Insurance Fraud: A Perpetual Bane for Industry, Consumers

Since the insurance industry’s inception, fraud has proved a perpetual problem, an inherent risk that will likely never be totally eliminated. Carriers have long warned that fraud ultimately causes them to raise premiums to offset resultant losses, but during periods in which markets harden and consumers are faced with fewer options and higher rates, these warnings have a stronger resonance.

That’s not to say that incidents of insurance fraud necessarily increase or decrease when markets harden. According to the National Insurance Crime Bureau (NICB), a nonprofit organization supported by 1,000 property and casualty carriers, insurance fraud is perennially the second-most common white collar crime behind tax evasion, and costs the U.S. public roughly $30 billion in property and casualty claims alone. That breaks down to anywhere from $200 to $300 in additional premium costs per household.

The NICB cited bodily injury, auto repair, homeowners claim and workers’ compensation fraud as the four most common in 2000. Futher, it reports that 10 percent of all property and casualty claims are fraudulent.

The Coalition Against Insurance Fraud, another nonprofit organization, provides an even higher estimate, albeit one that includes costs related to life, health and specialty insurance as well as property and casualty lines: $80 billion, or roughly $950 per family, each year. The organization also notes that nationwide, fraud convictions have doubled over the last five years. State fraud bureau investigations resulted in 2,123 criminal convictions in 2000, according to the coalition’s Web site—more than double the 961 convictions reported in 1995.

The Coalition lists several factors contributing to the persistence of insurance fraud, including the following:

• Some insurers are too complacent when paying suspicious claims, maintaining it would be more expensive to fight them in court than pay them.
• The U.S. health care system is large, complex and overworked—and thus vulnerable, especially considering the pressure to control costs.
• Immigrant populations often make easy targets for con artists, who sell phony life, auto and other coverage to these groups.
• Insurance fraud is perceived as a low-risk crime by perpetrators, given the lack of specific insurance laws in most states, light jail sentences and other factors.
• Insurance fraud crimes are usually low on prosecutors’ lists of priorities, which usually focus on drug-related and violent crimes.
• Many consumers tolerate fraud, although it is directly correlated to higher premiums for which they must pay.

Geography of fraud
Fraud investigations and convictions vary greatly from state to state. The first state fraud bureau was established in 1946. The Coalition Against Insurance Fraud reports there are currently 46 fraud bureaus sponsored by 41 states, and that overall funding for such bureaus totaled $100 million in 2000—an increase of 34 percent over funding in 1995. The Alabama Insurance Department, incidentally, opened a fraud bureau as recently as January, making it the 42nd state to commit to combating fraud. However, six states lack specific fraud laws, which make it difficult if not impossible, to prosecute some cases in those jurisdictions.

Jim Quiggle, communications director for the Coalition, explained that insurance fraud is most prevalent in the nation’s highly populated states. “It’s no surprise that the most populous states are the epicenter of fraud in America today,” Quiggle said. “California has large populations of immigrants that are often drawn into scams in order to bolster their incomes… They’re not used to this sort of crime. Florida has large numbers of seniors who are classic targets of fraud schemes.”

Auto fraud hits hard
Quiggle noted that New York, New Jersey and Florida have some of the highest incidences of auto fraud. “These are no-fault insurance states, where insurance companies by law must pay medical bills. Organized rings have turned the PIP laws into their personal ATM machines. No-fault has led to a huge auto insurance scam industry in these states.”

According to an insurance fraud study by the Insurance Information Institute (III), the Florida and New York insurance departments are attempting to strengthen regulations to curtail fraud in no-fault auto insurance. In Florida, the problem is compounded because the state does not license or regulate medical clinics; state and federal officials, however, are proposing legislation to increase medical clinic registration. In New York, the state insurance department has attempted to file regulations to shorten the time allowed claimants to file personal injury claims from 90 days to 30, but has run into problems with the state Supreme Court.

Auto insurance fraud also runs rampant in California, for many of the same reasons it occurs so often on the East Coast. Quiggle explained, “This is a state with a lot of immigrants and seniors. California is very similar to its East Coast brethren in terms of sheer size in dollar value in auto insurance scams that are carried out on a daily basis.”

According to the California Department of Insurance, the highest incidences of auto fraud occur in the state’s southern regions, where an estimated 25 to 50 percent of auto insurance claims are fraudulent. In total, auto insurance fraud costs California consumers as much as $500 million every year.

