fraud in the insurance industry

FRAUD IN THE INSURANCE INDUSTRY www.360training.com

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No written part of the material may be reproduced in whole or in part without express permission. This information is provided for educational purposes only. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Version History: Version 1.0 November 2008

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Fraud in the Insurance Industry 1

Fraud in the Insurance Industry

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:

• The Need for Insurance Fraud Awareness

• Homeowners’ Insurance Fraud

• Health Care Fraud

• Common Patterns and Indicators

• Understanding Identity Theft

• Investigating Claims

• Regulations of the Insurance Companies

• Purpose of the Model Act This course includes: • Eight Chapters and Conclusion • 1 Online Final Exam

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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.

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Table of Contents

Chapter 1: Acknowledging Insurance Fraud 8

The Need for Insurance Fraud Awareness

The Power of Public Awareness

Defining the Problem

A Change of Attitude

Consequences of Insurance Fraud

In the Economy

In the Insurance Industry

Impact on the Consumer

The Act of Insurance Fraud

Fraud in the Marketing Process

Fraud at the Time of a Claim

The Perpetrators of Insurance Fraud

External Fraud

Internal Fraud

Reasons for Insurance Fraud

Decline of Moral Standards

Consumer Dissatisfaction with Insurers

Inadequacy of Fraud Prevention

Complexity of insurance Industry

Insurance Companies Rather Settle Than Investigate

Pressure of Regulation

Penalties too Weak

Prevention of Insurance Fraud

Integrity in the Agency and the Industry

Recognize Potentially Fraudulent Claims

Zero Tolerance for Fraud

Chapter 2: P&C Lines Affected by Insurance Fraud 29

Homeowners’ Insurance Fraud

Arson Fraud

Property Arson

Vehicle Arson

Fighting Arson Fraud

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Water Damage Fraud

Burglary & Theft Fraud

Boat Fraud

Commercial Equipment Fraud

Disaster Fraud

Auto Insurance

Types of Schemes

False Auto Insurance Claims

Auto Arson and Theft Fraud

Vehicle Cloning

Motorcycle Theft and Fraud

Workers’ Compensation Insurance

Types of Fraud

Employer Fraud

Medical Provider Fraud

Insult Added to Injury

Other Bodily Injury Fraud

Slip-And-Fall Claims

Product Liability Claims

Understanding Risk Utility

Lost Earnings Claims

Chapter 3: Impact of Fraud on Health and Life Insurance 57

Health Care Fraud

A Federal Crime

Dishonest Health Care Providers

Types of Health Care Fraud

Impact of Fraud Goes Beyond Financial Loss

Fighting Health Care Fraud

National Health Care Anti-Fraud Association

Read Benefit and Billing Statements

Beware of “Free” Medical Treatments

Protect Health Insurance Information

Fraud and Long-Term Care Insurance

Paying for Long-Term Care Crisis

Opportunities for Fraud

Remedies for Fraud

Fraud in Disability Insurance

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Life Insurance Fraud

Life Settlements vs. Viatical Settlements

Reasons for Considering a Life Settlement

Viatical Settlements Investment Fraud

Impact of Viatical Fraud on Industry

Chapter 4: Recognizing Potentially Fraudulent Claims 76

Common Patterns and Indicators

Indicators of Moral Hazard

Morale Hazard Indicators

Common Patterns of Insurance Fraud

When the Loss Occurred

Unusual Conditions or Circumstances

Insured or Other Claimant Oddities

The Claim Papers

Receipts and Invoices

Statements

The Claimant’s Attorney

Chapter 5: Identity Theft and Insurance Fraud 81

Understanding Identity Theft

Law Enforcement Perspective

Financial Services Industry Perspective

Classifications of Identity Theft

Criminal Identity Theft

Financial Identity Theft

Business/Commercial Identity Theft

Identity Cloning

In Life and Health Insurance

Fraudulent Life Insurance Policies

Using Identity of Dying Patient

Using Identity of Healthy Person

Drug Organization Laundering

Viatical Settlements and Identity Theft

Understanding Viatical Settlements

Viatical Fraud

Identity Theft in the Health Care System

Source of Cash

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Medical Identity Theft

Fraudulent Health Care Benefits

Protecting the Beneficiaries

Use of Insured’s Social Security Number

In Personal Lines

Homeowners and Identity Theft

Reimbursement to Crime Victims

Endorsement to Homeowners’ Policy

A Personal Decision

Auto Insurance

Stealing the Identity

Bogus Accidents and Claims

Chapter 6: Legal Issues in Insurance Fraud 102

Investigating Claims

Preventing Fraudulent Acts

Auto Insurance Fraud4

Automobile Loss Exposures

Fraudulent Claims

Home Insurance Fraud

Regulations in P & C Insurance

The Law of the Agency

The Law of Sales

Commercial P&C Insurance Fraud

Commercial Policies

Business Insurance

Chapter 7: Insurance Fraud and Consumer Protection 114

Regulations of the Insurance Companies

Categories of Consumer Protection

Post-Claim Representation

Pre-Claim Representation

Consumer Protection Legislation

Theories of Recovery

Types of Remedies

Unfair Practice and Acts

The Federal Trade Commission’s Act

Uniform Deceptive Trade Practices Act

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Misstatements and Misrepresentations

False Information and Advertising

Consumers can be a Part of the Solution

Chapter 8: The Model Insurance Fraud Act 131

Purpose of the Model Act

Definitions

Fraudulent Insurance Act

Unlawful Insurance Act

Criminal Penalties

Restitution

Administrative Penalties

Civil Remedies

Exclusivity of Remedies

Cooperation

Immunity

Regulatory Requirements

Summary 141

Case Studies 144

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Chapter 1 Acknowledging Insurance Fraud

The Need for Insurance Fraud Awareness

The Power of Public Awareness

Public awareness is a powerful tool for affecting positive change and growth in

our world today.

Public awareness:

• Gives people accurate facts and information.

• Nurtures understanding and consensus.

• Ignites human passions.

• Moves people to take decisive action.

Examples of the power of public awareness include:

∇ Many credit the awareness efforts by Mothers Against Drunk Driving with

containing drunk driving by stirring up public outrage.

∇ When people died from poisoned Tylenol capsules in 1982, Johnson &

Johnson’s decisive recall of Tylenol was supported by a massive effort to

inform the public. That outreach earned the company widespread praise

and preserved the company’s stock value from a potentially catastrophic

hit.

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∇ Public awareness efforts by the Pennsylvania Insurance Fraud Prevention

Authority show the impact outreach can have on fraud. After a two-year

campaign in that state, the percentage of people who believe it is all right

to inflate workers compensation claims dropped nearly 60%.

Defining the Problem

Public awareness can be effective only if we can define

the problems we are trying to address. The anti-insurance

fraud community has struggled to even define exactly what

fraud problems it most needs to solve.

• It is a white-collar crime and a blue-collar crime.

• It happens in corporations and in government housing.

• It is committed by immigrants, elderly, CEOs, career criminals, dedicated

churchgoers, doctors, lawyers, celebrities, athletes. It is also committed

against them.

• It is a property-casualty crime, a life insurance crime and a health

insurance crime.

• It is a problem of right and wrong attitudes, and a problem of right and

wrong behaviors.

Far too many consumers tolerate insurance fraud, and believe

that wealthy insurers will not miss a few thousand dollars here and

there. Until the public sees fraud as a crime that affects

everyone’s well-being, then we will NOT succeed in this battle

against insurance fraud.

A Change of Attitude

Changing unacceptable fraud behavior first involves defining and changing

unacceptable attitudes toward crime, insurers, law enforcement, each other,

and more.

The more public awareness makes people intolerant of

insurance fraud, and of those who commit fraud, the

greater will be our impact on fraud reduction.

AWARENESS TIP!

Insurance fraud is

a big, vast and complex crime.

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Here are the key attitudes that public awareness must change:

• Unacceptably large numbers of normally honest consumers still tolerate

fraud, readily commit “soft” fraud themselves, and have relatively low

sympathy for insurance companies being victimized by fraud.

• The public views insurance fraud as a crime of easy money with little

risk of getting caught, or of few serious consequences if they are

caught.

• People believe they are entitled to commit fraud after paying high

premiums with no or few losses for many years.

• Too many insurers are in denial about the scope of fraud and its

impact on their bottom lines.

• People lack a strong sense of outrage over insurance fraud as a crime,

and view fraud as a victimless crime at worst.

• Consumers can prevent themselves from becoming victims (self-

empowerment).

Consequences of Insurance Fraud

According to the National Insurance Crime Bureau insurance

criminals are ripping off the insurance industry and the

American public daily.

• 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.

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In the Economy

Insurance fraud is an economic crime costing individuals,

business and government billions of dollars a year. Fighting

insurance fraud is a major expense for federal, state and

local governments. This dilutes the nation’s overall anti-crime

efforts by diverting often-limited government resources needed

to fight other crimes:

• States conduct extensive anti-fraud programs, funded by taxpayers and

insurance companies. Most states, for example, have insurance fraud

agencies that investigate suspected swindles and refer cases for potential

prosecution.

• State, local and federal law enforcement all are involved in investigating

insurance-fraud cases, often jointly.

• Taxpayer funded prosecutors devote considerable time and resources

to pursuing fraud cases in court, many of which are complex and require

extensive time to build viable cases.

• The federal government annually allocates several billion dollars to

fighting fraud in Medicare and Medicaid, the respective public health

insurance programs for the elderly and poor.

Insurance fraud also can impose large personal costs on its victims.

• Many victims feel embarrassed, humiliated and even violated.

• Often their lives and families also are disrupted for long periods of time.

• Many must recover from serious financial losses or fraud-related

physical injuries.

• Victims also may have to recover or replace property that was stolen,

damaged or destroyed by schemes.

• Many victims also must spend considerable assisting law enforcement

and prosecutors as material witnesses.

Federal and state government fraud-fighting efforts cost taxpayers billions of

dollars a year, thus diverting scarce tax money from other essential public

services. Fraud against taxpayer-funded health programs such as Medicare and

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Medicaid diverts that money from meeting the health needs of America’s the

elderly and poor.

In the Insurance Industry

The Insurance Information Institute estimates that fraud accounts for 10% of the

property/casualty insurance industry’s incurred losses and loss adjustment

expenses, or about $30 billion a year.

Fraud may be committed at different points in the insurance

transaction by different parties: applicants for insurance,

policyholders, third-party claimants and professionals who

provide services to claimants. Common frauds include

"padding," or inflating actual claims; misrepresenting facts on

an insurance application; submitting claims for injuries or

damage that never occurred; and "staging" accidents.

Prompted by the incidence of insurance fraud, about 40 states have set up 48

fraud bureaus (some bureaus have limited powers, and some states have more

than one bureau to address fraud in different lines of insurance). These agencies

have reported increases in referrals (tips about suspected fraud), cases opened,

convictions and court-ordered restitution.

P&C 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.

Auto Insurance ~ False injury claims involving deliberately staged car accidents,

for example, are a major reason auto insurance premiums in New York, Florida

and New Jersey are among the nation’s highest.

Workers’ compensation ~ Workers compensation premiums are rapidly rising

rapidly, in part because of fake injury claims by employees and fraud by some

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employers to lower their premiums. Many smaller businesses, especially, report

that workers compensation insurance is increasingly unaffordable.

A common life-insurance scheme involves murdering a spouse, relative or

business associate to collect on the victim’s life insurance policy, which often is

worth $100,000 or more.

The safety of people is jeopardized when they unknowingly

buy fake health insurance.

• In addition to having their premium money stolen,

policyholders needing chemotherapy and organ transplants have had to

pay for life-saving medical treatment themselves when they discovered

their insurance was fake.

• In other health schemes, medical providers often perform potentially

dangerous and unneeded surgery on healthy people solely to increase

their insurance billings.

• In many cases, the victims are elderly, poor and homeless.

Impact on the Consumer

To the Insured

Many insurance fraud schemes steal money directly from

policyholders. The varied schemes can cost people from a few

dollars to their entire life savings.

Phony Health Coverage ~ Several hundred thousand people, for

example, have unknowingly purchased phony health coverage. They lost the

premium money they paid, but many also faced catastrophic losses when they

became ill and had to pay large medical bills themselves because their policy

was worthless. Some people incurred hundreds of thousands of dollars in

personal debt.

Fraudulent Viaticals ~ Thousands of people also have lost money to viaticals, a

quasi-insurance product where people invest in the life-insurance policies of

dying people. Viaticals can be legitimate, but many people have lost large

investments in fraudulent viaticals. Some have lost their life savings.

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Dishonest Agents ~ Dishonest insurance agents will pocket client insurance

premium checks themselves, leaving the clients dangerously uncovered.

Dishonest insurance agents also increase a policyholder’s premiums by secretly

adding unwanted coverage to clients’ policies. Agents often target the elderly

with these swindles.

Ruined Credit ~ Many seriously ill people who purchased phony health insurance

found their credit ruined when they couldn’t pay large medical bills after their

policy refused to pay.

Lost Jobs ~ Some fraud schemes can cost people their jobs. Convicted swindler

Martin Frankel gained control of a small life insurance company called Franklin

American and secretly siphoned the company’s assets into his own accounts.

This sent the company into bankruptcy, costing hundreds of employees their

jobs.

The Act of Insurance Fraud

Fraud in the Marketing Process

Underwriting

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 of Fraud

Fraud occurs when a person knowingly or intentionally conceals,

misrepresents, and makes a false statement to either deny or obtain 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.

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“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.

Fraud at the Time of a Claim

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

First-Party and Third-Party Claims

If the accident you were involved in was not your fault, diminished value is

probably owed to you. As such, a third party claim is entitled to diminished value

no matter what part of the United States the accident has occurred in.

First party claims are those where the “the insured” has a direct contract with

an insurance company. For example, if the insured was driving and accidentally

hit a deer then the insured would turn the diminished value claim into their

insurance company.

Depending upon the insured’s state of residence and insurance policy language,

insurers estimate that diminished value is owed in approximately 50% of the

claims.

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First party diminished value claims vary significantly depending on the insured’s

policy and whether they are claiming diminished value under the collision,

underinsured part of the policy, or the uninsured part of the motorist coverage.

Conversely, third party diminished value claims are considered more matter-

of-fact, with an estimated 99% of claimants having the right to recover diminished

value.

Tort law allows for the innocent party to be entitled to monetary compensation.

As the decrease in the claimant’s vehicle’s value is part of the damage caused by

the insured, the claimant is entitled to monetary funds for diminished value.

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.

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• 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.

The Perpetrators of Insurance Fraud

External Fraud

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.

Professional Fraud Perpetrators

Con artists ~ Often the perpetrators are white-collar professionals operating from

medical centers, law offices, auto repair shops, or even the house next door.

Auto salvage fraud ~ This has long been a favorite scam of some professional

fraud perpetrators.

Crime rings ~ These are professional criminals who have formed groups to

engage in insurance fraud.

Arson-for-profit rings ~ These are professional criminals who have formed a

crime ring to commit arson fraud. This is a scheme in which insured property was

deliberately damaged or destroyed in order to defraud insurance companies.

