Fraud, Leaving its Prints on the Industry

Fraud, in all forms, is as old as the industry itself. Given a struggling economy, the temptation to create fraud against or within the industry has been on the upswing recently.

According to Jim Quiggle, director of communications for the Coalition Against Insurance Fraud (CAIF), a national alliance of consumer leaders, insurance companies and state regulators, industry fraud is being fed by a struggling economy. “The economy has placed a lot of pressure on the business sector and consumers as well, and has created a tremendous amount of opportunities and temptations to commit fraud. Fraud is alive and well throughout America. Another trend we’re seeing going along with this is the increase in ring activity. Many scams that were mom and pop variety scams are becoming large, well-managed corporate style criminal-ring operations.”

The Insurance Information Institute (III) reports that property/casualty fraud cost the industry $27 billion in 2001. “It just demonstrates the magnitude of this problem,” Jeanne Salvatore, vice president for consumer affairs at the III, notes. “We see different parts of the country being hit. You’ll see one year there will be a big problem and then it will crop up somewhere else. Right now, New York is sort of fraud central for auto insurance fraud.”

Quiggle notes that one area that has taken on a corporate look is the auto fraud ring. “California has been one of the epicenters of criminal ring activity in auto fraud. Many states with large port cities like California tend to see these rings thrive. Another large-style corporate ring activity we’re seeing is in staged auto accidents. Those are continuing to crop up and operate especially in urban areas like New York, San Francisco, Miami, etc.

“In Texas, we’re seeing a small increase in mold related frauds. It has not taken off as a full-scale crime wave, but the large growth in mold claims has definitely induced a number of fraudulent claims. We’re seeing mold remediation outfits that are making false claims ‘cooking’ houses and charging insurance companies for equipment they’re not using. They’re also charging for larger mold cleanup than they actually do conduct. Cooking is the heating up of houses from the inside so mold spreads more quickly. Texas has also fallen victim as a center for a growing wave of phony group health coverage that is being sold to small businesses and consumers. A lot of firms have been operating inside Texas both headquartered inside the state and outside selling within the state. Small businesses in Texas are hurting because of the economy and small business owners are vulnerable to convincing sales pitches that peddle rock bottom prices for health coverage. These people are buying coverage without asking questions. Texas has busted several very large phony group health plans as well as a number of agents who have been selling it.”

Ed Sparkman, public affairs manager for the National Insurance Crime Bureau (NICB), points out, “In general, we estimate fraud is about 10 percent of every claim. One of the trends we’re dealing with is identity theft and all the things that surround that. It’s not just stealing somebody’s identity it’s what you do once you steal it. The problem is the thieves and crooks become very enterprising. As you crack down on one thing, they turn to another.”

Most experts agree, auto theft continues to be a problem for the industry.

“Dealing in theft especially, one of the things is the aspect of recovery rate,” Sparkman continues. “It is the lowest (62 percent) it has ever been. Basically that means four out of every 10 autos stolen just disappears. Part of that also gets in from a fraud perspective with leased vehicles. We’re seeing a real trend toward people committing fraud once their vehicle is due from the lease. They’ll have high mileage on it and it is much easier to just have the vehicle just disappear and take an insurance hit on it and get reimbursed through your insurance company.”

The workers’ comp front
Another area seeing large activity in the fraud spectrum is workers’ compensation, according to Quiggle.

“It is a problem with both premium fraud by employers and claims fraud by employees who are faking injuries. Much of this is driven by the shaky economy. They tend to view the workers’ comp system as a source of easy insurance cash. Phony group health plans are cropping up all over the country, and not just in Texas and California. We’re seeing it too in Florida, Oklahoma, Colorado, Louisiana and Georgia among other areas. We’re also seeing an upsurge in PEO (Professional Employer Organization) fraud in a number of states by fake PEO’s selling worthless workers’ comp insurance. There is an increasing amount of that happening in a number of states.”

Medical malpractice is also being targeted, and Quiggle notes “We’re on the cusp of an upsurge in phony medical malpractice being sold to doctors. Florida recently busted two rings that were peddling phony medical malpractice to doctors and other medical providers. One of them was based in New Zealand that claimed it had an international license to sell medical malpractice and therefore didn’t have to be licensed by the state. There is no such thing as international licenses, but doctors were buying that line. That tells you how desperate people are for affordable medical malpractice coverage. The growing crisis in medical malpractice insurance is creating a perfect environment for fraud against the doctors and I expect we’ll hear about more scams in the future.”