California regulators identified two major forms of auto fraud that occur in the state: automobile fraud, in which policyholders or repair shops report damages or losses that never occurred, and staged automobile accidents, of which there are two typical variations. The swoop-and-squat involves organized fraud rings that set up unwitting motorists for rear-end collisions. The paper accident involves organized rings soliciting consumers to make claims for accidents that never happened. Paper accidents are becoming more prevalent because they pose less danger to perpetrators, and the chances of police involvement are fewer than in swoop-and-squat schemes.

In Texas, the Insurance Research Council found that 36 percent of statewide auto insurance claims were fraudulent in 1996, while 54 percent of claims in Houston and 47 percent of those made in the Dallas/Fort Worth area were fraudulent. That year, 18 people were indicted for operating an auto fraud ring that bilked $50,000 in phony claims from insurers.

Disaster fraud: a frequent occurrence
Fraud involving disaster- and catastrophe-related insurance claims is committed frequently on the East and Gulf Coasts, and in many areas vulnerable to hurricanes, floods or other severe weather.

“Any time you have a lot of damage from hurricanes or severe storms,” said Quiggle, “you will find crooks coming out of the woodwork to scam insurance companies. Whenever there’s a lot of property damage from a hurricane or other natural disasters along the coast, especially the Gulf Coast area, the amount of damage will be magnified by fraudulent contractors.”

Of course, many carriers ultimately pass these added costs on to their policyholders through higher premiums. California policyholders could be faced with such a situation after a Los Angeles Superior Court denied insurers’ requests to stop enforcement of a law signed in 2000 that allows homeowners to file claims for damages from the 1994 Northridge earthquake noted after the original filing deadline passed. Carriers contend that this allowance will result in fraudulent claims being filed.

Workers’ comp wide-open for fraud
Workers’ compensation markets have been hardening at an alarming rate across the country, due in no small part to widespread fraud. The NCIB reports that workers’ comp fraud costs insurers roughly $5 billion annually. The III considers this type of fraud especially troublesome because it can entail not only employee claims abuse, but also employer fraud to keep premiums down and medical provider fraud such as exaggerated billing. Unauthorized insurers can also commit workers’ comp fraud by collecting premiums from employers and then failing to pay claims.

Quiggle noted that workers’ comp fraud is especially rife in California, where small and immigrant-owned businesses cannot obtain such coverage through major carriers. According to the state insurance department, workers’ comp fraud costs from $1 to $3 billion each year.

To combat the problem, the state has established the Workers’ Compensation Fraud Program to better coordinate presenting cases to prosecutors, assisting law enforcement agencies, and training insurers and employers in fraud detection. Founded in 1991, the program’s funding that year totaled $3 million. By 1999, funding had grown to $28.5 million.

Other states with high rates of workers’ comp fraud have enacted similar measures. New York officials have implemented the FRAUD-I.T. project to compare new hires to people collecting workers’ comp benefits, enabling identification of people working at second jobs while collecting benefits from primary employers. In Florida, where the III claims workers’ comp fraud costs $6.5 million each year, the Florida League of Cities established a Special Investigations Unit (SIU) to fight fraud within municipalities and coordinate actions with the state’s Division of Fraud.

In Texas, the state legislature chartered the Texas Workers’ Compensation Insurance Fund in 1991 to stabilize the workers’ comp market there. In 2001, the Legislature redesigned the fund’s charter and changed its name to Texas Mutual Insurance Company. Referrals made by its fraud department have reportedly resulted in more than 110 convictions since its inception.

According to Terry Frakes, senior vice president of public affairs at Texas Mutual, three major forms of workers’ comp fraud the company encounters include:

• Claimant Fraud, the most common form, in which an employee either fakes an injury to collect compensation or collects compensation longer than necessary.
• Provider Fraud, the costliest form of fraud, in which medical or legal professionals defraud Medicare and Medicaid systems, as well as employers by, reporting false or exaggerated injuries.
• Premium Fraud, in which employers mislead carriers about the nature of their companies to pay less, or nothing, in premiums.

Insurance fraud may be never entirely be eliminated as an expensive thorn in the side of the industry, or as a drain on the pocketbooks of consumers who ultimately bear the costs associated with fraud through higher rates. As for now, states, industry associations, anti-fraud organizations and insurers themselves have sizeable jobs cut out for them in the effort to combat perpetrators who are working overtime to create new schemes for the criminal misuse of insurance.

Topics California Florida Carriers Texas Auto New York Fraud Legislation Claims Workers' Compensation Property Property Casualty