AWARENESS TIP! Those who commit insurance fraud range from organized criminals who steal large sums through fraudulent business activities and insurance claim mills to professionals and technicians who inflate the cost of services or charge for services not rendered, to ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money.

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Corrupt Medical and Legal Professionals

Medical build-up fraud ~ This happens when doctors have taken advantage of

the system by billing both employees’ group health insurance companies and

employers’ workers compensation insurers by inflating both types of bills for what

were actually minor injuries.

Rolling labs ~ Vans or motor homes that have been equipped with medical

laboratories at which unnecessary and sometimes fake medical tests were

conducted. The unsuspecting patients’ insurance companies were then billed for

the costs of those tests.

Medical mills ~ These include pain mills and stress mills in which physicians or

chiropractors have repeatedly performed thousands of dollars worth of

unnecessary medical examinations, tests and treatment programs, and have

billed patients for treatments that were never given.

Opportunistic Insurance Fraud

People who have committed opportunistic insurance fraud or soft fraud have

usually done it because they saw it as an easy way to obtain some extra money

to help resolve a financial problem.

Internal Fraud

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.

Reasons for Insurance Fraud

Decline of Moral Standards

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Someone has said that 20% of the people will be honest all the time, 20% will be

dishonest whenever an opportunity arises, and the remaining 60% will be

dishonest depending on circumstances. Fraud best suits many people by

being a silent non-violent crime.

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.

Consumer Dissatisfaction with Insurers

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.

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• 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."

Inadequacy of Fraud Prevention

Described as the second largest economic crime in America after income

tax evasion, insurance fraud is both pervasive and expensive.

Insurance companies are not law enforcement agencies. They can only:

• Identify suspicious claims.

• Withhold payment where fraud is suspected.

• Justify their actions by collecting the necessary evidence to use in a

court.

The success of the battle against insurance fraud depends on two elements:

� The resources devoted by the insurance industry itself to detecting

fraud.

� The level of priority assigned by legislators, regulators, law enforcement

agencies and society as a whole to eradicating it.

Complexity of insurance Industry

Stopping insurance fraud is NOT simple. Challenging cases

suspected of no-fault fraud is a lengthy, expensive and

uncertain process. New York state law permits medical

providers to build up a claim for up to 180 days before proof of

expenses must be submitted to insurers.

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• Insurers, faced with a mountain of medical expenses from a myriad of

medical providers must decide within 30 days whether to accept or deny

the claim.

• Claims suspected of fraud are not exempted from this 30-day rule (the so-

called Presbyterian Hospital decision).

• If an insurer denies a claim based on the suspicion of fraud a lawsuit will

most likely be generated by the attorney representing the medical mill.

• When attorneys know they will lose a case in arbitration they go to court

since trial judges and referees are generally less knowledgeable about no-

fault regulations and case law.

Insurance Companies Rather Settle Than Investigate

Insurance companies have not been aggressive in fighting back. Many

companies would rather settle than fight due to the costs. Insurance

companies fear being sued if they cannot prove fraud.

Pressure of Regulation

Due to time frames placed on companies in settling claims companies don’t

have the time to investigate claims.

Penalties too Weak

Penalties are too mild or insufficient to deter fraudsters from doing it again.

Prevention of Insurance Fraud

Integrity in the Agency and the Industry

Most insurers train employees and alert insurance agents to

spot fraud. Many insurers actively educate consumers how to

detect and protect against fraud, and often sponsor active fraud

hotlines so people can phone in tips.

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.

AWARENESS TIP!

Insurance fraud prevention and

detection begins with the

insurance producer who

sells the insurance policy. He

usually has the first contact

with the insurance risk.

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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 a 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.

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.

Recognize Potentially Fraudulent 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. 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

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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 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.

Zero Tolerance for Fraud

Insurers also sponsor the National Insurance Crime Bureau (NICB). The NICB is

increasing the number of fraud convictions by gathering detailed data about

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suspected fraud crimes, and referring them for prosecution. The NICB also runs

a national consumer fraud hotline.

Federal Regulations

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 contains

significant anti-fraud provisions aimed at the health care system.

• The Act focuses on rooting out fraud in federal programs such as

Medicare but portions also impact private health care, especially in

defining the crime of health care fraud.

• Although health care insurance is generally outside the purview of

property/casualty insurance, health care fraud affects all types of

property/casualty insurance coverage that include a medical care

component.

HIPAA makes "knowingly and willfully" defrauding any health

care benefit program a federal crime. It also includes making

false statements "in any matter involving a health care benefit

program," theft or embezzlement, obstruction of investigations

and money laundering.

An antifraud program directed by the Inspector General of the Health and Human

Services Department and the Attorney General:

• Enforces the laws.

• Coordinates enforcement with state and local authorities.

• Maintains a database on prosecutions (excluding settlements) against

health care providers.

• Offers guidance and information on fraudulent health care practices to

health care providers.

Some portion of antifraud activities will be funded by fines, damages and the

forfeited property of those convicted of fraud. Private contractors investigate

Medicare fraud, and beneficiaries are encouraged to report fraud. Health care

providers involved in any claim in the federal health programs that result in a civil

monetary penalty are excluded from all federal health care programs. Maximum

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25

prison sentences for many health care crimes are extended to five to ten years,

and maximum fines per offense are increased from $2,000 to $10,000.

The Violent Crime Control and Law Enforcement Act (1994) makes insurance

fraud a federal crime when it affects interstate commerce.

• One of the law's provisions specifies that people engaged in insurance on

an interstate basis who knowingly make false statements or intentionally

overvalue any aspect of their business with the intent to deceive can be

fined or imprisoned for up to 15 years.

• Insurance company employees, including agents, who embezzle or

misappropriate any company funds, can be punished similarly if their

actions adversely affect the solvency of any insurance company.

• Other provisions make it a crime for insurance employees to make false

entries of facts in order to deceive anyone about the financial condition of

the company; bar those convicted of these crimes or others involving

similar crimes from working in the insurance business, in addition to

paying fines; and make it a crime to impede or obstruct the administration

of insurance regulations.

• In addition, the law extends the charge of federal mail fraud to cover any

illegal actions that use private overnight delivery services (such as Federal

Express) that have been used in an attempt to circumvent the federal mail

fraud statutes.

Other laws that help combat insurance fraud are:

• The federal mail fraud statute, which prohibits the use of the U.S. Postal

Service to defraud or obtain money or property by means of false or

fraudulent pretenses, representation or promises.

• The federal Racketeer Influenced and Corrupt Organizations (RICO)

statute and state laws patterned on the federal statute. RICO statutes

are regularly used to prosecute insurance fraud cases, particularly those

involving mail fraud. In addition to criminal penalties, RICO statutes may

provide for civil actions (with triple damages) against those involved

directly or indirectly in a "pattern" of criminal activity. Before the federal

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26

statute was enacted in 1970, the principals of organized crime operations

could often escape prosecution by removing themselves from direct

participation in criminal activities.

Tougher Health Fraud Penalties

Stopping widespread Medicare and Medicaid fraud is a special focus of

federal efforts. Congress has enacted tougher penalties and expanded current

federal health insurance fraud laws to cover all payers.

Stiff Terms and Fines for White-Collar Criminals

Federal law imposes stiff prison terms and fines for white-collar criminals who

loot insurance companies. The law also heavily penalizes anyone who gives

false financial information to state insurance regulators, and forbids convicted

insurance felons from returning to insurance without permission.

Information Sharing

The federal government and health insurers share fraud info on a large scale,

thus helping them discover hundreds of hidden schemes and build stronger

cases for prosecution.

The Justice Department began sharing with health insurers its own field

intelligence about health frauds with health insurance companies in 2000.

The federal government further tightens the net by collecting and sharing vast

amounts of data covering convictions and other actions against health providers

under a landmark 1996 federal law, The Health Insurance Portability and

Accountability Act of 1996.

State Government

Regulations

Increased crackdowns in the 1990s uncovered far more insurance fraud than

anyone realized existed. To give prosecutors better legal tools to convict crooks,

the Coalition against Insurance Fraud developed a tough model state fraud law.

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Several states have adopted or strengthened their insurance fraud laws based

on the coalition’s model.

Among other provisions, this model creates state fraud bureaus that help hunt

down fraud artists and build strong cases against them. Many fraud bureaus

even have power to subpoena and fine crooks.

Fraud Bureaus

Most states have set up their own fraud bureaus, often with

insurance industry funding. Many have law enforcement

powers. In some states, laws require insurers to establish SIUs

and to file antifraud plans with the insurance department. The

NICB has set up a standardized computer program to eliminate

duplicate reporting and to speed up the electronic transmission

process.

While insurance fraud, like other types of fraud, is illegal in

all states, some laws are more effective in fighting it than

others.

• Where insurance fraud is not specifically mentioned, it

falls under general fraud provisions such as fraud by deception.

• The level of seriousness attached to the crime also varies by state.

Some states classify insurance fraud or certain types of insurance fraud

as a felony, others as a misdemeanor, a lower level of crime. Some

classify insurance fraud as a felony when more than a certain dollar

amount is involved.

Privacy laws protect the rights of policyholders and claimants against the

release of information considered confidential. However, to successfully

bring a case to trial, insurers must be able to provide information to prosecutors

on individuals suspected of fraud.

Immunity laws that allow insurance companies to report

information without fear of criminal or civil prosecution now exist

in all states, BUT not all laws cover insurance fraud

specifically, or allow information to be reported to law

AWARENESS TIP!

It is easier to prosecute cases of

insurance fraud in states where it is identified as a specific crime in the penal code

along with the penalties that

can be imposed.

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28

enforcement agencies as well as to state departments of insurance.

• Many are limited in other ways, providing protection against libel suits or

violation of unfair claims practices acts only in auto insurance fraud, for

example, or arson investigations.

• Some experts believe that immunity laws should be extended to also

include good faith exchanges of certain kinds of claim-related information

among insurance companies.

The National Association of Insurance Commissioners has developed model bills

for immunity as well as insurance fraud laws to encourage states to address the

problem of insurance fraud and to assist them in formulating appropriate

legislation.

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Chapter 2 P&C Lines Affected by Insurance Fraud

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.

AWARENESS TIP! By

understanding the risks of fraud and

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

from fraud.

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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.

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 fire-related fraud 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

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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.

While arson-for-profit is unquestionably the most vicious and costly economic

assault on the property insurance industry, claims personnel should also be alert

to fraud, which occurs when an insured takes criminal advantage of an accidental

fire.

The media emphasizes the damages, injuries and fatalities caused by

intentionally set fires. However, these crimes become insurance fraud when

arsonists submit insurance claims for damages and losses

caused by the blazes.

Arson affects everyone regardless of where the fire occurs.

Insurance crime causes each person to pay the price for arson

fraud through higher insurance premiums.

The National Fire Protection Association estimates there are more than 100,000

intentional fires set annually, causing in excess of $2 billion in direct property

damage. Intentional fires consistently rank first among the major causes of

structural fire dollar losses.

Property Arson

There are many reasons why people commit property arson.

• Young offenders usually set intentional property fires for thrill-seeking or

vandalism purposes.

• Adults usually do so for financial-related reasons.

• Arson-for-profit can be economically lucrative and is a classic method

for committing insurance fraud.

There are many potential motives for burning commercial and residential

buildings and property to collect insurance proceeds. These include the following:

• To claim losses on non-existent property.

• To rebuild or remodel a home.

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• To alleviate financial problems, such as heavy debts or pending

bankruptcies.

• To replace old or damaged equipment and household goods.

• To quickly liquidate a business or unwanted inventory.

• To dispose of illegal chemicals.

• To cover other crimes, such as tax evasion or financial scams.

While an arson blaze can destroy physical evidence, insurance investigators

follow a paper trail to uncover a suspicious property fire’s origin and cause.

Among other techniques, they will typically review a claimant’s mortgages,

financial records, ownership paperwork, business records and previous claims

history to help determine if the property fire claim is truly legitimate or an attempt

to fraudulently make money.

Vehicle Arson

The planned, intentional burning of a vehicle in order to collect an insurance

claim payoff is an increasingly common scheme, and like property arson, is one

we all pay for. The National Fire Protection Association estimates one in six

highway vehicle fires are intentionally set.

• Since vehicles contain large amounts of combustible material, people

contemplating vehicle arson can incorrectly assume a fire will easily

consume the vehicle and hide the criminal evidence, so they claim an

“accidental” fire to their insurer.

• Safety and engineering designs, however, have made it very difficult for a

vehicle to burn under normal conditions.

• Insurance investigators utilize a wide range of testing techniques to

uncover potential arson.

Like property arson fraud, vehicle arson fraud schemes are oftentimes

financially motivated. People have an instant criminal motive when a vehicle is

worth more in an insurance claim than it is on the market. Some of the more

common fraud-related reasons for vehicle arson include:

• Owner cannot afford the vehicle payments

• Vehicle is worth less than the payments owed on it

• Vehicle is in poor mechanical condition and the owner cannot sell it

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• Owner has exceeded lease terms, such as mileage limits

• Owner wants a nicer vehicle

• Vehicle was used in other insurance fraud or theft schemes and is set

ablaze to cover up those crimes

Fighting Arson Fraud

Whether an arson fire is an elaborate scheme involving

organized criminal conspiracies, or a simple scam to “get a

little money” on an insurance claim, these insurance crimes

cost everyone. Beyond the financial costs, these crimes can also

jeopardize the safety of the insured and his family if an intentionally

set fire spreads to his property or workplace, causes a vehicle accident, or

releases toxic fumes into the atmosphere.

Property/casualty insurers have specialized teams of claims

professionals and investigators who examine suspicious

fire claims. Working in conjunction with fire and police

agencies, as well as experts in the origins and causes of fires,

the insurance industry is dedicated to the prevention and

detection of arson, and uncovering potentially fraudulent

claims that cost them and their policyholders billions of dollars

annually.

Water Damage Fraud

A few years ago 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.

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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.

Boat Fraud

Approximately 1,000 boats are stolen each month in the United

States, costing their owners and insurance companies millions

of dollars annually.

The insured should use the same logic that he uses to prevent car theft to

prevent boat theft. For example, he should not leave keys in the boat and

should always shut the engine off when disembarking.

Criminals typically avoid boats that take too much time to steal or create too

much noise in the theft process. Tips for making their job harder include:

• Dock your craft in well-lit areas.

• Secure your boat to the dock with a locked steel cable.

• Remove expensive equipment from your boat when not in use.

• Lock the boat's cabins, doors and windows when not in use.

• Chain and lock detachable motors to the boat.

• Remove registration or title papers in the craft.

• Disable the boat when not in use by shutting off fuel lines, removing the

battery or distributor cap.

• Use a trailer hitch lock after parking a boat on its trailer.

• Install an alarm system and a kill switch in the ignition system.

A boat is more than just a pleasure craft. It is an investment as well. Protecting

this investment includes marking and identifying one’s boat and equipment. If

AWARENESS TIP!

Boat theft is big business.

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35

his boat or equipment is stolen, this identification will help police in the

recovery effort.

• Mark your boat and equipment with the vessel's Hull Identification Number

(HIN). The HIN is a 12-character serial number that identifies your boat.

While these characters may simply look like a long string of letters and

numbers to us, they contain information that can help law enforcement

agencies more quickly recover stolen boats.

