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Crime Watch

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Perspective

New Michigan fraud coalition

Phony health plans redux

Crash kingpins draw jailtime

2009 — a moderately good year

Fraud definitions need tightening

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WINTER 2010

Fake hate crimes maydisguise some arsons

Impending financial ruin has moved some business owners to fraud that’s extreme even by the recession’s standards: allegedly lying they’re victimized by hate crimes.

Richard Wu said assailants forced him into the New Star Asian Cuisine in Columbus, Ohio, spray-painted an anti-Chinese slur on the wall, then set the place on fire. But Wu actually was an employee of the restaurant. The owner offered to pay him $2,500 to torch the eatery, Wu said. He faces up to 20 years in federal prison when sentenced. The owner awaits trial.

Strip mall owner Dan Thornton hired cronies to burn down the place after he fell behind on $400,000 in startup loan payments. Thornton said the fire was an anti-gay hate crime. But Wal-Mart cameras caught his arsonists buying supplies for starting the fire. Thornton’s cronies pleaded guilty in September, and he awaits trial.

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SMALL BUSINESSES IN CENTER OF RECESSION-DRIVEN SCHEMESArsons, slip and falls, fake health plans the latest fallout

Insurance schemes foisted by consumers scamming illicit payouts to weather the recession have garnered large doses of attention in recent month, but many small businesses are caught in the vortex of fraud as well.

This is the untold story of the recession. Financially flailing Mainstreet owners are milking insurers in extreme acts of survival. Owners also are targets of insurance schemes.

Definitive trend data are hard to come by, making it hard to precisely define what’s happening. But something is happening. Residual financial distress may keep stepped-up schemes alive for months even though the economy finally shows signs of rebounding.

Overall, the monthly average of suspicious claims rose more than 36 percent percent in the first half of 2009 compared to the same period in 2008, according to the National Insurance Crime Bureau (NICB).

Arsons by business owners are among the more dramatic acts of financial desperation. Nearly one of every three state fraud bureaus says case referrals for commercial arsons have risen in 2009—often significantly, reveals the coalition’s upcoming study of state fraud bureaus.

Joseph Ray Beilharz owned a failing merchandise liquidation business called Deadwood Liquidators. The Fairfax, Va. man’s hired arsonists filled empty beer bottles with gasoline, stuffed t-shirts into the tops, then tossed the lit Molotov cocktails inside. Beilharz received nearly eight years in federal prison in July 2009.

Large debts ignite consThe owners of a failing printing company lit up the place for an insurance

bailout, South Carolina prosecutors charge. A large blaze caused $3 million in damage to Genesis Press, including loss of two large custom printing presses. Co-owners Lawrence Ira Kudeviz and Christopher Petrone owed large debts and increased their insurance just before the fire, prosecutors allege.

Fake burglaries of expensive business equipment also are popping up.Thomas Lee Deatherage’s music store in Reno faced bankruptcy. He lied to The

Hartford that thieves burgled his music store and stole more than $100,000 in equipment from his shop’s storage facility. Deatherage created fake invoices and receipts for phantom inventory. He faces up to eight years in prison when sentenced.

Illinois restauranteurs James Karonis and Denise Fardelos claimed a burglar

Suspicious claims for general liability rose 36% in ’09, NICB says

Board of DirectorsDennis Schulkins, Co-ChairState Farm Insurance CompaniesJames Brown, Co-ChairCenter for Consumer AffairsUniversity of Wisconsin-MilwaukeeDoug Ashbridge, TreasurerFarmers Insurance GroupSteve Perry, SecretaryNational Association of Insurance Commissioners

Allstate Insurance Jim MurrayAmerican Council on Consumer Interests John BurtonAmerican Family Insurance Scott StrainAmerican Insurance Association Peter Foley

Citizen Advocacy Center David Swankin CNA Jim MartinConsumer Action Ken McEldowneyConsumer Alliance Don RoundsConsumer Federation of America Stephen Brobeck

