Insurance Fraud Problems with Identifying Legitimate Claims

Next to income tax evasion, insurance fraud is believed to be the second most costly economic crime. Because insurance fraud is an act of deception, it is difficult to identify and equally difficult to prosecute. The problem is further compounded by the fact claims adjusters carry large “pendings” (open files) and they are under severe time constraints to resolve these claims. Because of these time constraints, there has developed over the years what I call a “process and pay mentality” – claims adjusters simply need to get the files closed and to control claims related expenses. This is especially true on lower dollar exposures. In many instances, even when adjusters have concerns about the legitimacy of a claim, they make what they call a “business decision” to settle rather than incur unjustified investigative costs.

Beginning in the mid 1970s, states have implemented strong anti-fraud laws designed to curb the the staggering costs of fraud on the insurance industry and the insurance buying public. Most of these laws make it a felony to “present or cause to be presented, false, misleading or incomplete information in support of a claim.” You need not collect one penny on the claim, the felony occurs even when you attempt to do so. Unfortunately, while these laws exist, largely because of prison overcrowding and the implementation of sentencing guidelines (that set parameters for sentencing for particular crimes), most first time offenders never see the inside of a prison cell when convicted of insurance fraud. Because of this, many people are willing to roll the dice in hopes of “earning” a big payday.

In addition to making insurance fraud a felony, states have also passed legislation that requires insurance companies to investigate and report (to the state) cases of suspected fraud. For example, insurance companies in many states must file anti-fraud plans that describe the efforts they will undertake to detect and deter fraud. As part of this, they must also have one or more people whose primary role is fraud detection. The number of people engaged in fraud detection is often dependent on the number of policies in force that a particular company has. In other words, companies who have a significant number of policyholders are normally required to have more personnel dedicated to anti-fraud efforts. Insurers who fail to comply with these laws are subject to stiff fines and/or other sanctions.

Insurance companies have made great strides over the years to combat insurance fraud. For example, most companies now have what are known as Special Investigations Units (SIUs) whose mission it is to investigate and report fraud. Some insurance companies dedicate SIU investigators to investigation only – they do not negotiate and settle claims. Some other companies have a consolidated unit that both investigates and adjusts claims. Obviously, the latter type unit must be staffed by licensed adjusters who may, or may not have investigative backgrounds. I have worked with both types of units and find them equally effective.

Regarding qualifications to do SIU work, I do not believe it is necessary for a competent insurance fraud investigators to have a law enforcement background. I have worked with many highly skilled adjusters over the years who have never set foot in a police academy or had formal law enforcement training.

I am a strong proponent for investigating questionable losses. This is not just to comply with applicable laws, but to send a loud and clear message that insurance fraud will simply not be tolerated. The fact is, would-be violators know which insurance companies are the easy marks. And, you do not want that reputation.

In addition to establishing a highly competent SIU, I encourage insurance companies to offer on-going fraud recognition training to both claims adjusters and new loss takers. I also encourage the use by adjusters of what are called “Loss Detection Indicators” or “Red Flag Charts”. These handouts serve as handy desk references and assist adjusters in recognizing possible indicators of fraud in various categories. For example, under the heading “Automobile Accident Fraud”, indicators might include: Late night accident, no police report, multiple passengers, injuries inconsistent with amount of vehicle damage, etc. Under “General Indicators”, the list might include: Loss occurs shortly after policy inception, insured pushes for prompt settlement, insured or claimant threatens to retain counsel to force action by the adjuster, and so on. Most experienced adjusters know these indicators like the back of their hand. However, for new claims handlers, I believe they are invaluable.

While it’s uncommon for prison sentences to be handed out on insurance fraud prosecutions – at least for first time violators, there are some other sanctions that can be very effective and will, hopefully, create a deterrent effect. I believe that in addition to stiff fines and the payment of court costs, persons convicted of insurance fraud should be required to make restitution to the insurer and to the state for the costs of their investigations. In other words, hit them in the pocket book.

Because of the potential financial rewards and the relatively limited risk of prosecution, insurance fraud will continue to flourish. Nevertheless, we must do all that we can to curb it. The fact is, it is not a victimless crime – we all pay for it through ever-increasing insurance premiums.