• Engrave your driver's license number in a hidden location on the boat, as

well as its engine, ship-to-shore radio, depth sounder, compass, stereo,

trailer and other expensive components.

• Take photos or videotape of your boat, its HIN and equipment for

documentation and identification in case of a theft.

Avoiding Boat Fraud

Stolen boats are frequently sold to unsuspecting consumers. A person can

avoid being victimized in a stolen vessel scam by recognizing common fraud

indicators. These include the following:

• Before purchasing a boat, make sure its HIN exactly matches the HIN

listed on the registration and/or title.

• Carefully review the vessel and its ownership paperwork for these

fraud indicators:

o The boat has been rebuilt, previously reported stolen, sunk or

recovered.

o The title or proof of ownership is a duplicate issue or from out of

state.

o Registration numbers appear altered or are not uniform.

o The asking price is well below the market value. Be suspicious if

someone offers to sell you a boat or equipment at a price that's too

good to be true.

o Do not purchase any vessel if the seller is unable to produce title or

proof of ownership.

Commercial Equipment Fraud

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Heavy equipment theft is a growing problem in the United States. Data

indicate equipment theft insurance claims are growing at an annual 10-20% rate

since 1996.

The national average value of a used piece of heavy

equipment is $135,000.

• Thieves, many of whom belong to organized crime

rings, enter jobsites after hours, load equipment onto

trailers and then either resell the machinery to

unsuspecting buyers, dismantle the equipment into

smaller pieces for resale as spare parts, or illegally

export it to other countries.

• Loaders, backhoes, tractors, mowing equipment, bulldozers, forklifts,

compressors, generators, excavators and trenching equipment are

frequently targeted by criminals for their high direct resale value. Indirectly,

their losses also cause costly job delays, downtime for businesses and

higher insurance premiums.

• With a recovery rate of only 25% – compared to more than 60% for stolen

automobiles – stolen heavy equipment offers thieves a relatively low risk

means of garnering huge profits.

Automobiles and trucks have titles and standard, uniformly placed Vehicle

Identification Numbers (VINs) to help document their authenticity. There are also

many state and federal databases that register VINs to support the location,

identification and recovery of stolen vehicles.

Heavy equipment does not currently have such an extensive

identification system. Since most states do not require

commercial equipment to be titled, ownership verification of

stolen items can be difficult. Product Identification Numbers

(PINs) and component serial number plates on heavy equipment can range from

4 to 17 digits and often lack placement uniformity. Further, these numbers are

not registered in a national database and many businesses often do not have

identification on machines marking their ownership.

AWARENESS TIP!

Commercial equipment is a

target for thieves because they realize huge

profits.

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37

These weaknesses in identification have led to various heavy equipment fraud

schemes:

Switches ~ In this crime, the original PIN is removed from the equipment and

replaced by a different one. The original numbers can either be ground off, or if

on a stamped plate, simply removed and replaced with a bogus number or one

taken from a salvaged piece of equipment.

Cloning ~ This scheme starts with a thief copying the PIN and component serial

numbers from a legally-owned piece of equipment at a jobsite or dealership.

These legitimate numbers are then used to create counterfeit PIN and

component serial number plates. From there, thieves steal a piece of equipment

that is similar to the legally-owned one and replace the stolen identification

numbers with the counterfeit numbers. The stolen equipment is now a “clone” of

the legitimate one and can be sold for a huge profit.

Non-Existent or “Paper” Equipment ~ Criminals will obtain bank loans on

equipment that does not exist or they do not possess. In this crime, a person will

create fraudulent documentation concerning a piece of commercial equipment,

and then secure a bank loan on it.

Rental Equipment Theft ~ Many criminals rent heavy equipment with no

intention of returning it. The rental agreement will be for a few days and paid for

in cash or with a fraudulent credit card. When the rental company goes to the site

to retrieve the equipment, the site will be vacant. This equipment is often

dismantled and sold as separate parts or exported to other countries.

Owner Give-Up ~ In this scheme, heavy equipment is purchased and then

falsely reported stolen. While a fraudulent theft report and insurance claim are

filed, the heavy equipment may actually have been sold or hidden. The criminal

then collects the claim payment from the insurer.

Preventing Heavy Equipment Theft

Tips for preventing heavy equipment theft and fraud include:

• Install hidden fuel shut-off systems.

• Remove fuses and circuit breakers when equipment is unattended.

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• Render equipment immobile or difficult to move after hours or on

weekends by clustering it in a “wagon circle.” Place more easily

transported items, such as generators and compressors, in the middle of

the circle surrounded by larger pieces of equipment.

• Maintain a photo archive and a specific list of the PIN and component part

serial numbers of each piece of heavy equipment in a central location.

Stamp or engrave equipment parts with identifying marks, numbers or

corporate logos.

• Use hydro locks to fix articulated equipment in a curved position,

preventing it from traveling in a straight line.

• Use sleeve locks to fix backhoe pads in an extended position, keeping

wheels off the ground.

• Install a system that disables the electrical or ignition system if universal

keys are used.

• Install a global positioning satellite tracking device in each piece of heavy

equipment.

• Report any thefts immediately to the police and notify your insurance

company

Disaster Fraud

Becoming a victim of a natural disaster may be impossible to avoid. You

can, however, avoid being victimized by dishonest contractors often found lurking

in their wake.

After a natural disaster, sales people go from door-to-door in damaged

neighborhoods, offering clean-up or repair services. While many of these

business people are honest and reputable, others are not. A person should

educate himself against unscrupulous operators and avoid becoming a victim of

disaster fraud.

When someone comes to a person’s door offering clean-up or repair services, a

person should do the following:

• Get more than one estimate. Don’t be pushed into signing a contract right

away.

• Get everything in writing. Cost, work to be done, time schedule,

guarantees, payment schedule and other expectations should be detailed.

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39

• Demand references and check them out.

• Ask to see the salesperson’s driver’s license and write down the license

number. Also, take down the license plate number.

• Never sign a contract with blanks.

• Unscrupulous contractors may enter unacceptable terms later.

• Never pay a contractor in full or sign a completion certificate until the work

is completed.

Insurance coverage may be rendered void if intentional misrepresentation by a

policyholder is discovered. A catastrophe greatly magnifies the opportunity

for fraud and abuse. Insurance fraud is a felony.

Auto Insurance

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:

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40

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 with claimant's vehicle

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 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. 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.

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41

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 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.

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42

Insured persons 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.

While 62% of stolen vehicles are found (sometimes with significant damage to

them), unrecovered autos often wind up in the hands of organized criminals.

From there, the vehicle might be:

• Shipped overseas and sold on the black market.

• Stripped at a chop shop, with its parts sold to crooked body shop

operators who then sell the parts or install them on other vehicles.

• Resold to an unsuspecting consumer

Studies show that an auto theft occurs about every 26 seconds in the United

States. That is 1.2 million vehicles each year that wind up in the hands of thieves.

Vehicle theft is the nation’s number one property crime, costing an estimated

$7.6 billion each year. EVERYONE pays for these crimes.

We’re all victims because we pay for this crime through higher

insurance rates. According to the Insurance Information

Institute, about one-third of a typical comprehensive auto

insurance premium goes to pay for auto theft claims. This

adds up to mean that we each pay hundreds of extra dollars

each year in higher insurance premiums for this crime.

Preventing Vehicle Theft

The insurance industry is trying to slow down vehicle theft fraud partly by

supporting such organizations as the National Insurance Crime Bureau (NICB).

The NICB is the nation’s leading non-profit organization exclusively dedicated to

preventing, detecting and defeating insurance fraud and vehicle theft through

information analysis, investigations, training and public awareness.

The first step in car theft prevention is using common sense. This is simple and

does not cost money. Using common sense includes:

• Locking your doors.

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43

• Removing your keys from the ignition.

• Closing your windows completely.

• Parking in well-lit areas.

The next step includes adding a visible or audible anti-theft device to a vehicle.

Car thieves avoid autos with alarms or anti-theft devices. These include:

• Audible alarm system.

• Steering wheel locks.

• Steering column collars.

• Theft deterrent decals.

• Wheel locks.

• Window etching.

The third step is utilizing a vehicle immobilizer system. This may include the

following:

• Smart keys with computer chips that must be present to start the vehicle.

• Fuse cut-offs.

• Kill switches.

Another layer of prevention includes a tracking system that emits a signal to the

police or a monitoring service when the vehicle is reported stolen. A vehicle that

has a tracking system and is stolen can oftentimes be recovered faster and with

less damage.

Vehicle Cloning

Vehicle cloning is a growing crime affecting consumers

who purchase used vehicles. Unsuspecting buyers may

believe a vehicle is a legitimate used car or truck when it is

actually a stolen vehicle.

• Cloning is a crime in which stolen vehicles assume the identity of non-

stolen, legally owned, vehicles that are a similar make and model.

• By applying counterfeit labels, plates, stickers and titles to stolen vehicles,

criminals can make them appear as if they are legitimate, legally owned

cars and trucks.

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• These criminals — many of whom participate in organized crime rings

specializing in vehicle cloning schemes — then sell the stolen vehicles to

unsuspecting consumers.

The result is that you have two or more vehicles that look exactly alike…at least

by their identification documents and vehicle tags. The reality is that only one of

them is a legitimate, legally owned vehicle. The rest are stolen and have been

disguised to look like the legitimate one.

Vehicle cloning is a highly lucrative crime. Estimated U.S. vehicle cloning

profits exceed $12 million annually, with criminals netting an average of $30,000

per cloned vehicle.

Vehicle cloning is a relatively easy and inexpensive crime to commit. For less

than $2,000, cloning criminals can use a computer, color printer, typewriter,

barcode label printer, rotary tool and engraving pen to counterfeit a vehicle’s

identification numbers, stickers, labels and titles.

Here’s how a simple cloning scheme works.

• An individual will copy a vehicle identification number (VIN) from a legally

owned and documented vehicle sitting in a parking lot or car dealership,

oftentimes high-value sport utility vehicles and luxury cars.

• The legitimate VIN is then used to create a counterfeit VIN tag, frequently

multiple times.

• From there, thieves steal a similar vehicle as the legally owned one from

the parking lot, and replace the stolen vehicle’s VIN tag with the

counterfeit one containing the non-stolen vehicle’s identification numbers.

Bearing a counterfeit tag, the stolen vehicle is now a “clone” of the legitimate one

and can be titled without detection by government agencies. To complete this

scam:

• Criminals create counterfeit ownership documents for the cloned vehicle

or obtain the ownership documentation under false pretenses, such as

identity theft.

• They use this phony documentation to sell the stolen vehicle to an

innocent purchaser, frequently at fair- or below-market value.

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45

Sophisticated cloning operations can produce vehicle clones

that are virtually undetectable by consumers, and are

oftentimes only discovered through physical inspections by

experienced auto theft investigators.

Methods of Cloning

Criminals committing vehicle cloning schemes use a variety of tools to ply their

criminal trade:

Fraudulent/Counterfeit Documents – Cloning operations typically alter,

produce, sell and possess illegal documents, such as vehicle identification

stickers, bar codes, titles, registrations, licenses and insurance cards

Altered Vehicle Identification Numbers - Cloning rings intentionally alter or

duplicate a legitimately registered VIN and use that VIN on counterfeit ownership

and registration documents, as well as the cloned vehicle.

Title Washing - Title washing involves transferring a vehicle title among states to

remove title brands and change an odometer reading. Criminals will transfer the

title among several states to disguise the vehicle’s history and confuse the

ownership trail. They use the final clean title to sell the vehicle to an

unsuspecting customer.

Identity Theft - Cloning rings frequently steal personal identification documents,

such as driver’s licenses, social security numbers and credit card numbers, to

obtain apparent legal ownership of a vehicle that is subsequently cloned, resold,

stripped for parts or illegally exported.

The Internet - Criminals increasingly use the Internet to scam vehicle buyers,

counterfeit identification documents and steal identities. Organized criminal rings

use Internet auction sites to illegally sell stolen cloned vehicles, identification

tags, license plates and other parts.

Preventing Vehicle Cloning

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46

The National Insurance Crime Bureau offers these tips to

help us avoid becoming a vehicle cloning crime victim.

• Check the vehicle’s VIN with appropriate

government agencies and your state bureau of

motor vehicles.

• Analyze the ownership pattern for any new or late

model vehicle with no lien holder.

• Have a private company conduct a vehicle history

search.

• Trust your instincts: If a used vehicle deal sounds

too good to be true, walk away.

Motorcycle Theft and Fraud

More than 30,000 motorcycle theft reports are filed each year in the United

States and Canada, resulting in millions of dollars in insured losses.

Motorcycles are tempting targets for thieves and insurance fraud scams.

Like cars, sport utility vehicles and trucks, stolen motorcycles offer criminals an

avenue to huge profits. Motorcyclists oftentimes lavish great attention on their

cycles, from elaborate paint schemes, to chromed parts, to specialized frames, to

high-performance engines and exhaust systems. It is not uncommon for a

motorcycle's base price to exceed $20,000, with aftermarket parts adding

thousands of dollars to the original cost.

Unfortunately, the sport's growing popularity has also caught the attention of

thieves and fraud artists who take advantage of more cycles and parts to further

their criminal ways. Stolen cycles are typically sold whole or stripped down for

parts resale or reconstruction into another cycle. In addition, higher-end

motorcycles are sought-after luxury items worldwide, promoting a large export

market for stolen cycles.

AWARENESS TIP!

EVERYONE should keep a

look out for look-alike

cloned vehicles when shopping

for a used car or truck!

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47

Preventing Motorcycle Theft and Fraud

Motorcyclists must be especially careful to avoid becoming a theft or fraud victim.

Because criminals can easily alter, reuse and camouflage motorcycle parts and

frames, recovery rates for stolen cycles are typically in the 25-30& range, versus

65-70% for automobiles.

In addition to theft, criminals also target motorcyclists with fraud scams. One of

the most common occurs when criminals assemble a motorcycle using replica

aftermarket parts, and then sell it as an original brand-name product to

consumers interested in purchasing a used brand name cycle. This is known as

a "cloned" cycle and is an age-old method for ripping off

unsuspecting motorcyclists.

While stronger state titling laws on replica and salvaged cycles

have helped discourage motorcycle fraud, criminals still

obtain and apply false vehicle identification numbers to

cloned cycles.

As in auto theft prevention, motorcycle owners should use common sense when

parking their motorcycle. Here are some important tips:

• Remove your keys and park in well-lit areas.

• Lock your motorcycle, even when in storage. Many motorcycle

manufacturers offer alarm systems similar to those for automobiles.

• Be wary of used cycles titled or registered as an "assembled vehicle." If

possible, have your insurer inspect the cycle prior to purchasing it.

• Verify that a previously driven cycle titled and registered as a Harley-

Davidson or other popular brand name is not an assembled clone made

from aftermarket components.

• Look closely at used cycles for a title history that reveals numerous

manufacturers’ statements of origin for major component parts.

• Watch for cycles alleged to be all custom. They could be assembled from

stolen or altered aftermarket parts, especially chrome components.

• Be on the lookout for cycles or major component parts that were allegedly

acquired at a "swap meet."

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48

• Obtain an expert appraisal and/or insurance policy pre-inspection before

purchasing and insuring a used cycle.