Consumer Federation of the Southeast Walter DartlandErie Insurance David RiouxFlorida Consumer Action Network Bill NewtonHanover Insurance Group Frank SztukHartford Insurance Group Jack McGoldrick

International Association of Insurance Fraud Agencies Robert F. Craig John Hancock Financial Services Carmen RussoLiberty Mutual Group Glenn D. WolfLouisiana State Police Lt. Trevor SmithMassMutual Barbara Carra

MetLife, Auto & Home John SargentNational Association of Consumer Agency Administrators Elizabeth OwenNational Association of Insurance CommissionersHon. Sandy Praeger

National Conference of Insurance Legislators Hon. Brian KennedyNational Criminal Justice Association Cabell C. CropperNational District Attorneys Association Sean MorganNational Fraud Information Center vacant

National Insurance Crime Bureau Joe WehrleNational Urban League Robert McAlpineNationwide Insurance David BanoOffice of Attorney General, Pennsylvania Hon. Tom Corbett

OneBeacon Insurance Boris Shekhtman Pennsylvania Insurance Fraud Prevention Authority Ralph BurnhamProgressive Insurance Jeff MoorePrudential Insurance James Doyle

Sentry Insurance John D. KlocTravelers Insurance Ken JonesUnum Group Dave CovinoZurich North America Brian Wilson

StaffDennis Jay Executive DirectorHoward Goldblatt Director of Government AffairsJames Quiggle Director of CommunicationsKendra Smith Executive Assistant

The Coalition Against Insurance Fraud is an independent, nonprofit alliance of consumers, government agencies and insurers dedicated to combatting all forms of insurance fraud through public information and advocacy. Fraud Focus is published four times a year. Material may not be reproduced without prior permission. Contact Information: 1012 14th Street, NW, Suite 200, Washington DC 20005; phone 202-393-7330; fax 202-318-9189; email info@insurancefraud.org.

2009 The Coalition Against Insurance Fraud, Inc.

2 Winter 2010 • Fraud Focus

C O V E R S T O R Y

stole stoves, ovens and furniture from their Escapades Restaurant. But they used the same “stolen” equipment for another restaurant they later opened, prosecutors charge.

Small businesses also are targets of insurance cons. Slip and falls by consumers looking for fast insurance cash appear to be frequent recession scams.

Questionable slip-and-fall claims rose 51 percent from the first half of 2009 over the first half of 2008, according to NICB.

Erie Insurance reports an 18-percent spike in slip-and-fall claims from July through September 2009 over the same period in 2008. Slip and fall claims in general have risen 20 percent during the last two years, adds Russell Kendzior, chair of the National Floor Safety Institute.

Westfield Insurance, which has a large block of mid-sized and smaller commercial business, also sees more suspicious slip-and-fall claims.

“We’ve seen a steady increase in the last year and a half...” says Steve Jarrett, director of the insurer’s special investigation unit. “We’ve seen them with places like hotels, grocery stores and convenience stores.”

Diane Smith poured water onto the floor of McDade’s Grocery in Jackson, Miss., sat down and pretended she fell and hurt herself. She’d enlisted her daughter and granddaughter as “witnesses.” Prosecutors handed Smith three years of probation.

A similar crime involves planting a dangerous or disgusting object in food or drink, like a broken piece of glass in a restaurant salad. The goal also is to extort an insurance settlement.

Donald Williams said a needle in a hamburger pierced his tongue at a McDonald’s franchise in Columbia, S.C. But Williams finally admitted he planted the needle because he needed insurance money to pay bills.

Small businesses also are being fleeced by bogus health plans. These cons can saddle employees with thousands of dollars in unpaid medical bills (see Profile, pg. 6).

Many insurers are aggressively responding to suspicious claims. They’re trying to send a message that the recession isn’t open hunting season on insurer coffers.

Lower thresholds for triggering investigations are being imposed. Nuisance claims often are being challenged instead of paid off. Some insurers also are litigating claims—even when threatened with expensive suits by con artists.

Sending deterrent messages through public outreach is another potentially effective strategy. Most efforts, however, have targeted consumer cons such as vehicle and home arsons. Dissuading small businesses from insurance ripoffs is a less-explored outreach arena fraud fighters need to explore more widely.

