INSURANCE TOPICS

Insurance Fraud

THE TOPIC

MAY 2009

The Insurance Information Institute estimates that fraud accounts for 10 percent of the property/casualty insurance industry’s incurred losses and loss adjustment expenses, or about $30 billion a year. This fraud results in higher premiums.

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, 41 states and the District of Columbia have set up 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.

RECENT DEVELOPMENTS

• A new report by the National Insurance Crime Bureau (NICB) shows an increase in claims related to “opportunistic fraud,” a phenomenon that could be related to the economic downturn. Opportunistic fraud is when a policyholder has a legitimate claim but pads it to produce a larger payment. Claims for hail damage were up 407 percent in the first quarter 2009, compared with the same quarter the previous year. Commercial slip and fall claims rose 77 percent and fire and arson claims rose 76 percent. By far the largest number of claims in the first quarter of both years were in the staged and caused accidents category. (See following chart.)

• Auto Insurance Fraud: Owner Give-Ups: The National Insurance Crime Bureau (NICB) released a study in October 2008 detailing owner give-ups, defined as vehicles that were reported stolen by their owners when the owner is in fact making a false theft report. Using data submitted by its member companies from 2004 through March 2008, the NICB found that the top five cities for owner give-ups were Houston, TX; Las Vegas, NV; Phoenix, AZ; Los Angeles, CA; and Chicago, IL. By state the top five were California, Texas, Georgia, Florida and Arizona. The vehicles most subject to owner give-ups were the Dodge Ram, followed by the Ford F-150. In addition, the NICB tracked owner give-ups compared with gas prices from January 2004 through December 2007 and found that give-ups increased as gas prices rose.
• Indications that owner give-up fraud may be on the rise include a report from New York State's fraud bureau that found that give-ups rose by about a third in 2008, reports from Florida police that give-ups are increasing in Miami and a report from Wisconsin that the state has seen an uptick in inquiries about suspicious vehicle thefts. These findings were detailed in a September 2008 Coalition Against Insurance Fraud survey.
• Home Arsons: According to data released by the FBI in January 2009, total arson (buildings and vehicles) dropped in all four regions of the country and among all population groups but one in the first six months of 2008, compared with the first six months of 2007. The exception was in cities with populations of from 250,000 to 500,000, where arson increased by 2 percent. Nationwide arson was down 5.6 percent.

Chart Notes: This chart defines laws that can effectively deter fraud. Also see Background: State Legislation. 1. Insurance Fraud Defined: Insurance fraud is specifically declared unlawful in the state's laws. A fraudulent act is committed if information in insurance applications is falsified in an attempt to obtain lower premium rates or to inflate the amount of loss in a claim. Defining the crime specifically helps educate law enforcers about insurance fraud and provides prosecutors with clear-cut cases. Raising the level of the crime from a misdemeanor to a felony not only increases the penalties but also acts as a deterrent to future crimes. Includes claims, underwriting and insurer fraud. (All jurisdictions but not all lines of insurance.) 2. Immunity Statutes: These laws provide protection for good faith exchange of information between insurers or others and state insurance departments or law enforcement officials. Individuals or organizations are exempt from libel or unfair trade practices lawsuits, which could be brought against them for releasing information on prior claims. (All jurisdictions but not all lines of insurance.) 3. Fraud Bureaus: Special units have been set up, generally, in state insurance departments to identify fraudulent acts, collect information on repetitive offenders and investigate cases. The main purpose of the bureau is to set up documented criminal cases that can be readily prosecuted. Some bureaus have law enforcement powers. (41 states and D.C. but not all lines of insurance.) 4. Mandatory Insurer Fraud Plan: Insurers are required by law to set up a specific program that identifies insurance fraud and outlines actions taken to reduce insurance fraud. (21 states and D.C.) 5. Mandatory Photo Inspection: Photos must be taken of used cars before collision or comprehensive insurance is issued. This is designed to eliminate claims for damage sustained prior to the issuance of a policy and the purchase of insurance for nonexistent vehicles. (Five states.)

BACKGROUND

Introduction: Insurance fraud can be “hard” or “soft.” Hard fraud occurs when someone deliberately fabricates claims or fakes an accident. Soft insurance fraud, also known as opportunistic fraud, occurs when people pad legitimate claims, for example, or, in the case of business owners, list fewer employees or misrepresent the work they do to pay lower premium workers compensation.

People 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. Healthcare, workers compensation and auto insurance are believed to be the sectors most affected.