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.

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.

Types of Fraud

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.

AWARENESS TIP!

The field of workers’

compensation insurance has been fertile for insurance fraud

perpetrators.

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49

• 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.

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.

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50

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: premium evasion by employers.

• 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.

• 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.

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,

AWARENESS TIP!

Workers have been fined for fraud, but little has been done

against employers

who are committing

unprecedented corporate

crime.

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51

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

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52

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.

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53

• 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.

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54

• 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.

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55

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.

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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.

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Chapter 3 Impact of Fraud on Health & Life Insurance

Health Care Fraud

Since the early 1990s, health care fraud – the deliberate submittal of false

claims to private health insurance plans and/or tax-funded public health

insurance programs such as Medicare and Medicaid – has been viewed as a

serious and still-growing nationwide crime phenomenon, linked directly to the

nation’s ever-growing annual health care expenditures.

It is an undisputed reality that some of the health insurance benefit transactions

processed in the United States every year are fraudulent. Although they

constitute only a small fraction, those fraudulent claims carry a very high price

tag of billions of dollars each year.

Although the immediate targets and victims of that fraud are private health

payers and government-funded health plans, all of us ultimately pay for the

crime – through higher health insurance premiums (or fewer benefits) for

employers and individuals, higher taxes, and higher insurance co-payments for

privately and publicly insured patients.

The country’s ever-larger pool of health care money is such a

temptation to fraudsters that in certain areas law enforcement

agencies and health insurers have witnessed in recent years

the migration of some criminals from illegal drug

trafficking into the safer and far more lucrative business of

perpetrating fraud schemes against Medicare, Medicaid and

private health insurance companies.

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58

In one state, government programs and private insurers have lost hundreds of

millions of dollars in recent years to criminal rings – some of them based in

Central and South America – that fabricate claims from non-existent clinics, using

genuine patient-insurance and provider-billing information that the perpetrators

have bought and/or stolen for that purpose. When the bogus claims are paid, the

mailing address in most instances belongs to a freight forwarder that bundles up

the mail and ships it off shore.

A Federal Crime

In response to these realities, Congress—through the Health

Insurance Portability and Accountability Act of 1996

(HIPAA)—specifically established health care fraud as a federal

criminal offense, with the basic crime carrying a federal prison

term of up to 10 years in addition to significant financial penalties.

The federal law also provides that should a perpetrator's fraud result in the injury

of a patient, the prison term can double, to 20 years; and should it result in a

patient's death, a perpetrator can be sentenced to life in federal prison.

Congress also mandated the establishment of a nationwide "Coordinated Fraud

and Abuse Control Program," to coordinate federal, state and local law

enforcement efforts against health care fraud and to include "the coordination

and sharing of data" with private health insurers.

In their capacities as health insurance regulators, many states also have

responded vigorously since the early 1990s, not only by strengthening their

insurance fraud laws and penalties, but also by requiring health insurers to

meet certain standards of:

• Fraud detection.

• Investigation.

• Referral.

as a condition of maintaining their insurance or HMO licenses.

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Dishonest Health Care Providers

Individual patients can, and in some cases do, commit health care

fraud—either on their own or in collusion with dishonest health

care providers. By far the greatest damage, though, is

attributable to fraud committed by dishonest health care

providers.

• This is NOT because large numbers of physicians and other health care

professionals are dishonest.

• The vast majority are honest and ethical, and they too are victimized

both by the dishonest few within their professions and by the

increasing number of professional criminal operations that pose as

health care providers for purposes of committing fraud.

The few who make up that dishonest minority, however, have all the necessary

tools with which to commit ongoing fraud on a very broad scale. Those tools

include the following:

• The entire population of insured patients to attract and exploit.

• The entire range of potential medical conditions and treatments on which

to base false claims.

• The ability to spread false billings among many insurers simultaneously,

increasing their fraud proceeds while lessening their chances of being

detected by any one insurer.

Types of Health Care Fraud

The most common types of fraud committed by dishonest health care

providers are:

• Billing for services that were never rendered—either by using genuine

patient information to fabricate entire claims or by padding claims with

charges for procedures or services that did not take place.

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• Billing for more expensive services or procedures than were actually

provided or performed, commonly known as "upcoding"— falsely billing

for a higher-priced treatment than was actually provided (which often

requires the accompanying "inflation" of the patient's diagnosis code to a

more serious condition consistent with the false procedure code).

• Performing medically unnecessary services solely for the purpose of

generating insurance payments—seen very often in nerve-conduction

and other diagnostic-testing schemes.

• Misrepresenting non-covered treatments as medically necessary

covered treatments for purposes of obtaining insurance payments—

widely seen in cosmetic-surgery schemes, in which non-covered cosmetic

procedures such as "nose jobs," "tummy tucks," liposuction or breast

augmentations, for example, are billed to patients' insurers as deviated-

septum repairs, hernia repairs, or lumpectomies.

The illicit proceeds of such schemes typically amount to very

significant sums of money. In cases involving individual

dishonest providers, it is not uncommon to see schemes in

which the thefts have ranged from a few hundred thousand

dollars to several million dollars in a relatively short period of

two, three, or four years prior to their detection.

In “institutional” cases, involving such perpetrators as hospital chains, national

laboratory companies, transportation, pharmaceutical and medical equipment

companies, the totals in various federal criminal and civil fraud cases of recent

years have ranged from tens of millions to hundreds of millions of dollars.

Several recent high-profile fraud cases involving hospital chains and

pharmaceutical companies, for example, have resulted in criminal and/or civil

settlements ranging from $600 million to $850 million.

Impact of Fraud Goes Beyond Financial Loss

Health care fraud features the theft of very large amounts of money. However,

the damage it does goes well beyond financial losses. More important is its

inherent exploitation of individuals and their insurance information as the

basis for falsified claims. This exploitation includes:

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Falsification of Patients' Diagnoses and/or Treatment

Histories

By its nature, one cannot commit health care fraud

without FALSIFYING something about a patient’s

medical condition and/or treatment history. Thus, fraud

perpetrators routinely assign to the patients, whom they

exploit, false diagnoses of medical conditions they do not

have, or of more severe conditions than they actually have.

Theft of Patients’ Finite Health Insurance Benefits

Privately insured patients typically have lifetime caps or other limits on benefits

under their policies. Every time a false claim is paid in a given patient’s

name, the dollar amount counts toward that patient’s lifetime or other

limits.

Physical Risk to Patients

Finally, the perpetrators of some types of fraud schemes deliberately and

callously place their trusting patients at significant physical risk—illustrating

vividly why federal law provides for longer potential prison terms in health care

fraud cases that result in a patient's injury or death.

EXAMPLE: In June 2002 a Chicago cardiologist was sentenced to 12-1/2 years

in federal prison and was ordered to pay $16.5 million in fines and restitution

after pleading guilty to performing 750 medically unnecessary heart

catheterizations, along with unnecessary angioplasties and other tests as part of

a 10-year fraud scheme. Three other physicians and a hospital administrator also

pleaded guilty and received prison sentences for their part in the scheme, which

resulted in the deaths of at least two patients.

Health care fraud is a serious crime that legitimately

concerns all parties to our health care system—insurers and

premium-payers, government and taxpayers, and patients and

health care providers—and it is a costly reality that

government and society cannot afford to overlook.

AWARENESS TIP!

Until discovered those phony or

“inflated” diagnoses

become part of the patient’s

medical history, at least in the

health insurer’s records.

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Fighting Health Care Fraud

National Health Care Anti-Fraud Association

Founded in 1985 by a handful of private insurers and law enforcement personnel,

the National Health Care Anti-Fraud Association is a private-public non-profit

organization focused solely on improving the private and public sectors' ability to:

• Detect.

• Investigate.

• Prosecute.

• Prevent fraud against our private and public health insurance systems.

Today it represents the combined efforts of the anti-fraud units of over 90 private

health payers and the entire spectrum of federal and some state law enforcement

agencies that have jurisdiction over the crime, along with hundreds of individual

members from the private health insurance sector and from federal, state and

local law enforcement.

The NHCAA pursues its mission by fostering private-public cooperation against

health care fraud at both the case and policymaking levels, by facilitating the

sharing of investigative information among health insurers and law enforcement

agencies and by providing information on health care fraud to all interested

parties.

The NHCAA Institute for Health Care Fraud Prevention, a non-profit educational

foundation, provides professional education and training to industry and

government antifraud investigators and other personnel.

Read Benefit and Billing Statements

Individuals should read their Benefit and Billing Statements if they receive an

"Explanation of Benefits" after their health insurance plan has paid a claim on

their behalf, or if they receive a bill directly, they should read it carefully to ensure

that they actually received the treatments that were paid for, and they should

report apparent discrepancies to the Special Investigations Unit of their insurance

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63

company or its Hotline. Many such statements list toll-free numbers that one may

call to report suspicious charges.

Beware of "Free" Medical Treatments

Various community-based service organizations periodically

offer perfectly legitimate free screenings of vision,

cholesterol, blood pressure or other basic health indicators.

A person should question any "free" treatment that features

“no out-of-pocket expense” or “no deductibles,” or for which

he is required to provide his health insurance coverage

information.

Protect Health Insurance Information

Protect your health insurance card like your credit card.

In the wrong hands, a health insurance card is a license to

steal. A person should not give out policy numbers to door-to-door salespeople,

telephone solicitors or over the Internet.

Report fraud. He should call his insurance company immediately if he suspects

he may be a victim of health insurance fraud.

Fraud and Long-Term Care Insurance

Paying for Long-Term Care Crisis

As the American population ages, the need for nursing home

care, home health care and medical services in general is

expected to grow dramatically. Some experts consider it a

CRISIS in our country.

How to pay for this care in the future is a hotly discussed topic.

• A small percentage of individuals have private insurance coverage, and

still fewer have the ample resources needed to pay for their own care.

AWARENESS TIP!

Sometimes heavily advertised offers of

“free” medical treatments often are the lure with

which fraud perpetrators seek to obtain patient

names and insurance

information for use in fraudulent

billings.

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64

• Up to now, most nursing home care for the elderly and incapacitated has

been paid for by Medicaid, or for shorter stays, by Medicare.

• Medicare, however, provides coverage only for up to 100 days of nursing

home care immediately after discharge from a hospital, but many nursing

home stays last much longer than that.

• Although Medicaid will pay for unlimited nursing home care, in order to

qualify for Medicaid, one must not exceed strict income/asset

requirements.

• People above those levels frequently have to transfer most of their assets

well in advance of needing nursing home care in order to meet Medicaid’s

financial threshold. Others who have not done such estate planning may

have to spend down their assets on their nursing home care until they

meet the Medicaid eligibility threshold.

Long-term care insurance has been around for about 30 years.

• Originally intended to supplement Medicare’s limited coverage for nursing

home care, today’s long-term care policies cover far more.

• Besides nursing home stays, a typical policy will also cover home health

care services, care in an assisted-living facility, respite care, hospice care,

adult day care, care advisory services and so called “stay-at-home”

benefits such as medical equipment (hospital-type beds, wheelchairs,

walkers, crutches), home modification and even emergency summoning

services.

More and more people in their 40s, 50s and 60s are purchasing insurance

policies to cover themselves against the potentially catastrophic costs of long-

term care and to avoid having to divest their assets in order to qualify for

Medicaid coverage. Moreover, Congress has conferred certain tax

advantages to encourage more people to purchase this coverage for

themselves and not rely on Medicaid, and so have a number of states —

including New York.

Coverage under long-term care policies is usually limited to an overall

dollar amount or a maximum benefit period, or both.

• Typically, insurers will offer an inflation protection rider at additional cost

that will increase coverage to offset higher medical costs in coming years.

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65

• A number of large insurance companies now offer a variety of long-term

care insurance products, and business is brisk.

Opportunities for Fraud

As in any area of insurance, however, the opportunities for

fraud in long-term care coverage are abundant.

• Unlicensed companies may be selling bogus

insurance policies, collecting premiums from

unsuspecting customers, and then disappearing.

• Reputable licensed companies are discovering patterns of fraud

involving:

• Agents and brokers.

• Policy holders.

• Service providers.

Agents/Brokers

Common types of abuses involving agent/broker dealings with prospective

purchasers include:

• Overly aggressive sales tactics.

• Misleading information as to what a policy covers.

• Misleading information about what Medicare and Medicaid cover.

• Not informing a prospective purchaser about the contestable period (up to

two years) or the existence of the so-called “elimination” or “waiting”

period (typically 90 days) during which the customer will have to pay for

care before the insurer begins to pay on the policy.

• Convincing a policy holder to cancel an existing policy and to sign up for

another company’s product just so the agent/broker can earn another

commission.

Unsuspecting victims of this type of fraud may end up with a more expensive

policy that may not even offer as many benefits as their first policy did.

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Another type of agent/broker fraud is practiced upon the insurers that they

represent. This occurs when an agent/broker:

• Deliberately conceals an observable or known medical condition such as

Alzheimer’s disease, Parkinson’s disease, or Lou Gehrig’s disease that

would either disqualify the customer for coverage or result in significantly

increased insurance premiums.

• Misrepresents an applicant’s age or past medical history on an

application form filled out by the agent/broker.

Agent/broker fraud presents dangers to BOTH policy holders and insurers.

• The insurers may be paying commissions for policies that were

misrepresented to their customers or improperly obtained from the

insurers.

• Moreover, insurers may have to pay out claims on policies for which the

customer did not qualify due to concealment of underlying medical

conditions.

• Most importantly, a customer with an invalid policy may be left without any

coverage, or significantly reduced benefits, due to the agent or broker’s

fraud.

Policy Holders

Fraud by policy holders includes:

• Deliberately concealing from the agent/broker and the insurer an

underlying medical condition at the time of application that would

otherwise disqualify them from obtaining coverage. This type of fraud can

be perpetrated by an applicant for coverage, or by a family member acting

on the applicant’s behalf, or both.

• Faking an inability to perform activities of daily living (ADL) in order

to obtain benefits. Benefits under most long-term care policies do not

begin until the policy holder can no longer perform such ADL as bathing,

continence, dressing, feeding oneself, using the toilet or getting in and out

of bed, a chair or a wheelchair.

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• An insured or family member obtaining services (such as a home health

aide) or items (such as medical equipment), paying the provider directly,

then altering the receipt so as to obtain a higher reimbursement from the

insurer.

• Fabricating a receipt for services or items never provided — and

submitting the receipt to the insurer for payment.

Such activities not only defraud the insurer, they also ironically

can end up hurting the insured, since they add unnecessary

charges towards the maximum dollar amount of coverage

afforded under the policy.

Providers

Fraud by providers is probably the most common and potentially the most

costly. Frauds encountered thus far are often similar to those found in health

insurance programs such as Medicare, Medicaid, private insurance and

managed care plans and union benefit plans. They include:

• Billing for services or items that were never provided to a policy holder.

• Billing for services or items that were unnecessary or inappropriate.

• Billing for services or items that were misrepresented as other than what

was actually provided.

• Upcoding or unbundling.

• Making an inappropriate or false assessment of the insured’s ability to

conduct ADL.

• Billing the insurer for services or items at a higher rate than that agreed to

between the provider and the insured.