According to Elliott Flood, vice president and associate general counsel for Texas Mutual Insurance Company, which employs 17 members in its special investigations department, plus private investigators, workers’ comp fraud is a major issue.

“The most notable trend is in the healthcare area,” Flood said. “There is a lot more attention to healthcare fraud schemes. The organized frauds like healthcare, those are deliberate white-collar frauds and long-term operations. They’re not driven by the economy, they’re driven more by opportunity and the willingness by people in certain professions to perpetrate these things.

“You’re seeing in workers’ comp fraud, more groups getting involved. An example would be a case a couple years ago where we set up an office in Dallas and the FBI had an agent pose as one of our company agents. The ostensible story put out on the street was that there was an adjuster in our company that was taking claims that if you paid him a little money (bribe), they would set up claims on dead people. We issued a policy of insurance so that these claims could be set up and our adjuster was one of our employees working with my department the whole time. It was over a million dollars with the claims that were billed and paid on dead people. Several chiropractors got involved in it and there was a taxi driver who was acting as sort of a middleman, brokering these claims, and it really took off like a rocket. You had doctors from other towns contacting the guys in Dallas. That’s an example of the emergence of organized rings and how these things can spread.”

As Flood points out, according to a survey for Texas, “The legislature did a study by the Research and Oversight Council, that said between 10 to 30 percent of workers’ compensation was fraud. That’s a big range. If you go from year to year and one year it is 15 percent and the other year it is 20, you’re not going know if you’re still in that range. The only kind of forecast that I can make is that you’re going to continue to see a lot of fraud. I’m even thinking I might have to add staff next year. We are staying very busy. With the economy, the job market going south, that is naturally going to increase it. You’ve also had an increase of chiropractors in the state. Some of these individuals have teamed up with attorneys to shop around and obtain workers’ compensation clients and try and extend their treatment longer so they can make more money. This results in increased claims costs and creates opportunities for people to commit fraud.”

When asked if workers’ comp fraud targets one area of Texas, Flood notes, “It doesn’t discriminate. It is evenly spread. The healthcare frauds tend to concentrate in the metropolitan areas where there is a large volume of doctors. Now it is a small percentage of doctors that are bad like everything else. In fraud, the lion’s share of the profession are not the problem, they’re a small percentage, but they do a lot of harm.”

Identity fraud – old/new player
As if those fighting fraud didn’t have enough to worry about, identity fraud has taken off recently, opening the door for criminals to capitalize all the way to the bank.

Joseph Harrington, manager of communications for the American Association of Insurance Services (AAIS), notes, “Identity fraud is a new peril that consumers are faced with and it gives insurers new opportunities to expand the type of protection they provide to individuals in a new area. Reports are the incidents of identity fraud are growing greatly, yet so far we believe very few people have any sort of protection for it. Credit cards are one of the easiest ways to commit an identity fraud. It is also used to apply for loans for unemployment and other purposes.”

Harrington adds that, “The new identity fraud expense endorsements are controlled by limits and deductibles. There is the ability however for some wide scale and broad scale offenses in this regard. You see press reports where people on the inside—whether it is a financial institution, a service bureau, a government agency—have the ability to get at information on scores of people and that is something the industry will simply have to monitor as these new endorsements grow and mature.

“Overall, there are clearly growing reports of fraud for two reasons. One, it appears there is more identity fraud as more information is stored and transmitted electronically. There are also more places and occasions to report the fraud. Clearly, the people who stand to lose the most are the major creditors who extend the credit and they absorb most of the losses. I think more insurers will offer more coverage in the years to come. What has happened this year (2002) is that … we have to give Travelers its dues … Travelers introduced this coverage back in 1998 and I believe it has entered the mainstream right now in terms of a standard offering by insurance companies. It remains to be seen whether the prevailing weight of this coverage will be provided through property/casualty insurers or through services that now specialize in protecting and monitoring one’s credit position. That seems to be a whole emerging new area of financial services that straddles investments and insurance. It just remains to be seen who will be best positioned to offer this kind of protection. This (identity fraud) is a fairly new area for the property/casualty industry to venture into.”