“The recession has handed fraud fighters a worst-case challenge. But it’s also a best-case longterm opportunity to strengthen their defenses and better deter more people against this crime no matter what the future economy,” says the coalition’s executive director Dennis Jay.

Small business fraud — Continued from Page 1

Donald Williams said a needle in a hamburger pierced his tongue at a

McDonald’s franchise in Columbia, S.C. But

Williams finally admitted he planted the needle because he needed insurance money to

pay bills.

New coalition warning Michigan about arsonsThe Detroit area is being lit up with arson-for-profit schemes. That’s the heated alert by a new anti-fraud coalition that’s warning consumers against torching their homes and vehicles for insurance cash in economically hardhit Michigan. The Michigan Insurance

Fraud Awareness Coalition (MIFAC) launched its first Fraud Awareness Week in mid-October to boost public resistance to insurance crimes. MIFAC garnered headlines throughout the week: The area’s top five insurance swindlers...a two-year $1-million pilot to hire more arson investigators and an assistant prosecutor... newsy revelations of rising arsons in the Detroit area. MIFAC’s website (www.michiganinsurancefraud.org) will be a hub of fraud info in Michigan. Shortterm awareness campaigns are popular among anti-fraud groups. Among the 2009 events: The Texas Chapter of IASIU and Crime Stoppers exposed local fraud fugitives. Montana’s insurance commissioner traveled the state alerting consumers about cons. Fraud fighters in Yolo County, Calif. staged a fraud fair. New Jersey’s AG sponsors an annual student essay contest.

Medicare fraud turning violent as Mafia moves in for the money The Mafia and other violent criminal gangs have elbowed into Medicare fraud

because it’s safe, earns easy money, and conviction means lighter sentences than for drug dealing, officials say. Investigators have been threatened, an informant was shot and killed, and a woman’s throat was slit in a pharmacy being probed for fraud. A Medicare swindler can steal $25,000 a day while a cocaine dealer might need several weeks. Drug offenses can earn life in prison; Medicare sentences are much shorter. Six

members of New York’s Bonanno crime family pleaded guilty in October to stealing seniors’ Medicare numbers in South Florida for false claims. A Russian-Armenian crime ring allegedly siphoned more than $20 million from Medicare through bogus Los Angeles-area clinics. They lured elderly Vietnamese immigrants to the clinics, gave them free lunches and checkups, then stole their medical ID info. Their Medicare accounts then were billed for worthless tests or equipment.

Giant comp medical mill swatted after $70 million in claimsThe largest workers comp fraud case in California history closed another chapter

when the state’s workers comp board dismissed $70 million in bogus medical bills an octopus-like medical mill had submitted to 23 comp insurers. Premier Medical Management Systems reveals how scam factories can mass-produce bogus worker injury claims that heist millions of dollars. Premier allegedly erected a network of 130 physician offices and clinics in the Los Angeles area. The outfit targeted unsuspecting Hispanics with minor injuries. Premier rang up thousands of dollars in medical bills for each claim with useless treatment, officials say. Every part of the con was for sale. Docs, diagnostic-testing outfits, pharmacies and patient transport firms paid Premier large kickbacks to access the scheme. Travelers Insurance and other insurers worked for seven years to unravel the vast scheme.

Winter 2010 • Fraud Focus 3

F R A U D N E W S

In Brief

Send Us Your NewsLet us know how your organization is combating insurance fraud. Send your news to: Fraud

Focus, 1012 14th St. NW, Suite 200, Washington DC 20005 or fax to 202-318-9189 or email to news@insurancefraud.org.