• Billing for services that were outside the scope of the provider’s license.

• Continuing to bill a per diem rate for nursing home care or home health

visits after the insured has died, or for nursing home care after the insured

has gone home.

• Billing for home care services while the insured is in a nursing home.

Providing inadequate or substandard services or items is

also arguably a fraud on both the insurer and the insured,

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both of whom have paid to obtain quality medical care, services and equipment

when the need arises.

Problems can include providing:

• Inadequate or insufficient medical services.

• Substandard quality medical services.

• Inadequate staffing (e.g., in a nursing home).

• Services using under-skilled, incompetent or impaired staff.

• Services using unlicensed individuals.

• Damaged, used or poor quality medical equipment or items.

Remedies for Fraud

Dealing with fraudulent and abusive practices can be daunting, but

careful strategies can protect insurers and their policy

holders.

• Insurers should deal only with agents and brokers who are licensed

and in good standing with the state insurance department.

• Insurers should reserve the right to review and approve any printed

material used by brokers and agents that is not insurer-prepared.

• Insurers should not hesitate to sever relationships with dishonest

brokers or agents and report them to the insurance department.

• Insurers should pay for nursing home and home health care only if it is

furnished in or by state-licensed facilities.

• Survey reports and any deficiencies cited against licensed providers

should be reviewed to ensure themselves that policy holders are receiving

acceptable levels of care and services.

• Assisted-living services should be those provided by reputable and

professionally — run assisted-living facilities — not some informal or

unregulated group home.

• Insurers should also carefully review the accuracy of the information

submitted by the applicant, and obtain the applicant’s consent for the

release of his or her medical history.

• Insurers should not hesitate to obtain and review medical records to

determine if claims for payment for services or items are justified by a

properly documented examination or assessment by a physician, a

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diagnosis, and a treatment plan or orders appropriate to the policyholder’s

medical condition and his or her ability to carry on ADL.

These are just a sampling of the many types of fraudulent and abusive activities

found in the arena of long-term care insurance and some ways to prevent them.

Long-term care insurance fraud needs to be watched closely.

This type of insurance coverage is becoming more popular. While not cheap,

long-term care insurance coverage is reasonably affordable for many people

today, and group coverage is even more so. Yet an increase in fraudulent

activities will only escalate the costs of this coverage and reduce its salability.

• Insurers who offer these coverages should have a sufficient number of

well-trained auditors and investigators and allocate enough resources to

prevent and contain these types of fraud.

• Insurers should also keep federal and state prosecutors and state

insurance departments informed of any fraud uncovered in their business.

Fighting these types of fraud takes time, money and commitment; but the

investment will be well worth the cost.

Fraud in Disability Insurance

State Disability Insurance (SDI) defines disability insurance fraud as any claim

for SDI benefits where a person, alone or in collusion with any other person,

willfully makes a false statement or misrepresentation, or withholds a material

fact for the purpose of collecting SDI benefits.

EXAMPLE: Filing a claim with SDI for an injury or illness that does not exist or

helping another person file a false claim is insurance fraud.

• An individual who commits disability insurance fraud against the SDI

program may be disqualified from receiving further benefits for the current

claim and future claim(s), and may be liable to repay a 30% penalty in

addition to the overpayment amount.

• Any person who falsely certifies to his/her medical condition or to the

medical condition of any other person is subject to an additional 25%

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penalty on any overpayment made due to the false medical. If criminally

prosecuted, the individual may face additional penalties.

Life Insurance Fraud

Life Settlements vs. Viatical Settlements

A life settlement is the sale, assignment, transfer, or

bequest of the death benefit or ownership of a life

insurance policy by the owner of the policy where the

insured does NOT have a catastrophic or life-threatening

illness or condition.

• Typically, the owner of the policy receives cash

(generally an amount greater than the cash surrender value in the policy,

but less than the full amount of the death benefit); and the life settlement

company becomes the new owner and beneficiary of the policy and is

responsible for the payment of all future premiums.

• Upon the death of the insured, the death benefit is paid to the life

settlement company.

• Life settlements usually involve the sale of life insurance policies by

owners where the insured is a senior citizen or where the insured may

have a medical condition that will likely result in a shortened life

expectancy.

A viatical settlement is the sale, assignment, transfer, or bequest of the

death benefit or the ownership of a life insurance policy by the owner of the

policy to a viatical settlement company where the insured HAS a catastrophic

or life-threatening illness or condition.

• Typically, the owner of the policy receives cash from the viatical

settlement company; and the viatical settlement company becomes the

new owner and beneficiary of the policy and is responsible for payment of

future premiums.

• Upon the death of the insured, the death benefit is paid to the viatical

settlement company.

AWARENESS TIP!

It is important to understand life and viatical settlements in

order to be properly aware of the potential threat of fraud

involved.

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In order to enter into a viatical settlement transaction the insured

must have a catastrophic or life-threatening illness or

condition. Such illness or condition is not required for entering

into a life settlement.

Currently,

∇ Life settlement providers and brokers are NOT required to be licensed

and are NOT regulated by the New York Insurance Department.

∇ However, viatical settlement providers and brokers are required to be

licensed and are regulated by the New York Insurance Department.

Reasons for Considering a Life Settlement

Some of the reasons why a person might consider selling his life insurance policy

are as follows:

• The life insurance policy is no longer needed or wanted.

• Premium payments have become unaffordable.

• Considering surrender of the policy.

• Policy is about to lapse.

• Change in estate planning needs.

• Change in financial circumstances.

• Change in life circumstances (such as divorce or death).

A fee, commission, or other form of compensation is usually paid to the life

settlement broker who negotiates a life settlement contract between the owner of

the life insurance policy and the life settlement company. The amount of money

that the broker receives will depend upon a number of factors, including, but not

limited to:

• The age and medical condition of the insured.

• The type of life insurance policy (e.g., universal life, whole life, term).

• The amount of the death benefit.

• The rating of the issuing insurance company.

• The amount of premiums necessary to keep the policy in force.

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• The amount of compensation the life settlement broker

receives.

A person should contact several life settlement companies

before selling his policy in order to obtain the best offer.

• Since he will be providing personal information to these unregulated

companies, he should make sure that the companies he deals with have

procedures in place to protect the confidentiality of his information.

• If he has a life insurance policy with a cash value, the amount he receives

should be at least greater than the cash surrender value of his policy.

The ownership rights and obligations under the policy are transferred to

the new owner and a new beneficiary will receive the proceeds upon the

death of the insured.

∇ This is an important decision that may have significant financial

consequences for the policy holder and his family members.

∇ As such, he may want to include his family as part of his decision-making

process before making any major changes to his life insurance policy.

∇ During the application process, the policy holder will be required to sign an

authorization releasing his medical and other personal information to the

life settlement company. Once they obtain that information, it may be

shared with other parties, including lenders or third party investors.

He should be sure to carefully read his application, contract and all other material

that he receives to determine what procedures the life settlement company uses

to maintain and protect the confidentiality of his personal information.

• He should know who is involved in the transaction and check them out

thoroughly.

• If he negotiates through a life settlement broker, find out the name of the

life settlement company involved in the transaction. Inquire about the

privacy policy of all parties involved in the transaction.

• Although not regulated by the New York Insurance Department, life

settlement companies may be subject to federal and/or state laws with

respect to privacy.

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There are several options to explore:

• Borrow against the cash value of his life insurance policy.

• Cash out the policy based on the available cash surrender value.

• Check with the life insurance company to find out if the policy can be

converted to a paid-up policy or if the death benefit can be reduced in

order to lower the amount of his premium payments.

• Use the life insurance policy as collateral to secure a loan.

Life settlement proceeds may be taxable. The policy holder should consult his

tax adviser for additional information.

A person should consult his legal advisor before entering into a life settlement

contract. Since the life settlement industry in New York is not regulated:

• There are no requirements for disclosure.

• There are no advertising guidelines for life settlements.

• The “agents” involved in these transactions are not required to be licensed

or trained.

• The Insurance Department can only provide limited assistance when an

insured has a complaint or problem with a life settlement company.

• Life settlement companies may encourage people to purchase new

insurance for the sole purpose of entering into a life settlement.

Viatical Settlements Investment Fraud

Historically, some insurance companies have offered an accelerated death

benefits option which allows the insured an opportunity to receive up to 80% of

the death benefit at any time within the last year of their projected life. The

remaining 20% is then paid to the insured's estate.

On the other hand, the business of viatical settlements involves

the selling of a policy death benefit, at less than face value, by

a terminally ill person to a third party.

This is accomplished, for a commission, with the assistance of a broker who

offers the policies to settlement provider companies for bid, with the highest

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bidder obtaining the policy for resale to investors. The broker receives a

commission based on the sale price.

Fraud in the unregulated viatical settlement industry has become rampant; as

much as 40-50% of the life insurance policies viaticated may have been procured

by fraud. Experts estimate that investors have lost more than $400 million in

these types of investments since the industry started in the 1980's. One

corporation alone charged with 155 felony counts relating to criminal fraud had

bad policies with a face value of $12.7 million.

Clean Sheeting

Unscrupulous individuals in the viatical industry procure policies by a

practice referred to as "clean sheeting" which is the act of applying for life

insurance while intentionally failing to disclose the applicant's status as

being terminally ill. They can get away with it initially because most insurance

companies avoid the added costs and invasiveness of medical exams and blood

tests by relying on an honor system below a certain policy face value.

Many insurance agents and brokers assist and often encourage viators in

committing the fraud because it not only provides more policies than would be

available though legitimate means, but it also provides a much higher rate of

return due to the fact they can be bought from viators so cheaply.

In a legitimate transaction, the ill person usually receives 50%-70% of the face

value of the policy. However, a "clean sheeted" policy viaticated during the

contestable period may offer as little as 10% of the face value because it carries

the high risk of rescission, or cancellation by the insurance company, due to

fraud.

Wet Ink Policies

After the policy is issued, the insured person will sell his policy or multiple policies

from different insurance companies, sometimes within weeks, to a settlement

provider using a broker. This is referred to as a "wet ink policy" because the

ink on the contract is still "wet" when the policy is sold.

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The odds against an individual finding out that he is terminally ill within weeks of

buying a policy are exceedingly high. To see that happen repeatedly within a

short period of time with the same broker or provider is strong evidence that they

are both well aware that the policies have been "clean sheeted”.

To hide the fact that the policy has been viaticated shortly after issuance,

con artists will obscure viatication by simply changing the beneficiary to

someone at the settlement provider firm.

• A second way is to employ a "collateral assignment" which is similar to

where the insured seeks a loan from a third party and secures the loan by

pledging the death benefits of the policy.

• In fraudulent transactions they pledge the death benefits but do not

receive a loan.

Contestability Period

Finally, some settlement providers merely delay reporting that the policy has

been viaticated until the contestability period is over, falsely believing that it is

not a crime then. An indication of culpability is that virtually all parties attempt to

hide the viatication of fraudulently obtained policies from the insurance company

for as long as possible.

The contestability clause for life insurance lasts for two years after issuance,

during which time it may be rescinded by the insurer for fraud in the application.

After this period ends, the insurer is obligated to pay the death

benefit, regardless of any fraud in the application.

Impact of Viatical Fraud on Industry

Insurance companies cannot afford to pay out large death

benefits after collecting small premiums for only a few

years. These added costs will affect everyone. If the viatical

industry does not discipline itself, it risks ceasing to exist as an

industry either by being legislated out of existence or by being

pushed out of the market after destroying investor confidence

in its product.

AWARENESS TIP!

If viatical fraud is to be stopped, it

will require:

Complete awareness of the problem.

Total commitment of the insurance

industry to see it stopped.

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Chapter 4 Recognizing Potentially Fraudulent Claims

Common Patterns and Indicators

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.

Indicators of 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 Indicators

Morale hazard is a condition that exists when a person is less careful

because of the existence of insurance. Morale hazard does not involve intent

to cause or exaggerate a loss. Instead, the insured becomes careless about

potential losses because insurance is available.

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• 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.

Common 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.

When the Loss Occurred

Studies have shown that insurance fraud has frequently taken place

relatively shortly after property, casualty and health insurance policies

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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

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.

Insured or Other Claimant Oddities

Circumstances surrounding the insurance policy have also been known to

indicate elements of potential fraud.

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.

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.

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The Claimant’s Attorney

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

suspicions that need to be investigated.

Basics of Claim Investigation

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.

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.

• He should show empathy to the claimant and offer help.

• He should 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.

• He should be sure that the claimant knows when the statute of limitations

will run, and confirm that fact in writing.

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Once the injuries have resolved, the claims professional should:

• 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.

AWARENESS TIP! Understanding and recognizing

indicators of fraudulent claims is vital to insurance fraud awareness.

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Chapter 5 Identity Theft and Insurance Fraud

Understanding Identity Theft

Identity theft can affect anyone, regardless of age, gender, economic

status, or race. Identity theft is the fastest growing crime in the United States—

an increase fueled, in part, by the involvement of organized crime. Millions of

Americans are victimized by identity theft each year at an annual cost to the

U.S. economy of over $50 billion.

Identity theft is the fastest growing crime in the United

States.

Once thieves have stolen a Social Security number (SSN) or driver's license

number, they strike quickly. The average theft is $17,000 and may be a done

deal in less than two days. Often, the perpetrators have moved on to the next

target before anyone even notices the crime has occurred.

In the end, victims usually are not responsible to pay their imposters' bills.

What they do get stuck with is the arduous task of:

• Clearing their credit reports.

• Correcting their financial status.

• Regaining control of their identity.

As they negotiate this maze, they may have problems:

• Obtaining new credit.

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• Procuring personal loans.

• Renting an apartment.

• Getting hired.

Victims of identity theft often find that the authorities are overwhelmed and

unable to render tangible assistance, as victims try to untangle the web of

deception that has allowed another person to impersonate them.

There are two primary classes of economic crime related to identity theft:

� Account takeover identity theft means the thief uses personal

information to gain access to a person’s existing accounts. This

occurs when a thief acquires a person's existing credit account information

and uses the existing account to purchase products and services. Victims

usually learn of account takeover when they receive their monthly account

statement.

� True name identity theft means that the thief uses personal information

to open new accounts. This occurs when a thief uses another person's

SSN and other identifying information to fraudulently open new accounts

and obtain financial gain. Victims may be unaware of application fraud for

an extended period of time, which can allow the thief to continue the theft

for months, or even years.

Law Enforcement Perspective

Stealing wallets and purses was once the most common way

of obtaining SSNs, driver's licenses, credit card numbers, and

other identifying information. Today, identity thieves attack

virtually every area of an individual's life — wherever personal

information is stored or sent.

Methods include:

� Dumpster diving in trash bins for credit card statements, loan

applications, and other documents containing names, addresses, account

information, and Social Security numbers.

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� Stealing mail from unlocked mailboxes to get pre-approved credit offers

and newly issued credit cards, utility bills, bank and credit card

statements, investment reports, insurance statements, benefits

documents, or tax information.

� Fraudulently accessing credit files by posing as a loan officer,

employer, or landlord.

� Getting names, addresses, birth dates, and SSNs from personnel or

customer files in the workplace.

� Shoulder surfing at ATM machines and phone booths to capture PIN

numbers.