Insurance fraud received little attention until the 1980s when the rising price of insurance and the growth in organized fraud spurred efforts to pass stronger antifraud laws. Allied with insurers were parties affected by fraud—consumers who pay higher insurance premiums to compensate for losses from fraud; direct victims of organized fraud groups; and chiropractors and other medical professionals who are concerned that their reputations will be tarnished.

In their fight against fraud, insurers have been hampered by public attitudes. Four out of five Americans think that a variety of insurance crimes are unethical, and one out of five think it is acceptable to defraud insurance companies under certain conditions, according to the Coalition Against Insurance Fraud (CAIF). The organization released the findings in a 2008 study, “The Four Faces of Insurance Fraud.” It found that the public is consistently more tolerant of specific insurance frauds today than it was 10 years ago. For example, 82 percent of respondents think it is unethical to misrepresent facts on an insurance application in order to lower their premiums, down from 91 percent in 1997. The study also found that more Americans believe insurance fraud to be widespread. For instance, four out of five people say inflating claims to cover deductibles is prevalent.

In addition, 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 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.

Insurers must preserve the fine line between investigating suspicious claims and harassing legitimate claimants and the need to comply with the time requirements for paying claims imposed by fair claim practice regulations. All states have unfair claim settlement practice laws on their books to ensure that the parties involved are informed of the progress of investigations and the investigators settle the claim promptly or within a specified amount of time. About 19 states have provisions that provide guidance and protection for investigators by allowing time limit extensions or waivers and detailing what evidence is required and to whom the evidence should be made available.

Auto Insurance Fraud: Auto insurance fraud and claim buildup added between $4.8 billion and $6.8 billion to closed auto injury claim payments in 2007, according to the Insurance Research Council (IRC)’s November 2008 study, “Fraud and Buildup in Auto Insurance Claims: 2008 Edition.” The study found that fraud and buildup in auto injury claims varied widely by state and by type of liability coverage. For example, among the 12 no-fault states, Florida had the highest rates of fraud and buildup in both bodily injury (BI) and personal injury protection (PIP) claims while North Dakota had the lowest for BI and Kansas had the lowest for PIP. The IRC examined more than 42,000 auto injury claims closed with payment for 22 insurers representing 58 percent of the private passenger auto insurance market. Since the study involved only claims closed with payment it most likely underestimates the incidence of fraud and buildup in all claims filed.

Another common auto fraud involves vehicles damaged by storm flooding that later appear in used car lots and auction sales. Consumers unwittingly purchase these vehicles, which may not seem damaged but could have problems with their electrical systems or air bags, for example. In some states, vehicles that have been flooded bear the words “salvage only” on their titles, usually after damage to the vehicle has reached about 75 percent of its value. Unscrupulous sellers may switch or clone manufacturers’ serial number plates from clean vehicles and put them on a flooded vehicle that has been repaired. They may also resell a car that has a salvage title in a state that has more lax title standards. This practice is called “title washing.”

Standardized state rules for titling vehicles are necessary to combat salvage fraud. In recent years many states in the hurricane-prone parts of the United States have adopted rules that require that the words “flood vehicle” be included on the titles of vehicles that have been water damaged and rebuilt. Before such a vehicle can be sold, the buyer must be notified in writing of the vehicle’s past flood damage. However, if one state in the region does not have such strict laws it can become a dumping ground for undeclared flooded vehicles.

In response to the flooded vehicles that became available for sale after the hurricanes of 2005, the National Insurance Crime Bureau (NICB) created a database in which vehicle identification numbers (VINs) and boat hull identification numbers (HINs) from flooded vehicles and boats are stored and made available to law enforcers, state fraud bureaus, insurers and state departments of motor vehicles. The database (VINcheck) is online and can be accessed by the general public. It was updated in 2008 to include all total losses reported by NICB's participating insurers.

Another attempt to solve the problem of title washing is the National Motor Vehicle Title Information System (NMVTIS), a database that requires junk and salvage yard operators and insurance companies to file monthly reports on vehicles declared total losses. Insurers must state for every vehicle declared a total loss the name and contact information of the insurer; the vehicle identification number; the date the insurer declared the vehicle a total loss; the original vehicle owner; and the vehicle owner at the time the report was filed. The database is required under the Anti Car Theft Act of 1992. The implementation of the NMVTIS was delayed by problems with development as the Act was reauthorized in 1996, shifting responsibility to the U.S. Department of Justice and operations were awarded to the American Association of Motor Vehicle Administrators (AAMVA). In addition, differences between the parties involved in collecting the data led to an order by a U.S. District judge that the U.S. Attorney General’s office issue regulations and procedures for operating the database. Insurers report the information to a third party, such as ISO, which transmits it to the AAMVA. As of May 2009, 73 percent of the U.S. vehicle population was represented in the system. The system can be accessed by the public at http://www.nmvtis.gov .

