappropriation, corruption, false statements, false

overtime, petty theft and pilferage, use of company property for personal benefit, and payroll and

sick time abuses.

Pharmacy Fraud ~ A corrupt pharmacist, often abetted by a physician and a patient, dispenses a

generic drug rather than a brand-name drug and pockets the difference. Or, a pharmacist fills an

insured prescription, buys it back at a discount from the patient, then sells it again. Or, a patient

receives a drug with street value and peddles it, so everybody gets paid: the pharmacist, the

prescribing physician, the patient-entrepreneur who sells the drug on the street, and the person

who buys it, often for another resale. New York investigators have raided apartments piled high

with thousands of prescription drugs.

Psychiatric Schemes ~ In the 1980s, the nation experienced an epidemic of clinical depression,

as hospital chains filled their beds with teenagers, the overweight, and substance abusers. For

insurance purposes, these people were not young or heavy or addicted--they were depressed,

whether they liked it or not. Private insurance companies estimate that psychiatric schemes cost

them millions.

Upcoding ~ A doctor performs one medical procedure and charges the insurer for another, more

profitable (or permissible) one. One state’s medical equipment supplier billed Medicare nearly

$1 million by charging $1,300 for orthotic body jackets designed to keep patients upright, but

instead supplied wheelchair pads that cost between $50 and $100.

Unbundling ~ the whole is sometimes worth less than the sum of its parts. A wheelchair broken

down into its components--a wheel here, a seat there--with a separate bill for each, can mean a


significant profit. A glucose monitoring kit may cost $12 in a drugstore; unbundled, the kit costs

Medicare up to $250.

Documents

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