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Allstate filed a $5.3-million lawsuit alleging 10 docs and others submitted thousands of bills for useless diagnostic tests from supposed car crashes...Fraud prevention by Medicare has improved from “abominably bad” to “very weak,” the coalition’s Dennis Jay said in a recent Readers Digest story. "It still has a long, long way to go for taxpayers to feel comfortable that their dollars are being well spent."... Suspicious vehicle fires rose 20 percent during the first half of 2009 over the same period last year, NICB says...Vehicle arson case referrals in California spiked 31 percent in 2009 over 2008, the insurance department says... Another recession hint: Case referrals in Florida spiked 21 percent over the last fiscal year, the Department of Financial Services says....After busting a storm-chasing contractor who routinely inflated home-repair claims from hail damage, State Farm claim specialist Tom Cockerill earned IASIU’s highest honor, the Investigator of the Year Award... Speaking of which, a busy hail season has made Colorado a major hotspot for shady contractors who bilk insurers with inflated repairs... Connecticut’s AG is asking the feds to investigate insurers that allegedly steer auto-repair customers to body shops of the insurers’ choosing...Lights, action: YouTube users were asked to submit short anti-fraud videos in a contest sponsored by the New York Alliance Against Insurance Fraud.

4 Winter 2010 • Fraud Focus

P R O F I L E

B y J a m e s Q u i g g l e

Mary Lloyd bought what she was told was a full-benefit health insurance plan. The East Bethel, Minn. woman’s husband then ended up in the hospital with a blocked artery. She was stunned to discover her plan wasn’t insurance and required her to pay most bills. The retired couple was stuck with more than $50,000 in medical expenses.

A Colorado man was gravely hurt in a hit-and-run accident. His hospital bills reached $43,000 before he died. His so-called health plan with the National Trade Business Alliance Association, paid out just $250, says the Colorado insurance department.

Fake and deceptive health plans like these have spread with alarming speed around the U.S. over the last two years.

“Fake health plans are a big problem because people are looking for a good insurance deal in this economy, especially with so many consumers looking for jobs. If there’s an opportunity, scam artists will find them,” says Sandy Praeger, Kansas insurance commissioner and chair of the anti-fraud task force of the National Association of Insurance Commis-sioners (NAIC).

Nobody knows how many people have been robbed, how many shady plans exist or the dollar damage they’ve inflicted on trusting consumers. But least 30 states have taken various punitive actions in the last two years, mostly issuing emergency shutdown orders, says one regulator.

The cons exploit a troubled economy and broken health system that have spawned an outsized target pool of millions of stressed consumers

and small businesses searching for affordable insurance deals.

Health cons take blindingly diverse forms. But most basically, they promise full-benefit coverage then deliver well-disguised lesser products such as:

Fake coverage that is a worthless pieces of paper;

Shriveled limited-benefit coverage that can be nearly useless;

Medical discount cards that merely offer price breaks on medical services for which buyers pay from their own pockets; or

Deceptive combinations of the above. “These swindles have spread so fast

that regulators in many states have been forced to take immediate action to protect consumers due to the sheer volume of such schemes. Just the tip of the iceberg has been revealed,” says Ted Bader, chief investigator for the Washington State insurance

department, and who has studied these plans extensively.

One woman was in debt for more than $250,000 in medical bills when

she became gravely ill after paying for fake coverage, says a state regulator who asked to remain anonymous. A Rochester, N.Y. woman thought she’d bought a generous health policy from a telemarketer peddling coverage through an outfit called Cinergy. The woman rang up nearly $28,000 in hospital bills, but received just $1,164. Sales pitches use lies or weasel-worded half-truths that promise affordable premiums, generous benefits and easy signup without meddlesome medical

exams. Got preexisting conditions? Not to worry.

Aggressive marketing tactics can quickly reach thousands of sales prospects in seconds using invasive blast faxes and emails, TV ads and telemarketing. Well-polished websites encourage easy online purchases. Even crudely printed signs stapled to telephone poles lure victims.

Sales prospects often must join phony trade “associations” or “unions” as well. These shell groups create a convincing illusion of affordable group coverage backed by a seemingly solid advocacy organization devoted to members’ health needs.

Licensed health agents also are hired to peddle some plans, further reinforcing the sense of realism.