Other auto insurance frauds are owner give-ups, where a vehicle owner arranges to have a vehicle stolen; rate fraud where owners give a false address where rates are cheaper; and misrepresenting the major use of a vehicle, such as citing “farm use” for vehicles registered at urban addresses.

Workers Compensation Fraud: Since some jobs are more dangerous than others, workers compensation insurers need to know the type of work employees do. The more dangerous the job, the higher the insurance premium. One type of workers compensation fraud involves employers who misrepresent their payroll or the type of work carried out by their workers to pay lower premiums. Some employers also apply for coverage under different names to foil attempts to recover monies owed on previous policies or to avoid detection of their poor claim record. Medical care abuse, such as "upcoding" (where providers exaggerate treatment provided to injured workers) and claimants over-utilizing medical care to keep receiving lost income (indemnity) benefits are common problems.

Health Insurance and Medical Fraud: The Blue Cross and Blue Shield Association and the U.S. Government Accountability Office estimated that healthcare fraud totaled $85 billion in 2003. Fraud and abuse take place at many points in the healthcare system. Doctors, hospitals, nursing homes, diagnostic facilities and attorneys have been cited in scams to defraud the system.

One type of fraud is the abuse and resale of legal narcotic and other prescription drugs. The Coalition Against Insurance Fraud (CAIF) says that private insurers alone lose up to $80 billion a year in fraudulent prescriptions and related medical claim costs from prescription drug abuse.

Another concern is health identity theft, where criminals steal victims’ names, health insurance numbers and other personal data and then defraud insurers by making false claims. The Federal Trade Commission received nearly 19,500 complaints of health identity theft from January 2002 to April 2006, according to the CAIF.

Besides defrauding insurance companies, criminals also victimize patients by maxing out policy limits, leaving the policyholder with no coverage and damaging the patient’s credit history.

To combat the problem, some medical facilities have limited employee access to data and require photo IDs for people seeking treatment. One insurer no longer sends provider statements to post office box billing addresses and other insurers are using sophisticated data mining software to uncover suspicious billing practices.

The Consortium to Combat Medical Fraud, a joint project of the Coalition Against Insurance Fraud, the National Health Care Anti-Fraud Association and the National Insurance Crime Bureau was formed in 2008 to develop new strategies to combat fraud committed by medical providers. Other participants include insurance companies, state insurance fraud bureaus and the FBI.

Catastrophe Fraud: The hurricanes of 2005, especially Hurricane Katrina, resulted in cases of insurance fraud where, for instance, homeowners or renters made claims for expensive home appliances that were never purchased and where homeowners inflated claims for items actually destroyed. Some of the fires that broke out in buildings in New Orleans and other affected communities after Hurricane Katrina are suspected cases of arson, committed by flood victims who did not have flood coverage, and thousands of flood-damaged cars were cleaned up and resold without disclosing their flood status.

The increase in billion-dollar weather catastrophes in recent years and the propensity of claimants to commit opportunistic fraud has resulted in some insurers turning to forensic meteorologists to try to reduce fraud. These experts can accurately verify weather conditions for an exact location and time, allowing claims adjusters to validate claims and determine if more than one type of weather element is responsible for damage. Because they use certifiable weather records, their findings are admissible in court.

Crop Insurance Fraud: Federally sponsored multiple peril crop insurance is sold and serviced by the private market but is subsidized and reinsured by the federal government. It covers crop losses as a result of all types of natural disasters and is a source of financial protection for farmers. The U.S. Government Accountability Office has found evidence of fraud in the federal crop insurance program and recommended a number of actions, including reducing premium subsidies to those who repeatedly file questionable claims, improving the effectiveness of growing season inspections and strengthening oversight of insurance companies’ use of quality controls. Government investigators are increasingly using satellite images to match actual crop planting and growing practices in suspicious cases with information submitted in claims.

Insurers’ Antifraud Measures: The legal options of an insurance company that suspects fraud are limited. The insurer can only inform law enforcement agencies of suspicious claims, withhold payment and collect evidence for use in a court. The success of the battle against insurance fraud therefore depends on two elements: the level of priority assigned by legislators, regulators, law enforcement agencies and society as a whole to the problem and the resources devoted by the insurance industry itself. To that end most insurers have established special investigation units (SIUs). These entities help identify and investigate suspicious claims. By 2001 about 80 percent of property/casualty insurers had SIUs, according to the Coalition Against Insurance Fraud. These units range from small teams, whose primary role is to train claim representatives to deal with the more routine kinds of fraud cases, to teams of trained investigators, including former law enforcement officers, attorneys, accountants and claim experts, who thoroughly investigate fraudulent activities. More complex cases involving large-scale criminal operations or individuals that repeatedly stage accidents may be turned over to the National Insurance Crime Bureau, which has special expertise in preparing fraud cases for trial and serves as a liaison between the insurance industry and law enforcement agencies.