� Culling personal data from online sources, such as public records and

fee-based information.

An identity theft is generally perpetrated to facilitate other crimes, such as

credit card fraud, check fraud or mortgage fraud or insurance fraud.

Armed with a person's identifying information, an identity thief can:

• Open new accounts in the name of a victim.

• Borrow funds in the victim's name.

• Take over and withdraw funds from existing accounts of the victim, such

as their checking account or their home equity line of credit.

Although by far the most prevalent, these financial crimes are not

the only criminal uses of identity theft information, which can

even include evading detection by law enforcement in the

commission of violent crimes.

Identity theft takes many forms, but generally includes the acquiring of an

individual's personal information for use in criminal activities such as

obtaining unauthorized credit and/or bank accounts for fraudulent means. The

personal information used includes the following:

• Social Security number.

• Date of birth.

• Mother's maiden name

• Account numbers.

• Address, etc.

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Financial Services Industry Perspective

Identity theft has emerged as one of the dominant white-collar crime problems of

the 21st Century. Estimates vary regarding the true impact of the problem, but

agreement exists that it is pervasive and growing.

In addition to the significant harm caused to the monetary victims

of the frauds, often providers of financial, governmental or other

services, the individual victim of the identity theft may

experience a severe loss in their ability to utilize their credit

and their financial identity.

This loss can be short in duration, or may extend for years. It may result in:

• The inability to cash checks, obtain credit, purchase a home.

• The arrest of the individual for crimes committed by the identity thief.

Classifications of Identity Theft

The crime takes shape in three possible ways:

• Criminal.

• Financial.

• Identity cloning.

Criminal Identity Theft

Criminal identity theft occurs when an imposter gives another

person's name and personal information such as a drivers'

license, date of birth, or Social Security number (SSN) to a law

enforcement officer during an investigation or upon arrest.

• The imposter may present to law enforcement a counterfeit license

containing another person's data.

• The imposter fraudulently obtained a driver's license or identification card

in the victim's name and provides that identification document to law

enforcement.

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• The imposter, without showing any photo identification, uses the name of

a friend or relative.

• In many cases, the imposter is cited for a traffic violation or for a

misdemeanor violation and is released from the arrest.

• The imposter signs the citation and promises to appear in court.

• If the imposter does not appear in court, the magistrate may issue a bench

warrant, but the warrant of arrest will be under the victim's name.

• The identity theft victim may not know there is a warrant of arrest issued

under his/her name.

• The victim may unexpectedly be detained pursuant to a routine traffic stop

and then subsequently arrested and taken to county jail because of the

outstanding bench warrant.

In some cases the imposter will appear in court for the traffic or

misdemeanor violation and plead guilty without the victim being aware of

this event. In other cases, the imposter is arrested and booked at the county jail

for a felony such as a drunk driving or other serious public offense.

• The imposter provides the victim's name and personal

information. This information is then recorded in the

countywide database and is usually transferred to the

State's criminal records database and possibly to the

national databases, the National Crime Information

Center (NCIC).

• Some identity theft victims, unaware of the earlier

criminal activity by the imposter, may learn of the

impersonation when the victim is denied employment or

terminated from employment. In these cases, the employer conducted a

background investigation and had relied upon the criminal history

found under the victim's name.

• The employer is legally obligated to inform the victim of the reason for the

rejection of employment.

The victim must act quickly and assertively to minimize the damage. Yet,

the responsibility to correct the erroneous data in the various criminal justice

AWARENESS TIP!

The burden of clearing one’s

name within the criminal justice

system is primarily on the victim of identity

theft.

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computer systems is with the officials working within the criminal justice system.

There are no established procedures for clearing one's wrongful criminal record.

Financial Identity Theft

Identity theft is one of the fastest-growing types of FINANCIAL FRAUD. It is

also called "account-takeover fraud" or "true-name fraud," and it involves thieves

assuming one’s identity by applying for credit, running up huge bills and stiffing

creditors - all in his name.

There's a new type of Internet piracy called "phishing." It's

pronounced "fishing," and that's exactly what these thieves

are doing: "fishing" for personal financial information. What

they want are account numbers, passwords, Social Security

numbers, and other confidential information that they can use to

loot checking accounts or run up bills on credit cards.

• With the sensitive information obtained from a successful phishing scam,

these thieves can take out loans or obtain credit cards and even driver's

licenses in the victim’s name.

• They can do damage to an individual’s financial history and personal

reputation that can take years to unravel.

∇ In a typical case, an individual will receive an e-mail that appears to

come from a reputable company that he recognizes and does

business with, such as his financial institution. In some cases, the e-mail

may appear to come from a government agency, including one of the

federal financial institution regulatory agencies.

∇ The e-mail will probably warn him of a serious problem that requires

his immediate attention. It may use phrases, such as "Immediate

attention required," or "Please contact us immediately about your

account."

∇ The e-mail will then encourage him to click on a button to go to the

institution's Web site. In a phishing scam, he could be redirected to a

phony Web site that may look exactly like the real thing. Sometimes, in

fact, it may be the company's actual Web site.

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∇ In those cases, a pop-up window will quickly appear for the purpose

of harvesting his financial information. In either case, he may be asked

to update his account information or to provide information for verification

purposes:

• His Social Security number.

• His account number.

• His password, or the information he uses to verify his identity

when speaking to a real financial institution.

If an individual understands how phishing works and how

to protect himself, he can help stop this crime.

Business/Commercial Identity Theft

Law enforcement agencies describe identity theft as the fastest growing crime

that business, consumers, and governments face. "Inside jobs" are on the

rise, as thieves increasingly steal clients' personal information from within

organizations.

Businesses can safeguard their reputation and avoid

financial damages by planning and implementing polices to

protect customers' personal information. Most companies collect

and retain personal information, but they also need to have

implemented a plan for collecting and keeping it safe.

• A business should consider that a single computer can hold records for

thousands of clients, and that an unlocked filing cabinet may contain

the access codes, account or license numbers that a company shares

with its partners, suppliers or vendors.

• Outside contractors hired to build and manage databases can view

and copy information about a company's clients, including credit card

and sometimes driver's license numbers.

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• Privacy legislation requires that all businesses put systems in place

to ensure that customer information is: secure, accurate, gathered with

consent, not used beyond a stated purpose.

Any factual or subjective information recorded or not, about an identifiable

individual is personal information. This might include such things as the

individual's name, address, age, gender, identification numbers, credit card

numbers, income, employment, assets, liabilities, payment records, personal

references and health records.

Personal information does not generally include employees' contact

information at their place of work but may include the employees' e-mail

address. In general, data that a business collects from customers or employees

must be used only for the purpose for which it was collected, or for an additional

purpose to which the person has consented.

Identity Cloning

Identity cloning is more rare, but also perhaps the most

serious variation of all identity theft. Instead of stealing the

victim’s personal information for financial gain or committing

crimes in his name, identity clones comprise the victim’s life by

actually living and working AS THE VICTIM.

• They may pay bills as the victim.

• Get engaged and married as him.

• Start a family as him.

• Identity cloning is the act of an imposter literally assuming the victim’s life

in a different location.

An identity clone will go after as much information about the

victim as possible. This enables them to answer questions in an

informative manner when they are on the move or asked about his

life.

• They will look to find out what city and state he was born in and what

street he grew up on.

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• They will want to know where he attended school and what relationships

he may have been involved in.

• They will want to know information concerning his parents and other family

members.

• They would like to have his name address and Social Security number as

well.

Identity clones consist of individuals hiding under the radar. Many of them are

convicted criminals, those running from the law, or people who suffer from

psychological problems.

Identity clones often seek out names of the deceased or young people.

Sometimes, getting a hold of a Social Security number is all it takes to completely

assume the life of that person. They also look for individuals who work in the

areas of law enforcement or the fire department. These fields require their

employees to become licensed, allowing an imposter to get a foot in the door and

clone more identities.

Victims of identity cloning typically learn of the crime after reviewing a

recent credit report.

• The report may list more than one address or mysterious charges under

their name.

• They may also become aware of the crime when noticing dual addresses

on the statements of their Social Security benefits.

Victims of identity cloning have a very difficult time

resuming a normal life. They are often subject to paying for

attorneys and private investigators to prove their case. Identity

cloning causes a much greater loss opposed to most types of

identity theft when considering the time and financial expenses

required in getting things back in order.

In Life and Health Insurance

Fraudulent Life Insurance Policies

Identify theft in life insurance also is growing.

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Using Identity of Dying Patient

A worker in a medical lab, for instance, can identify dying

patients from test results, then assume their identities and buy

life policies naming one of the worker’s relatives as

beneficiary.

Using Identity of Healthy Person

Terminally ill crooks also fraudulently take out life policies using the identities

of healthy people, and then sell the policies to firms that package them as

viaticals.

Drug Organization Laundering

In June 2004 Federal authorities cracked a twisted case of drug trafficking in the

Baltimore-Washington area that revealed how organized crime rings can use

identity theft to supplement income from other criminal sources.

The allegations in the indictment concluded that dozens of conspirators:

• Got their victims hooked on cocaine, crack or heroin.

• Then took out life insurance policies in their names.

• And collected when the victims died.

Among those arrested was an insurance agent who worked

with others to take out seventeen life insurance policies via

identity theft, and collected on the policies.

• Pilfered Social Security numbers and other stolen personal information

were used without the victim's knowledge to fill out the insurance

paperwork, the government alleges.

• The life insurance policies were paid for with proceeds from drug sales.

This indictment was unique in that it was the first time law enforcement has

come across a drug organization laundering proceeds in this fashion.

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• In the past, drug gangs would set up retail shops such as auto parts

stores, buy inventory with the drug proceeds, and then double their money

through sales.

• Identity theft is apparently just the latest method.

Some of the insurance policies were taken out on behalf of drug users. Others

were taken out on behalf of other individuals with low life expectancies. In each

case, a member of the crime ring was the designated beneficiary.

Viatical Settlements and Identity Theft

Understanding Viatical Settlements

Viatical settlements are sales of life insurance policies on persons who

have a life-threatening condition to unrelated investors. Viaticals arose

during the early years of the AIDS epidemic, but are now available to others who

have a life-threatening illness or condition.

• Licensed viatical settlement brokers typically offer suitable policies to

viatical settlement companies.

• The insured individual receives an amount of money less than the face

value of the policy to use for his or her own purposes, such as medical

expenses, travel, final wishes, etc. Investors receive the face value of the

policy at the death of the insured.

Under New York State Insurance Law, viatical settlement brokers must be

licensed.

• A viatical settlement broker must show his or her license when asked.

• The proceeds from a viatical settlement agreement must be deposited in a

New York State bank or other institution approved by the Superintendent

of Insurance.

• The proceeds are held in escrow until released when the transfer of the

policy is completed.

• An individual has a minimum of fifteen calendar days (from the date the

proceeds are received) to rescind a viatical settlement agreement.

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The amount the insured is paid as a percentage of the face amount of the

policy will vary based upon his life expectancy, current interest rates, etc.

• If he has certain estate needs, such as funeral expenses; the need to

provide for a spouse; etc., he may want to explore other sources of funds,

such as reverse mortgages, rather than selling his life insurance policy.

• He also should check with his insurer to determine if his policy contains an

accelerated benefits provision, which allows terminally ill insured

individuals to collect a portion of their death benefit.

"Cash surrender value" is the money one is entitled to when he surrenders

a life insurance policy.

• Cash values are typically smaller than the face value of the policy.

• His payment under his viatical settlement agreement should exceed the

cash value of his policy; otherwise he would be better off surrendering his

policy for its cash value.

The viatical settlement broker usually receives a fee when completing the viatical

settlement agreement. The fee is typically based on a percentage of the viatical

settlement agreement in accordance with the contract between the policyholder

and the viatical settlement company.

Viatical Fraud

Federal and state investigators have been working to combat

fraud in deals that let investors collect on a stranger's life

insurance policy.

• Terminally ill people sell their life insurance policies for a portion of

the death-benefit amount (the longer they are expected to live, the less

they get), and investors buy the right to collect the full benefit when the

insured dies.

• Companies that buy and sell policies base the price on the insured's

life expectancy. A policy may, for example, be designed to deliver a 24%

total return if the insured is expected to live for two years. If the person

dies after one year, the investor gets a 24% annual return. But if the

person lives for four years, the annualized return dwindles to 5.5%.

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• The timing issue is a problem even when everything is on the up and up.

For example, AIDS treatments developed in recent years have helped

many patients outlive their original life expectancy by several years.

• The fact that it is very difficult for an investor to get a second opinion on

the life-expectancy estimate--the insured's identity usually isn't

disclosed--can open the door to abuse.

Until recently, investors in viatical contracts who suspected trouble had

difficulty knowing where to turn. Although a few states were actively fielding

complaints, most were fighting over jurisdiction. They weren't sure whether this

was an insurance problem or a securities problem.

In the past few years, many states have closed the gap. At the same time,

insurance companies worried about being ripped off have stepped up their

antifraud efforts, and federal authorities have launched investigations into

several viatical companies.

EXAMPLE: Examiners might discover that medical records for some viators

said that they had been diagnosed with a terminal illness. Yet investigators found

that the same person's life insurance application, usually dated months or years

later, often answered "no" to questions about terminal illness.

In some cases, the viatical company may have had a dozen policies on the same

individual, even though it's unlikely that any policy would have been issued if the

insurance company knew the truth about the person's condition.

Identity Theft in the Health Care System

There are over 10 million victims of identity theft in the United States each year.

Source of Cash

The health care system in the United States is under assault

by organized crime.

• Health care now consumes one in seven dollars and is growing at a rate

six times greater than the rest of the economy.

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• The health care system is the richest source of readily available cash

within the United States economy.

Medical Identity Theft

Identity theft from the individual beneficiary’s medical account information

represents the most common cardinal event within health care fraud.

Medical identity theft involves:

• Obtaining a victim’s demographic and health insurance information.

• Including the person’s Social Security number, without their consent.

• To use in committing claims fraud or other crimes.

Fraudulent Health Care Benefits

• Criminals use a beneficiary’s medical identity information to generate

invoices for goods and services that were NEVER delivered to the patient.

• Such activity DAMAGES the beneficiary’s personal health record and

defrauds his/her plan.

• Criminals may also open fraudulent new accounts, forge checks in the

beneficiary’s name, transfer titles, generate money orders, and open

bogus phone service accounts.

• They can even file bankruptcy and often commit additional crimes in

the beneficiary’s name.

There are over 10 million victims of identity theft in the United States each

year much of which originates within the health care system.

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• On average, it takes 175 hours of work for a victim of identity theft to clear

their good name.

• In most cases, the victim does not even know that they have had their

identity stolen until they are denied employment or insurance coverage for

what is ultimately found to be false health information that has been

placed into their medical records as a result of the criminal’s fraudulent

transactions.

The reason criminals favor stealing a beneficiary’s

medical identity is understandable. With this information,

criminals can obtain:

• High-demand expensive aids.

• Pharmaceutical products.

• Other medical supplies that are easily fenced in the

burgeoning gray market of wholesalers or sold directly

to other purchasers at a discount through the Internet.

Compounding the problem, beneficiaries must routinely give

all of their identifying demographic and financial information

to each vendor of goods or services within the system.