Especially troubling, some swindlers create a powerful marketing lure by signing up legitimate insurers as nominal coverage providers. The

Sickening Health Plans SpreadingFast-moving cons exploit sour economy, broken health system

Shocked victims are stuck with anything from hundreds of

thousands of dollars in unpaid medical

bills down to several hundred dollars in stolen premiums.

insurers may or may not know they’re in bed with swindlers.

Kaiser Permanente teamed with a “labor union” called Contractors and Merchants Association that California banned in July 2009. A licensed insurer called American Medical and Life Insurance Company (AMLI) and a controversial outfit called Cinergy fraudulently sold limited-benefit policies hyped in TV ads as full health insurance. New York’s AG fined AMLI $700,000 in August 2009, banned the insurer from selling limited-benefit coverage in the state, and shut down the TV ads.

Shady plans also lie that they’ve teamed with legitimate insurers. An outfit called National Healthcare hyped a partnership with Aetna. But the state insurance department, which banned National in mid-2008, found no proof that Aetna signed on.

And dishonest plans often operate without required state licenses, under regulators’ radars. Under-resourced

regulators often discover illegal outfits only when consumer complaints start crossing their desks.

Many cons also lie that the federal ERISA law exempts them from state-required licenses. The U.S. labor department is investigating shady outfits such as these.

Health swindlers carpet bomb consumers with sales pitches, but also niche market. Small businesses are popular targets. Many main street owners can’t easily find affordable coverage, and most don’t know enough about health insurance to easily spot a swindle: Two of every three owners say they aren’t confident about choosing a health policy, reveals

a recent NAIC survey. Unlicensed plans also are peddled to seniors, plus Hispanic immigrants and other low-income groups.

Dozens of states have shot back over the last two years. California regulators barred a bogus outfit called the Contractors and Merchants Association in July. The group had sold phony guarantee-issue coverage to nearly 500 residents, regulators say. Florida has banned the National Trade Business Alliance of America and a related firm for hawking unlicensed coverage to nearly 800 residents.

An unlicensed outfit called the Consolidated Workers Association was banned in Montana.

Alaska has booted five outfits, including Oxonia Insurance Group and the International Association of Benefits.

Cease-and-desist orders are the most-common regulatory response. These are mostly short-term, emergency administrative measures that may or may not stop the cons.

Several states also have launched lawsuits intended as legal elephant guns: They can impose hefty fines and

other odious terms intended to crush them or at least drive them away.

Massachusetts reached a $17-million settlement with Health Markets for selling stripped-down insurance plans as full-benefit coverage. Minnesota is suing unlicensed outfits Home Health America and Consumer Health Benefits Association for allegedly deceptive sales.

A big question is whether states and the feds have enough resources. These schemes are agile and fast-spreading, recruiting victims seemingly at will. How many schemes are operating? Dozens? Hundreds?

“These explosive cons provide an urgent case for adding more anti-fraud resources to the health-reform bills being debated on Capitol Hill,” says the coalition’s executive director Dennis Jay. “Honest Americans being crassly exploited. There should be no more debate—or excuses: Health reform must help raise the fraud fight decisively to the next level.”

James Quiggle is director of

communications for the Coalition Against Insurance Fraud.

Winter 2010 • Fraud Focus 5

Unlicensed plans also are peddled to seniors, plus

Hispanic immigrants and other low-income groups.

Informed consumers can help spot bogus plansWrestling with a deluge of bogus health plans, fraud fighters must educate

consumers how to avoid being bilked and encourage people to notify their insurance departments.

The Coalition Against Insurance Fraud is alerting consumers with wallet-saving advice such as...

Don’t sign up if: A plan offers suspiciously low premiums while promising generous

benefits and easy signup, even with pre-existing conditions; The pitchman is pushy and tries to badger you into signing a contract

right now, but is evasive about plan details; or You receive unsolicited fax or email ads, or pitches from telemarketers.

Also, contact your state insurance department: Is the plan licensed?Never take the pitchman’s word that “you’re fully covered.” Review the entire

policy before signing up. Are you buying full-benefit health insurance? A stripped-down policy? A medical discount card (which is not insurance)?

Have an informed friend, agent or other expert review all documents, including the complete policy.

