Special Investigative Units Battle Insurance Fraud, ‘Crime of the ’90s’

People outside the industry are always surprised to learn how much fraud insurance companies are actually forced to deal with. It wasn’t until fairly recently, in the late 1980s, that insurance companies and local, state and federal governments realized that fraud was severely affecting the cost of insurance. As insurance fraud became recognized as the “crime of the ’90s,’ Special Investigative Units (SIUs) became the wave of the future for insurance fraud claim handling.

SIUs are usually comprised of former law enforcement or claims employees turned investigator who have had additional training. This additional training can consist of attending schools designed for or provided by various law enforcement agencies such as local police departments, FBI, ATF, State Fraud Bureaus and insurance education organizations.

Skills developed include interviewing, recognizing deception, document verification, arson investigation, accident investigation, missing persons location and computer database investigation.

Many SIUs, both in-house and external, are seen as paper tigers, good only for handling a reduced inventory of complex or labor-intensive files, which mainstream claim operations want to dump on someone else. Executive management often perceives SIUs as liabilities that should be neutralized before they draw loathsome and expensive bad-faith lawsuits. It is, after all, a very dangerous thing for a company to call a customer a liar, and then void his policy and deny his claim.

Accordingly, SIUs constitute a tiny part of a claims force, possibly 1/30th or less. And because of their focus, they can generate more than their corresponding share of claim expense when considering time costs, investigation technology and equipment, external resources, legal assistance, legal opinions, legal defense and the cost of potential bad-faith judgements.

Even so, the Insurance Information Institute and the International Association of Special Investigative Units estimate that an insurer saves $10 for every $1 that it spends fighting fraud. And that figure doesn’t take into account long-term financial benefits of resisting fraud, such as preventing “repeat customers’ and positive effects on public perceptions of right and wrong in regard to fraud. Unfortunately, these benefits are not scientifically measurable.

More often than not, SIUs don’t keep track of the number of fraud denials or dollars saved, for fear that a bad-faith plaintiff might argue that an insurance company had a profit motive to unfairly deny a claim and call it fraud. In the context of this complex environment, special investigators may have a hard time proving themselves effective.

The insurance policy

Insurance investigators are not cops. They have no law enforcement powers. They are civilians hired by insurance companies to conduct civil investigations into claims that are suspected to be fraudulent.

There are important differences between a law enforcement investigation conducted by a “peace officer’ and an insurance investigation conducted by a special investigator. Both types of investigators are experienced with “fact finding,’ yet they are investigating facts and uncovering suspect acts and intentions for very different reasons and different end results.

If proven by a preponderance of the evidence, insurance fraud is a breach of most policies that can warrant a denial of the entire claim, even the legitimate part. This is to ensure that there is a disincentive to unfairly misrepresent facts in an insurance claim.

Special investigators cannot compel witnesses with the threat of arrest as a peace officer can. They can, however compel parties who are making claims to cooperate in their claim investigation as required by the policy as a condition precedent to recovery. Failure to cooperate with insurance company representatives can independently result in the denial of a claim. Logically, contractually and legally, a person who is asking for indemnity under his or her policy has a duty to present and prove the merits of the claim. This includes cooperating in the insurer’s investigation of the claim.

The law enforcement community

While conducting civil investigations for the claims force, the special investigator may uncover acts that are illegal by local, state or federal law (insurance fraud). They are, in theory, only concerned with discovered acts that affect the ultimate coverage decision by their employer. There are, however, overlapping concerns between the results of a civil investigation and a criminal investigation that reveal violations of both the insurance contract and various laws regarding fraud. And in reality, the civilian investigator often finds himself required to turn over his file materials to law enforcement agencies as they pursue criminal prosecution.

There are other times when insurance investigations are carried out in limited collaboration with law enforcement investigators. Since special investigators are not law enforcement agents and have no powers of arrest, they often get little attention whether in the press, in society or in the law enforcement community.

However, the law enforcement community is beginning to recognize insurance investigators as a resource and now receive training to better understand our jobs and how we can be used to augment their investigations.

Fire departments have been quick to realize that insurance investigators have received much of the same training as their arson investigators, but also have the virtually unlimited financial resources of the insurance company at their investigative disposal. They often view special investigators as a means to complete investigative tasks that an overworked and under-funded fire department investigator can’t get to, can’t pay for or can’t justify to his or her department.

The politics of denial

When the SIU has completed a claim investigation and determined that an insured has breached the policy by materially misrepresenting facts, serious consequences can result depending on their actions.

Generally, a denial letter is sent to the insured citing a provision of the policy which allows an insurance company to render the policy void because of a material misrepresentation. The claim is then formally denied.

In effect, the insurance company has just accused its own customer of being a liar and then refused to pay for their loss. To make matters worse for the customer, the insurer also voided their insurance,leaving them exposed to further uninsured loss.

A lawsuit against the insurance company for bad-faith breach of the contract would seem imminent. In reality, there are very few who sue and even fewer who win. This might be a testament to only “pulling the trigger’ of claim denial when absolutely warranted.

Unfortunately, there are also those whose claims have been deemed non-meritorious who convince the court to award excessive punitive damages, again calling into question the perceived value of an SIU operation. Punitive damage awards reaching into the millions of dollars then become major business considerations for insurance executives trying to manage policy sales, claims forces, actuarial issues, catastrophe operations, regulatory mandates, political climates, litigation trends, public relations campaigns, expense management and
profitability.

It is a serious risk that any denial of a claim by an SIU for fraud could be turned into a potentially damaging bad-faith lawsuit.

So how effective are SIUs?

Are they simply a way to comply with state regulations and public demand for fraud-fighters, while spending and risking as little as possible? Or are they hard-hitting fraud-busters, charged with guarding the policyholder dollar by ensuring that unscrupulous white-collar fraudsters don’t steal from policyholder reserves?

The answer may depend on the utilization and focus of SIUs as directed by insurance company decision-makers and executives. There have been a few issues identified thus far relating to the effectiveness of Special Investigative Units: assisting law enforcement in prosecuting fraud criminals; raising the level of public awareness of fraud and its impact; training insurance industry personnel to recognize the signs of fraud; and ultimately investigating and resisting the payment of non-meritorious claims. But in the end, denials are not tracked and dollars saved are generally immeasurable, so the measure of effectiveness is subjective at best.

An insurance executive’s only solace might be that the mission of SIUs in fighting fraud, defending policyholder dollars and protecting solid societal values of right and wrong cannot be compared to spreadsheet data reflecting theoretical dollar figures of profit vs. expense.

Our only real recognition comes from those consumers progressive enough to understand the implications of insurance fraud, those who have worked with us and understand what we do, and even sometimes from the people who pay us—our employer insurance companies.

So how do we know if an SIU is worth the money that it expends?

In light of the alternative, which is to pay claims without resistance and to raise premium costs to cover the expenses, another question the insurance industry might want to ask itself from a legal, societal and moral standpoint is, “How can we afford not to finance an SIU?’

J.D. Decker was a paratrooper in the U.S. Army before working for a number of years in Los Angeles as an insurance fraud investigator. A Certified Fraud Examiner and Certified Insurance Claims Investigator, Decker currently manages an insurance company Special Investigative Unit.

Topics Carriers Fraud Claims Law Enforcement Training Development