As Quiggle notes, with identity theft, the best thing agents can do is “insist on multiple identity … several sources of identification for policyholders when they come in to take out auto insurance, etc. This is to verify these people are who they say they are when they apply for coverage.”

Is identity fraud a new player on the block or has it been around for sometime, and just now getting more notoriety?

Gary Lincenberg, a former federal prosecutor and expert on white-collar criminal activity, notes, “It has taken a lot of attention on the state level and Gov. Davis (D-Calif.) recently signed some bills in that area. Identity fraud has been going on for many, many years and has taken different shapes and is more advanced sometimes in how it is carried out. There is a whole area that is ripe for fraud and it runs the gamut from cases where people use other’s phone lines and can literally rack up hundreds of thousands of dollars in charges to staged auto accident cases.”

Lincenberg referred to an Insurance Research Council survey of 353 insurance companies with one third of them reporting that fraud had increased in the last three years, while only six percent had said it decreased.

“It has become much easier to pick up people’s identity.” When asked if he expects identity fraud to continue to be a problem, Lincenberg notes, “I think it will. On the federal level, some of the fraud sentencing guidelines have been ratcheted up on the hope of greater deterrence and the reach of federal jurisdiction has expanded somewhat. A lot of the legislation under the auspices of fighting terrorism has its greatest applications in normal fraud cases, so it may have been passed for one reason but its application will be largely in fighting other types of fraud. On the state level here, the D.A.’s office has an active consumer protection prosecution unit that gets into some of the stuff and they have just ratcheted up a high tech crimes unit.”

Fighting fraud
According to Quiggle, the Coalition’s main goal is to “alert the insurance industry and consumers about the dangers of insurance fraud and its costs to society. We’re working to educate people across the country and to fight back by contacting their insurance department and turning in suspected crooks to the proper authorities. We’re also lobbying for stronger state anti-fraud laws on a state-by-state basis.”

As Salvatore notes, “The industry, for a number of years now, has been increasingly aggressive in fighting fraud. There was a point in time, say 10 years ago, where companies never talked about it. They’d fight fraud, but never talk about it. Now they do, and they acknowledge it is a problem. They’re proud of joining organizations like the National Insurance Crime Bureau.”

And Lincenberg adds that the fight against fraud will not go away anytime soon, and the fraud landscape changes its look from time to time.

“You’re seeing some more reports in the media, but with the Internet in particular, we’ve become such a mechanized society and limits (credit cards) are higher on what you can charge, face-to-face interaction is less, and so it is just ripe for possibilities of fraud. The insurance company research reports reflect that. As far as auto accidents, insurance companies have become much more vigilant and it is a different atmosphere than it was 10 years ago for fraudulent claims … it is tougher to get them through. I think you’re seeing less where attorneys are running the show. More and more, cappers are running the show and attorneys are working for them. My sense is that a lot of the attorneys who were paying cappers to run out and get cases … there has been a lot more prosecution and stiffer prosecution.”

And if you thought criminals have not tried every area of possible fraud, guess again.

“Pretty much anything you want to think of, people have tried or done,” Sparkman notes. “We’re still getting some from the World Trade Center. Companies and agents are looking a little closer at policies from the insuring perspective. They’re checking a little deeper as opposed to a cart blanche policy. It is just common business sense to do that.”

With the economy not where it should be, there will continue to be the temptation to get involved in fraud and Sparkman notes, “The economy definitely has an affect on fraud and theft in general. What seems to be happening a lot is there are people out there who are not agents who just set up a business issuing a policy, pocketing the money and printing out receipts and telling you you’re covered. Of course as soon as a claim is put in, he’ll partially pay it or just not be around. We’re finding that is happening quite a bit. An issue that is being addressed is stiffer penalties. Especially in California, New York and some of the major states where fraud has become an issue. Every little bit helps. What you have to realize is that the criminals are becoming much more sophisticated. It makes catching them all that much harder.”

As Texas Mutual’s Flood adds, “The problem is not going away. It is a perennial problem and there is a tendency in the industry to ignore it or downplay it because it costs money to fight fraud and takes time and effort. It requires a strong commitment from the upper management of the company. You are having laws being passed in many states, including California, which require the insurance companies to fight fraud.”

The fight still has a few more rounds left to go.

To comment on this story, e-mail: dthomas@insurancejournal.com.

Topics California Carriers Texas Auto New York Fraud Agencies Claims Workers' Compensation Flood Property Casualty