Winter 2010 • Fraud Focus 6

C R I M E W A T C H

Crash kingpins slapped with stiff jail termsSome courts are leaning hard on the top brass of staged-accident rings. Consider the fate of three masterminds: The reputed head of the largest crash operation in South Carolina history was staggered with a 17-year sentence. The ring stole

$231,000 in insurance money via bogus injury claims. One driver twice lied that he’d swerved to avoid wild hogs in the road. Some 31 members have pleaded guilty.…Tu Quy Mai received 10 years for leading a Massachusetts outfit that fleeced insurers for more than $4 million with bogus medical and physical therapy claims. Mai erected a chain of clinics, with physical therapists faking treatment records to fool insurers. To avoid investigators, Mai nimbly kept changing the names of his clinics and billing companies, setting up straw owners to hide his ownership…Teresa Gallop tearfully pleaded for lenience, but received seven years for staging accidents using children as fake injured passengers in the Norfolk, Va. area. Gallop had her 16-year-old son Delanio Vick and another crony ram two cars together. Then she stuffed her four-year-old son, nine-year old nephew and 12 year-old son into the cars and had them pretend they were hurt to receive bogus treatment paid by insurers.

More homes enduring fiery fates in troubled times?Deeply in debt with too much real estate, Arkansas lawyer Aaron Jones lied

that a burglar tied him up and burned down his million-dollar mansion, prosecutors say. In fact, Jones allegedly did the deed himself for an insurance bailout. Arsons by cash-short homeowners are surfacing around the U.S. as the recession drags on. Home arsons are much less frequent than recession-driven dumpings of vehicles for insurance payouts over the last two years. But cases of anxious owners allegedly lighting up their homes continue to dot the fraud scene. Jones was managing partner in a Little Rock-area law firm. He claimed he awoke to find a burglar sticking a gun in his face. The invader tied him up and set the $1.6-million place on fire, he said. Jones made a $2.9-million insurance claim, but his shaky finances aroused suspicion. He’d reduced the home’s sale price drastically after it wouldn’t sell. Jones couldn’t make the balloon mortgage payment and he was saddled with an expensive Florida home…Several firefighters nearly died when Billy and Frayba Tipton torched their upscale house for insurance money, California prosecutors allege. The roof collapsed just 30 seconds after firefighters bolted from the flaming building.

Extortion claims for broken teeth are bustedLarry Butler’s claims for razor injuries weren’t exactly sharp, nor did Gregory

Framer’s broken-teeth scam have much bite. Both men paid for faking injuries to extort insurance money from innocent businesses. Butler filed the same claims against several razor manufacturers, costing the Palmdale, Calif. man 14 years in prison. Butler told at least four razor makers that their products had scarred his face. He submitted the same injury photos, receipts and medical price quotes to each company. A probe by GlobalOptions helped unravel the con…Gregory Flamer said he fell, hit his face and broke four teeth outside of Agnes & Muriel’s Restaurant in Atlanta. But Flamer had made four other claims for the same chompers, Travelers Insurance discovered. Flamer even denied, under oath, making the tooth claims against Travelers. His case quickly broke up just like his teeth, and the court imposed perjury and fraud sentences.

In Brief

Arson John Blash’s tour bus broke down. The Atlanta man couldn’t fix it, so he allegedly torched the bus for insurance money instead. But he also was burned over half of his body and was too injured to speak with investigators… Agent Miami producer Jose Peris allegedly stole more than $14 million by filing at least 3,800 fake contracts with premium finance companies. More than $7 million remains unrecovered…Property Jenifer Fisher said a burglar stole two TVs, a computer, cash, diamond wedding sets, digital camera and other goods. But the Wilder, Id. woman actually had pawned, sold or still possessed many of the items… Workers comp Johnson City, N.Y. police officer Matthew Romano allegedly stabbed himself then lied he was attacked. The suspected goal was to steal more than $90,000 in cmop money…Medical ID theft A Bronx man with no health coverage allegedly used a buddy’s ID to steal $70,000 in medical treatment and sue a landlord for injuries from falling down a fire escape…Insurer A claims adjuster for Zurich and Fireman’s Fund stole more than $175,000 in claim checks by diverting the money through family members. Melody Ann Mosqueda doctored real claims, California’s insurance department alleges…Health Diane Stanesic allegedly financed a gambling habit by faking cancer treatment to steal $36,000 in insurance money. The Pittsburgh-area women used her nursing background to create the claims, officials say.