This information routinely includes not only name and address but also

birthdates, their Social Security number, health insurance account numbers, and

credit information including bank account numbers. Armed with this information,

criminals can reconstruct an individual’s identity and proceed to use that identity

in the manner described above.

This sensitive information is readily obtained from medical offices

where patient records are not effectively secured from

temporary or low paid custodial staff members looking to

supplement their incomes. Otherwise reputable vendors will often

find that their employees are selling this information on the

street.

Frequently, hospitals and health insurance companies discover that criminals

seeking this confidential information have compromised their information

systems.

AWARENESS TIP!!

The amount of confidential information

demanded from an individual

before they can access the health care

system exposes them to devastating risk when their

identity is stolen.

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Protecting the Beneficiaries

It is important that we concentrate upon protecting the

beneficiaries of the health care system as they navigate the

complexities of the health care system. Health plans cannot

continue to ignore the growing volume of identity theft.

• Health plan administrators must maintain the financial integrity of their

plans, and protect the participants from both identity theft and

fraudulent billing by providers. Money paid out on fraudulent claims

reduces the quality of care for legitimate plan users.

• Within the current health care system, private health plans must have the

ability to protect the beneficiary from criminal activity while they also

protect their own financial resources. The amount of money in health care

draws criminal activity into the industry. Private health plans need to

take this growing threat to themselves and their beneficiaries

seriously.

Use of Insured’s Social Security Number

While the Social Security Act limits the circumstances under which

a state may require an individual to provide his or her social

security number, there is no such prohibition directed at

private insurers in this regard.

It should be noted that when an applicant does furnish their social security

number to the health insurer, the use of this information by an insurer in New

York is subject to the requirements of the Department of Insurance’s Privacy

Regulation 173.

According to this regulation, an insurer must implement a comprehensive

written information security program that is designed to:

• Ensure the security and confidentiality of customer information.

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• Protect against any anticipated threats or hazards to the security or

integrity of such information.

• Protect against unauthorized access to or use of such information that

could result in substantial harm or inconvenience to any customer.

Because there is no specific legislation prohibiting insurers’ use of social security

numbers as identifiers, the Department cannot mandate that insurers refrain from

their use. However, the Department, in reviewing the policies and systems

established by insurers to implement their information security program, will be

cognizant of insurers’ protection of insureds’ social security numbers.

In Personal Lines

Homeowners and Identity Theft

Identity theft is a hot topic today as news stories regularly profile victims

who are struggling to recover from its devastating impact.

• This is helping more consumers to recognize that they need to take

preventive measures to better safeguard their personal information

and hopefully lessen their risk of falling victim.

• And, judging by the calls received by Better Business Bureaus, it is

leading some consumers to question whether they should also

purchase protection in case they do fall victim.

Reimbursement to Crime Victims

Identity theft insurance provides reimbursement to crime victims for the cost of

restoring their identity and repairing credit reports. This would include expenses

such as:

• Phone bills.

• Lost wages for time taken from work to deal with the fraud.

• Notary expenses.

• Loan re-application fees.

• Certified mailing costs and sometimes attorney fees, with the prior consent

of the insurer.

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Endorsement to Homeowners’ Policy

Some insurance companies now include identity theft

insurance as part of their homeowners’ insurance policy.

Others sell it as either a stand-alone policy or as an endorsement

or rider to a homeowners or renters insurance policy.

A Personal Decision

Whether to purchase identity theft insurance is a personal decision.

• One should keep in mind that whether insured or not, victims are usually

not held responsible for fraudulent charges incurred by identity thieves.

• It is out-of-pocket losses that can be a consideration.

EXAMPLE: A survey which focused on ten metropolitan areas, found that ID

theft victims paid an average of $587 in out-of-pocket charges for legal fees,

copying charges, telephone calls and lost wages.

If an individual decides in favor of purchasing insurance against identity theft, he

should consider the following:

• Check first with his insurance agent or his homeowners’ insurance

company to find out if they offer identity theft insurance. Ask what they

would recommend for his situation.

• Be cautious before investing money in a new product being offered by an

unknown company. Make sure he is dealing with a reputable organization.

• Ask about the deductible; coverage limits, and any restrictions on how

the money for expenses is to be spent.

• Have a clear understanding of the services and assistance he would

receive in the event of an identity theft when comparing product costs.

EXAMPLES: For instance, some third party insurers reimburse out-of-

pocket costs, as well as offer investigators to help victims wend their way

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through the process of working with creditors, law enforcement, credit

bureaus and the like.

Auto Insurance

Stealing the Identity

Ironically, law enforcement’s success in fighting many

ordinary crimes such as car theft and burglary has spurred

identity scams. Enterprising crooks increasingly are stealing

people’s personal identities because it’s less risky and more

profitable than, say, burglary, experts say.

• Hacking into a database containing thousands of Social Security

numbers, dates of birth, policy numbers or driver’s licenses can easily put

criminals into the identify-theft business in a big way.

• One approach is to simply write down a license plate number, find the

driver’s name and then tell the motor vehicle registry that one has a new

address. The registry sends the registration to the new address. It often

includes the driver’s license number, which in many cases is also the

victim’s Social Security number.

• Sometimes, an insider at the registry provides license numbers to

crooks. Many stores also ask customers to write their driver license

number on checks, and a clerk can simply photocopy or write it down.

• Rummaging through dumpsters behind medical buildings and stealing

credit card receipts at restaurants also are time-tested sources.

• Crooks can easily find useful personal data on the Internet, or simply

buy data from information brokers who sometimes ask few questions

about a buyer’s motives.

Identity rip-offs against auto insurers especially are

acute in metro areas of populous states that require no-

fault auto coverage, such as New York, New Jersey,

Michigan and Pennsylvania.

Here, insurers must pay expensive bodily-injury claims no

matter who’s at fault.

AWARENESS TIPS!!

No-fault auto insurance is the biggest hotbed of

identity scams outside of

health insurance.

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Bogus Accidents and Claims

The crooks often steal the identities of people with good driving records.

• This ensures they’ll meet the company’s underwriting guidelines.

• A stolen identity makes it far easier to procure insurance, and all that’s

needed is someone else’s driver license number and name.

EXAMPLE: With the policy in hand, the perpetrator will maneuver an auto

accident, colliding with an innocent victim’s car or one loaded with accomplices.

Not coincidentally, both cars are filled with unrelated passengers, who often hide

behind stolen identities when making claims that can average $15,000-$20,000

per passenger.

A single stolen name often is used in four to six accidents.

• Typically, the driver hires three or more passengers who are paid to act

injured.

• The driver then spots a vulnerable victim – such as a woman driving alone

or a senior citizen — and crashes his beat-up old car into the victim’s car.

• The driver, who uses a stolen identity, does not file insurance claims but

the passengers do.

• Usually the driver does not own the policy; some other shadowy person or

business is the insured.

Faking injuries, the passengers then seek "treatment" at a dishonest clinic, which

racks up large and often-phony medical bills. The passengers then file claims

against either or both drivers for bodily injuries, and no-fault automatically pays.

EXAMPLE: One case involved 96 related staged accidents with multiple stolen

identities. One victim even had his identity grabbed when he exchanged his

license info with the other driver at an accident scene — which turned out to be a

staged accident. Others had their identities stolen after presenting licenses to

apply for driving jobs.

EXAMPLE: A Dallas intersection had 40 rear-end collisions in two years.

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• No crashes actually happened. They were all part of a massive stolen-

identity ring.

• Crooks grabbed the identities of more than 150 residents, bought auto

policies in their names, and then filed $2.8 million in phony claims — all for

supposed crashes at that ill-fated intersection.

• The theft victims didn't know their names were used until investigators

contacted them.

• Many victims didn't even own cars, or had expired driver's licenses.

EXAMPLE: In New Jersey, State Farm successfully sued 36 people who filed

$350,000 in claims from four accidents.

• One defendant stole a New York man's identity,

and then staged accidents after buying auto

policies in his name. The fraud surfaced during

routine investigations.

• One fraudster altered a police report to add names

of passengers.

• People who also claimed they were involved in the

accidents couldn't even remember who owned the

car or the vehicle's model.

• Many theft victims spent months proving they were

innocent to avoid prosecution and ruining their

credit.

AWARENESS TIP! If identity theft and

insurance fraud is to be stopped, it will

require:

Complete awareness of the problem. Total commitment of the insurance industry to see it stopped.

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Chapter 6 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

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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.

AWARENESS TIP!

The REAL victims of

insurance fraud are…ALL of

US!

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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 phenomenon. 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.

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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

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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.

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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 Insurance

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

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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 sometime in the future.

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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

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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.

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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.

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

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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

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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.

AWARENESS TIP!

Any omission or concealment

that is injurious to another or that allows a

person to take unconscionable

advantage of another may

constitute criminal fraud.

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Chapter 7 Insurance Fraud and Consumer Protection

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

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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.

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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

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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.

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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.

Consumer 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.

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• 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.

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• 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.

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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.

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Unfair Practice and Acts

The Federal Trade Commission’s 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

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• 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.

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• 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 Misrepresentations

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.

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• 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

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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.

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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:

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� 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.

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.

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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.

Consumers can be a Part of the Solution

Criminals who commit insurance fraud are stealing our money. Everyone is a

victim because we pay for this crime through higher insurance rates. Insurance

fraud costs Americans billions of dollars each year. Fraud is the second most

costly white-collar crime in America behind tax evasion. And insurance industry

studies show approximately 10% or more of property/casualty insurance claims

are fraudulent.

The National Insurance Crime Bureau (NICB) and the nation’s

property/casualty insurers are out to expose this ugly secret,

stop insurance fraud, and help consumers keep their money

in their pockets.

AWARENESS TIP!

Keeping our money in our pockets starts

with understanding who commits

insurance fraud and why they do

it.

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Insurance criminals are not easily identifiable. They typically do not carry

weapons, but they can be just as lethal as other criminals. Insurance criminals

range from organized fraud rings, to dishonest doctors and lawyers, to

unscrupulous vehicle repair facility operators, to neighbors who pad a claim.

Regardless of who they are, insurance criminals are motivated by one

thing: MONEY. Some insurance crimes are elaborately planned schemes

involving dozens of organized criminals. Others are simple attempts to get “a little

extra money” on a claim. Either way, these criminals cost each of us money and

in some cases jeopardize our safety.

Consumers are part of the solution. Each person can do the following:

• Protect himself from becoming an insurance fraud victim by knowing more

about these crimes.

• If he suspects insurance fraud, he can call the National Insurance Crime

Bureau toll free at 1-800-TEL-NICB to report his suspicions.

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Chapter 8 The Model Insurance Fraud Act

Insurance fraud in the United States — whether committed by claimants,

providers, employees or insurers — is pervasive and expensive. Insurance fraud

increases premiums, thus decreasing consumer capital for other goods and

services, and overall lowers our nation's standard of living.

Businesses have been forced to reduce staff, restrict growth and in some cases,

relocate because of high levels of fraud. Further, a high percentage of insurance

company insolvencies have been linked to internal fraud, and have left claimants

in financial ruin. Insurance fraud is perceived to be a high-reward, low-risk

endeavor; without substantive penalties, it's viewed as an easy way to make a

dollar.

The Coalition Against Insurance Fraud believes the effort to

combat insurance fraud must be a partnership among

consumers, the insurance industry and government.

States vary in their statutory efforts to fight insurance fraud. A total of 44

states currently define insurance fraud as a specific crime, and 37 states further

define certain classifications of insurance fraud as a felony. Insurance fraud laws

are essential to combat the increasing effect of fraud on the cost of insurance.

There are three major categories of fraud:

• Claims fraud.

• Applications fraud.

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• Fraud committed by employees in the insurance industry including agents,

adjusters, brokers or persons claiming to be in the business of insurance.

Any comprehensive insurance fraud act should address all

three categories. Then, strict enforcement will help restrain

prices and keep the insurance system financially sound. Also,

enforcement brings fairness to the system so honest consumers

don't subsidize, through unnecessarily high premiums, those

who cheat the system.

Purpose of the Model Act

The Model Insurance Fraud Act establishes insurance fraud as a specific

crime and as a felony in felony cases.

∇ It attacks insurance fraud at the source and can be used as a framework

for additional laws in each state, such as creating an insurance fraud

bureau.

∇ The model will help reduce fraudulent claims paid by insurers.

∇ Since the model also covers fraud committed by insurers and those who

purport to be insurers, it would curtail fraud committed against

consumers and lessen financial disruption of the insurance industry.

∇ Specifically, the model includes a cohesive attack on fraud with both

civil and criminal penalties for committing what's defined as either a

fraudulent insurance act or an unlawful insurance act.

∇ The model addresses all forms of insurance fraud including claims

fraud, underwriting fraud, deceptive sales practices and scams by

insurance operators.

The fraudulent act is an act based on an intent to defraud

someone, whether an insurance company or a consumer.

• The unlawful insurance act requires a lower standard of

proof and is designed to attack scams such as medical mills and fraud

AWARENESS TIP!

The Model Insurance

Fraud Act can be used as a framework for additional laws in each state.

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rings in which the leaders often are able to shield themselves from

prosecution under current laws.

• The model significantly expands the definition of insurance fraud that

currently exists in state laws and other models, as well as the remedies

available to both the consumer and insurer when defrauded.

• The bill affords the consumer an additional level of protection particularly

when it comes to shutting down the bogus insurance companies.

• The bill also sets strict penalties for licensed practitioners who are found in

violation of the fraud act.

The legislation puts insurers on the front line in the fight against fraud.

• Insurers are required to cooperate with law enforcement in cases of

suspected fraud.

• The model contains the broadest civil immunity for anyone who shares

information about suspected fraud.

• The model also requires insurers to draft anti-fraud plans and to place

fraud warnings on applications and claims forms, but avoids micro-

management of anti-fraud efforts by insurance departments.

Since the coalition first proposed this model in 1995, several states have utilized

its provisions in their efforts to enact anti-fraud legislation.

Definitions

This section defines terms used in the legislation, including “insurance

transaction” and “insurer.” The term “insurer“includes anyone purported to be in

the business of insurance as well as those authorized to do business in that

state.

The bill also defines “practitioner” as any individual who is, or is required to be, a

licensee of the state and whose services are compensated in whole or part by

insurance proceeds. This includes medical providers, lawyers, agents, building

contractors, adjusters and automotive repair shops.

These definitions are written to cover all forms of insurance fraud, as discussed

above, as well as those who are most likely to commit fraud, and are designed to

establish greater consistency from state to state.

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Fraudulent Insurance Act

A fraudulent insurance act is defined as an act committed by anyone who,

knowingly and with intent, defrauds another person for gain. A fraudulent

act includes claims fraud, application fraud and the legislation has a separate

provision dealing with insurer fraud. Individuals who conspire, aid and/or abet a

fraudulent act also are covered by the definition. A conviction under these

provisions must meet the criminal burden of proof beyond a reasonable doubt.

Among the actions that fall under the fraudulent act is the preparation and

presentation of false information affecting:

• The application for any insurance policy.

• An insurance claim pursuant to any policy.

• Any payments made pursuant to any insurance policy.

The actions that would fall under the insurer fraud elements of the fraudulent act

include:

• The solicitation for sale of any policy or purported policy.