Insurance company surveys confirm that SIUs dramatically impact the bottom line of many companies. In the 1990s insurers said that for every dollar they invested in antifraud efforts, including in SIUs, they got up to $27 back, but these returns have become harder to achieve as many easy to root out cases of fraud have been eliminated and fraud schemes have become more sophisticated.

Insurers have also created a national fraud academy. A joint initiative of the Property Casualty Insurers Association of America, the FBI, National Insurance Crime Bureau (NICB) and the International Association of Special Investigating Units, it is designed to fight insurance claims fraud by educating and training fraud investigators. It offers online classes under the leadership of the NICB.
New Technology to Combat Fraud: Although some insurers have cut back on fraud investigation expenses by outsourcing or dissolving their fraud units, advances in software technology are proving effective in fighting fraud. “Data mining” programs that scan many insurance claims can uncover repetitions and anomalies and analyze links to fraudulent activities or entities. The consolidation of insurance industry claims databases has also aided investigators. ISO's system, known as ClaimSearch, is the world’s largest comprehensive database of claims information. The National Insurance Crime Bureau (NICB)'s Predictive Knowledge program collects and analyzes information that can be disseminated to insurers and law enforcement agencies to detect, investigate and prevent insurance fraud. The NICB has also partnered with iMapData Inc. to create CATfraud, which identifies potentially fraudulent catastrophe-related insurance claims.

At least one large auto insurer has improved the software it uses for identifying suspicious claims related to the recession by cross referencing for claims that involve expensive, eight cylinder low mileage vehicles—also known as gas guzzlers—with arson, theft or single-vehicle accidents without injuries. These indicators seem to track the increases that law enforcement had noted around the country by mid-2009. Grouping these identifiers is known as scoring. When the software aggregates the scores and the number reaches a threshold set by the company, the claim is automatically sent to the SIU for investigation. This system also works for homeowners claims, which involve fire or theft and are combined with public records for preforeclosure or foreclosure information. Workers compensation claims can be combined with severity, injury type and frequency, for example, revealing that one person has filed a number of workers compensation claims. Across all lines of insurance, the software can search for addresses and other identifying data to ferret out claims by “travelers,” professional criminals who move frequently and use multiple scams to defraud insurers.

Insurers have developed data check systems that verify the accuracy of information provided by prospective policyholders on application forms. They also use a number of different software tools, including voice stress and systems that compare claims to baselines or thresholds developed from examining many similar claims, allowing claims handlers to determine if a claim is an exception to the norm. Event data recorders in newer cars are also tools that can help verify auto insurance claims data.

State Legislation: While insurance fraud is illegal in all states, some laws are more effective than others. It is easier to prosecute cases of insurance fraud in states where it is identified as a specific crime in the penal code and where what constitutes insurance fraud is defined along with the penalties that can be imposed. See chart: Key State Laws on Insurance Fraud.

To successfully bring a fraud 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 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. Some experts believe that immunity laws should be extended to include good faith exchanges of certain kinds of claim-related information among insurance companies.

Most states have set up their own fraud bureaus, often with insurance industry funding, some with law enforcement powers. In some states, laws require insurers to establish special investigation units (SIUs) and to file antifraud plans with the insurance department.

Federal Legislation: The Health Insurance Portability and Accountability Act of 1996 enacted significant antifraud provisions aimed at the healthcare system. The Act focused on rooting out fraud in federal programs such as Medicare but also impacts private healthcare, especially in defining the crime of healthcare fraud. Although healthcare insurance is generally outside the purview of property/casualty insurance, healthcare fraud affects all types of property/casualty insurance coverage that include a medical care component. The Act makes "knowingly and willfully" defrauding any healthcare benefit program a federal crime. It also includes making false statements "in any matter involving a healthcare benefit program," theft or embezzlement, obstruction of investigations and money laundering.

The Violent Crime Control and Law Enforcement Act (1994) makes insurance fraud a federal crime when it affects interstate commerce. People 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.

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 the late 1990s, some of the largest insurers in the country, especially auto insurers, have been filing and winning lawsuits concerning insurance fraud against individuals and organized rings. RICO statutes are used to prosecute insurance fraud cases 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 statute was enacted in 1970, the principals of organized crime operations could often escape prosecution by removing themselves from direct participation in criminal activities.

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