Winter 2010 • Fraud Focus 7

L E G I S L A T I V E M O N I T O R

Recession leavesfootprint as 2009session closes out

The recession has left an indelible footprint as the 2009 legislative year bids goodbye. Only a few fraud bills passed while most state legislatures focused on staying solvent. One recent success already is being challenged. Texas recently passed a law — heavily backed by the Texas Committee on Insurance Fraud — blocking shady docs and lawyers from soliciting accident victims for 30 days after the crash. The law helps prevent swindlers from badgering victims into receiving bogus injury treatment. But a plaintiff lawyer and chiro have sued. They argue the law unfairly prevents them from doing business, and violates free speech. The recession is leaving other worrisome footprints as states pare expenses. But fortunately, fraud fighters defeated one of their most direct cost-cutting challenges.

Proposals try to shave costs California Gov. Arnold Schwarzenegger proposed making insurance fraud a mere misdemeanor. The light sentences would shave costs by discouraging prosecutions and keeping cheaters out of jail. The coalition, NICB, IASIU, Los Angeles DA and others vehemently opposed the move. Letting hardened fraud criminals run free to exploit consumers and state insurance programs posed a serious threat to public safety. Schwarzenegger wisely backed off as the pressure grew and anti-crime messages sunk in. This was an important victory because of the sheer volume of fraud in California, and because states often copycat moves that start in the Golden State.

In another potentially damaging budget-slashing move, Arizona consumers would pay more for insurance if a budget proposal to axe the state fraud bureau becomes law, the coalition, NICB and IASIU warned in a joint letter to Gov. Jan Brewer.

The proposal still is preliminary, but would abolish the fraud unit and effectively halt most anti-fraud efforts in Arizona. The bureau already lost most fulltime employees to an earlier budget move.

“Since criminals seek the path of least resistance, any further cuts to the Fraud Unit would put the economic health of Arizona and its residents at risk,” the groups warned. Organized fraud rings, especially, would fill the enforcement void. Several fraud bureaus around the U.S. have faced budget cuts this year, but Arizona would be the first to close down entirely.

In non-recession news, Texas regulators are wrassling over deleting phone numbers from police accident reports. The common-sense provision would make it harder for cheaters to locate and contact crash victims to try to recruit them for bogus injury treatments. The public safety department had agreed to delete the phone numbers but then reversed course, allowing the digits back onto the reports. Yet another state agency then overruled that move, forcing the public safety regulators to drum up a new proposal this fall. The National Conference of Insurance Legislators (NCOIL) continued refining model laws dealing with airbag fraud, and with businesses that illegally avoid paying full workers comp premiums. The airbag model is coherent and holistic: It requires invoices proving a replacement airbag was purchased; criminalizes the theft and purchase of stolen airbags; requires automobile accident reports to note whether an airbag has deployed; and allows manslaughter penalties for deaths and injuries. The coalition has closely advised NCOIL in drafting this common-sense measure.

Creating uniform fraud guides Model guidelines for insurer anti-fraud plans will be a key 2010 goal of the NAIC’s anti-fraud task force. The guidelines will help states develop regs directing insurers to create effective anti-fraud plans. More states are considering requiring anti-fraud plans.