• An application for certificate of authority.

• Misrepresentation of the financial condition of any insurer.

This section makes ALL forms of insurance fraud, as well as

attempts to commit fraud, a specific crime.

• Without definite language targeting attempts, conspiracies, and aiding or

abetting fraud, an insurer often must pay false claims before a crime can

be said to be committed; even then, others involved in the fraud may go

free.

• The provision protects consumers from unscrupulous operators by

expanding the definition of fraud to include schemes perpetrated by

insurers or those who claim to be in the insurance business.

Unlawful Insurance Act

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An unlawful insurance act is defined as an act committed by anyone who

commits or allows to be committed an act with “an intent to induce reliance.”

Unlike the fraudulent insurance act, “intent to defraud” is not required; the act

utilizes a form of recklessness standards. Convictions under this section must

meet the civil standard of proof, which requires a preponderance of evidence

The legislation separates the definition for unlawful insurance actions

affecting claims and applications fraud from fraud committed by insurers.

Actions falling under the claims/applications fraud portion of the unlawful act

include:

• The application for any insurance policy.

• An insurance claim pursuant to any policy.

• Payments made in accordance with the terms of any policy.

Actions falling under the insurer fraud portion of the unlawful act include:

• An application for certificate of authority.

• Misrepresentation of the financial condition of an insurer.

• The solicitation for sale of any policy or purported policy.

This section expands the legal definition of insurance fraud into an entirely

new arena.

• Those who have shielded themselves from the actual act of fraud—

signing a false claim form, for example—can be charged through a civil

action, which requires a different standard of proof.

• This provision is designed to punish individuals who create a fraudulent

scheme, such as a medical mill, but have underlings execute it as the

schemers reap the bulk of the illegal reward.

• Like the provisions against fraudulent acts, this section also protects

consumers from unscrupulous operators by expanding the definition of

fraud.

Criminal Penalties

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The criminal penalties only apply to those persons charged with

committing a fraudulent insurance act.

• The penalties use a stepladder approach and increase based on the

amount defrauded and/or previous convictions for fraud.

• The provisions are meant to dovetail with the existing penalties already in

place in the states for other similar crimes.

• The penalties would allow the courts and the prosecution to segregate or

aggregate the economic loss suffered by the persons defrauded.

• The highest felony charge includes those charged with committing a

fraudulent insurance act where the offense places anyone at risk of death

or serious bodily injury.

Criminal sanctions must be severe enough to act as a deterrent rather than be

treated by perpetrators as part of the cost of doing the business of fraud. The

commonly used stepladder approach deters repeat offenders as well as

particularly egregious forms of fraud; states are left free to define those levels as

the legislature sees fit.

Restitution

Anyone convicted of committing a fraudulent act would be

required to make monetary restitution for any financial loss

due to the violation. The legislation grants the court the ability

to order the restitution to be paid in a lump sum or installments.

Restitution for victims is codified both for the purpose of providing justice and as

a way to seize perpetrators’ ill-gotten gains. Also, by allowing the court to decide

the payment schedule, you assure that the person involved has the financial

ability to give restitution to the victims of the fraud.

Administrative Penalties

The legislation includes language requiring notification of the appropriate

state licensing authority if any practitioner is found guilty of a fraudulent

insurance act.

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• The licensing authority would be required to hold a hearing to consider

whether administrative sanctions (including license revocation) are in

order against practitioners convicted of a fraudulent insurance act.

Practitioner is defined in the act to include all individuals who are licensed

by the state and compensated through the insurance system.

• Appropriate sanctions against licensed practitioners are included because

depriving them of their primary livelihood is an additional deterrent,

especially against repeat offenses. By mandating licensing authorities to

have hearings on those practitioners who have violated this act, you

assure that the public will be protected from those individuals who through

their fraudulent activity violate the public trust.

Civil Remedies

Individuals charged with an unlawful insurance act face these provisions.

Anyone defrauded by an unlawful insurance act can recover the profit or

payment lost as a result of the violation, plus reasonable attorney fees and legal

fees not to exceed $5,000.

These provisions also can be used against those charged with a fraudulent

insurance act. The state attorney general or any appropriate prosecuting

agency would have the authority to conduct civil proceedings on behalf of the

state insurance department and the victims of a fraudulent insurance act. If the

court finds the person has committed the fraudulent act, a $5,000 fine for each

violation would be assessed. Victims can recover the profit or payment lost

because of the violation, reasonable attorney fees and court costs, and all other

economic damages resulting from the violation. The legislation also allows

victims to recover treble damages if there is clear evidence the offense was part

of a pattern or practice of violations of the fraudulent insurance act.

The legislation also would allow the states to set a statute of limitations

either based on the amount of years after the commission of the act or the

amount of years after the act was discovered.

Civil remedies may be sought in cases where it’s difficult to prove charges

beyond a reasonable doubt; this is often true for acts defined as “unlawful.”

Attorney and legal fees in these cases are limited to $5,000 to eliminate any

profit motive, which should deter frivolous suits. In criminal cases, civil penalties

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and the threat of collecting treble damages is an additional deterrent. This

provision also makes it easier for prosecutors to bring charges against anyone

who commits a fraudulent act. Again, victims are assured of restitution and

recovery.

Exclusivity of Remedies

The legislation restricts the civil remedies provisions so they may not be used in

conjunction with, or in addition to, any other remedies available under law. The

exclusion avoids the potential for a plaintiff to bring actions under more than one

statute for the same act, a kind of double jeopardy.

Cooperation

Insurers are required to disclose information about suspected insurance

fraud to any court, law enforcement agency or insurance department.

• The bill allows a disclosing insurer to have the right to receive case-related

information from the agency to which the insurer submitted material.

• The legislation would protect any information that is privileged.

• The provision would preclude anyone from receiving restitution if they fail

to cooperate with the request for information.

This section prevents insurers from simply paying fraudulent claims and

then passing the costs on in the form of higher premiums. Under this

provision, suspected cases could no longer be ignored. To assist insurers in their

in-house attempts to curtail fraud, government agencies in turn would have to

disclose relevant information about reported cases.

Immunity

The bill grants civil immunity to anyone who, in the absence of actual

malice, furnishes information about insurance fraud.

• The bill allows exchange of information between insurers and any other

organization if it’s for the purpose of detecting and deterring insurance

fraud.

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• The section further allows for recovery of reasonable legal fees if any

action is brought against any person in which they have been found to be

immune from liability.

This section encourages reporting of suspected fraud. It allows anyone who has

that information to report it without fear of being sued for defamation, libel,

slander or similar offenses, which has had a chilling effect in many cases. Also,

many frauds, especially organized rings, are uncovered only when insurers

discover the same claims are filed with multiple insurers, or the same names or

addresses appear in many claims.

This provision protects insurers who share information among themselves as

long as the information is used exclusively for the prevention, detection and

prosecution of fraud. The restrictions help protect individual privacy and help

deter abuses of using such claims information.

Regulatory Requirements

All insurers have six months after their state’s law’s effective date to

prepare, implement and maintain an anti-fraud plan. The legislation

establishes a framework for the plan that includes procedures to:

• Prevent and detect all forms of fraud.

• Educate appropriate employees on detection and the anti-fraud plan.

• Hire or contract for fraud investigators.

• Report fraud to the appropriate authorities for investigation and

prosecution.

The anti-fraud plan may be reviewed by the insurance

commissioner and he or she may examine the insurer’s

compliance with its anti-fraud plan. The anti-fraud plans

that are submitted to the insurance department would be

exempt from the state’s public records act. Insurers also are

required to print or attach fraud warnings on all applications

and claims forms no later than six months after the effective

date of the law. Insurers face a fine for failing to prepare,

implement, maintain and submit an anti-fraud plan to the

insurance department.

AWARENESS TIP!

There’s considerable

evidence showing that insurers who invest in an active fight

against fraud receive a

substantial return on the investment.

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However, not all insurers fight fraud voluntarily; and their customers bear that

cost. By requiring all insurers to have a plan to fight fraud, and then ensuring they

comply with that plan, the playing field is leveled. All insured consumers will

benefit. Also, printed fraud warnings are a reminder against illegal acts and will

help deter claims fraud.

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Summary

The dictionary defines fraud as the intentional

perversion of truth to induce another to part with

something of value or to surrender a legal right.

Hard fraud occurs when someone deliberately

fabricates claims or fakes an accident. Criminals are

using increasingly sophisticated electronic schemes to

defraud insurance companies.

Soft insurance fraud, also known as opportunistic fraud, occurs when normally

honest people pad legitimate claims or intentionally understate the number of

miles they drive each year or, in the case of business owners, list fewer

employees or misrepresent the work they do to get a lower premium.

Those who commit insurance fraud range from organized criminals who steal

large sums through fraudulent business activities and insurance claim mills to

professionals and technicians who inflate the cost of services or charge for

services not rendered, to ordinary people who want to cover their deductible or

view filing a claim as an opportunity to make a little money.

Some lines of insurance are more vulnerable to fraud than

others. Health care, workers compensation and auto insurance

are believed to be the sectors most affected.

Fraud in insurance has undoubtedly existed since the industry's beginnings in the

seventeenth century, but it received little attention until the 1980s because

law enforcement agencies had other priorities and were reluctant to provide

the training needed to investigate and prosecute cases of insurance fraud.

And, given the fine line between investigating suspicious claims

and harassing legitimate claimants, some insurers were afraid

that a concerted effort to eradicate fraud might be perceived

as an anti-consumer move. In addition, the need to comply with

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the time requirements for paying claims imposed by fair claim practice

regulations in many states made it difficult to adequately investigate suspicious

claims.

But by the mid-1980s the rising price of insurance, particularly auto and health

insurance, together with the growth in fraud committed by organized criminals,

prompted many insurers to reexamine the issue.

• Gradually, insurers began to see the benefit of strengthening

antifraud laws and more stringent enforcement as a means of

controlling escalating costs—a pro-consumer move—and they found

ready allies among those who been adversely affected by fraud.

• These included consumers, who were paying for fraud through their

insurance premiums; the people used by organized fraud groups to file

false claims, often the poor, who sometimes found themselves on the

wrong side of the law; and chiropractors and other medical professionals

who were concerned that their reputation as a group was being tarnished

by organized fraud ringleaders who had recruited their members to make

fraudulent claims for treatment.

In their fight against fraud, insurers have also been hampered

by public attitudes.

• Ongoing studies by the Insurance Research Council show that significant

numbers of Americans think it is all right to inflate their insurance

claims to make up for all the insurance premiums they have paid in

previous years when they have had no claims, or to pad a claim to make

up for the deductible they would have to pay.

• In addition, insurance fraud must compete with violent and large-scale

white collar crime for prosecutors' attention and resources.

• Prosecutors commonly use a dollar threshold before they will allot

resources to trying fraud cases without investigating the merits of a case.

Antifraud activity on the part of state fraud bureaus and SIUs (special

investigative units within insurance companies) increased in the 1990s.

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• Heightened antifraud activity along with growth in funding for fraud-

fighting personnel resulted in increased prosecutions.

• Successful prosecution not only blocks future fraudulent activities by

individuals who are repeat offenders, but news of prosecutions also acts

as a deterrent to others who may be contemplating committing fraudulent

acts.

Insurance companies are not law enforcement agencies. They can only

identify suspicious claims, withhold payment where fraud is suspected and to

justify their actions by collecting the necessary evidence to use in a court.

The success of the battle against insurance fraud therefore

depends on two elements:

• The resources devoted by the insurance industry itself to detecting

fraud.

• The level of priority assigned by legislators, regulators, law

enforcement agencies and society as a whole to eradicating it.

An emerging issue for insurers using data sharing services is their impact

on privacy.

• Financial institutions, including insurers, must respect the privacy of their

customers and protect their personal information, a practice that may

deter efforts to combat fraud.

• The federal financial services deregulation legislation, the

Gramm/Leach/Bliley Act of 1999, raises this issue.

Insurers may also file civil lawsuits under the federal Racketeering Influenced

and Corrupt Organizations Act (RICO), which requires proving a preponderance

of evidence rather than the stricter rules of evidence required in criminal actions

and allows for triple damages. Since 1997, some of the largest insurers in the

country, especially auto insurers, have been filing and winning lawsuits

against individuals and organized rings that perpetrate insurance fraud.

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Case Studies

Marc Thompson. Deeply in debt from lavish living, the former Chicago grain

futures executive torched his home for $730,000 in insurance money. He let his

90-year old mother Carmen die in the basement to make it seem she had set the

fire as a suicide. Thompson took Carmen downstairs, then spread accelerant

over the walls and set the basement ablaze. He received 190 years in federal

prison.

Carla Patterson. The Newport News, Va. Woman said she found a dead mouse

in her vegetable soup at a Cracker Barrel restaurant. She demanded $500,000 in

insurance money to settle her complaint. But Cracker Barrel discovered the

rodent had no soup in its lungs, hadn’t been cooked, and that it had most likely

died in a mousetrap at Patterson’s home. Customers harassed Cracker Barrel

employees, and one worker lost her home when her hours were reduced after

business declined. Patterson received a year in prison.

Dr. Jorge Martinez. This Ohio pain management specialist threatened to deny

desperate patients painkillers unless they let him use their names to bill

insurance companies for more than $60 million in narcotic, drugs and expensive

diagnostic tests he never gave. Some patients grew addicted, and two died of

overdoses. Martinez also fraudulently billed insurers for more than 100 patients a

day for years. He received life in federal prison.

Tramesha Lashon Fox. The Houston high school chemistry teacher wanted to

unload her Chevy Malibu because she was tired of the monthly payments. Fox

gave passing grades to two failing students in exchange for “stealing” and

torching her car so she could collect insurance money. Fox received 90 days in

jail and lost her job.

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Dr. David Wexler. This dermatologist paid drug addicts to lend her their names

so he could bill insurers thousands for skin surgeries he never performed. The

New York City skin doctor made nearly 2,000 bogus claims for phantom

surgeries on one addict, including 1,400 on his face. Wexler paid the addicts a

virtual pharmacy of narcotics to keep them coming back. He received 20 years

in federal prison.

Dr. Young Moon. Cancer patients died prematurely when the Tennessee

oncologist diluted cancer drugs she gave to them, and billed healthcare insurers

$1.3 million for full doses. Many patients who normally should’ve grown sick

from the drugs never felt side effects and didn’t realize the drugs weren’t working.

Moon chalked up the diluted doses merely to bad management, but still received

15 ½ years in federal prison.

Dr. Michael Rosin. The Sarasota, Florida skin doctor operated on 865 healthy

patients to hike his insurance billings by nearly $4 million. Rosin diagnosed skin

cancer through employees had placed chewing gum and Styrofoam on biopsy

slides instead of human tissue. He performed 122 surgeries on one elderly man.

Rosin received 22 years in federal prison.

Michael & Rudi Apelt. Cindy Monkman fell for a handsome German day laborer

who lied that he was an international businessman. The Phoenix-area, Ariz.

Woman agreed to marry him just three weeks after they met. Michael Apelt took

out $400,000 in life insurance on Cindy just 10 days after they married. He and

brother Rudi soon took her into the desert and stabbed her to death. Both

brothers received death sentences.