In Brief

Some states already are lining up fraud bills for 2010, or at least thinking about it. More action may emerge this fall, but here are some of the early contenders...A bill in New Jersey would make it a crime for residents to lower their auto premiums by lying about where they live and garage their vehicles. Another New Jersey bill would expand the state’s insurance fraud immunity law by allowing greater exchange of information among insurers, NICB and law enforcement...The Maine insurance department will report to the legislature in November on whether the state should create an insurance fraud bureau. Any legislation would be proposed for 2010. The coalition is advising the department, supporting the need for a fraud unit...The Pennsylvania legislature is considering strengthening the state’s insurance fraud laws. The state hasn’t reviewed those laws in 15 years. One issue: Expanding the fraud immunity law to give insurers and law enforcement clearer ability to exchange info in fraud investigations...The New York Assembly’s insurance committee is considering hearings on the state’s no-fault auto insurance laws, including how to better attack auto schemes...The Rhode Island insurance department’s efforts to strengthen the state’s fraud laws fell short in 2009. The department is deciding whether to have another try next year. The coalition already is talking with the department to assist the efforts...The NAIC will hold its winter meeting in Dec. 5-8 in San Francisco. Visit www.naic.org.

Loose definitions of fraud need much tightening

B y D o u g H e a dTestifying to the U.S. Congress in

late September, a representative of the National Association of Insurance Commissioners said life settlements are “growing and diversifying at a much more rapid rate than the speed at which regulators have been able to conduct oversight, yielding significant opportunities for the conduct of fraud.”

Unfortunately, the lawmakers probably didn’t know what type of fraud the speaker was referring to.

Insurance fraud? Investment fraud? What opportunities was she citing?

At the Life Insurance Settlement Association (LISA), we were reminded of an earlier 2007 statement to the Interstate Insurance Compact, addressing the oft-discussed issue of Stranger Originated Life Insurance (STOLI).

“Whatever this is, it isn’t fraud,” Iowa Insurance Commissioner Susan Voss said, referring to STOLIs. That sort of uncertainty is a reason we believe the work of the Coalition Against Insurance Fraud is so important. “Fraud,” whatever it is, is too important a problem to insurers,

the public and the life settlements industry to be loosely defined.

Laws on the books clearly identify the elements of fraud: intent, falsehood, materiality, reliance and harm. Fraud should not be confused with a broader issue.

For most insurance consumers, fraud is an important topic to emphasize. Consumers do not want to engage in contracts then later be

accused of “fraud.” They can be terrified when the word is thrown around loosely in the context of insurance. Consumers will just back away from buying if they do not know the rules.

While promoting his book, “Predictably Irrational,” famed behavioral economist Dr. Dan Ariely of MIT suggested that fraud warnings be placed on the front part of insurance applications, not at the end. He

showed scientifically that this small change did affect consumer behavior. Such a change may be helpful.

LISA is committed to fighting fraud and we want to make sure it doesn’t occur on any side of a life insurance contract. Consumers who aren’t around when a claim comes due are certainly entitled to rely on the law and support of regulators regarding the expectation that their relatives and associates won’t have to deal with accusations of “fraud” when they file a death claim. Consumers want clarity when they buy insurance.

Bernie Madoff’s shenanigans are fraud, but not “insurance fraud.” It’s counterproductive that any consumer, or a whole industry such as life settlements, might be tainted with the brush of fraud, when that clearly isn’t true.

We have seen many fraud issues related to investments in life insurance settlements, but none related to life settlement transactions. Securities regulators are logically focused on fixing the problem. Settlement fraud is very clearly defined by the laws in the states that have adopted them. Fraud in procuring life insurance also is well-defined. Blending them doesn’t help anyone, and doesn’t add credibility to the public discussion of the broader issue of insurance fraud.

It’s noteworthy that the focus of the Coalition Against Insurance Fraud has been on fraud at the time of claim or incident. The focus going forward may have to include more activity at the origination of policies. This approach should not be limited just to life policies, but all insurance policies.

With all of the tools to stop fraud, it may be time to re-think fraud warnings and applications for insurance to ensure the proper information flows early. LISA members would welcome such initiatives in life insurance. An ounce of prevention is worth a pound of cure.

Doug Head is executive director of the Life Insurance Settlement Association.

1012 14th Street, NW • Suite 200Washington, DC 20005

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corrections to

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“With all of the tools to stop fraud, it may be time

to re-think fraud warnings and

applications for insurance to ensure the proper

information flows early.”