To Catch a Thief-State DOI’s Work Hard to Keep Agents in Line

A quick browse through the Web sites of state insurance commissioners across the country on any given day in any given year, is bound to turn up at least one account of regulators cracking down on an insurance agent for a variety of reasons—from minor infractions of the insurance code to theft of premium.

Most likely it’s the latter. Agents taking in premium dollars and not sending them to the insurance company to bind the insurance is the most common reason for regulators to take action against insurance agents. But just how big a problem is it?

“It’s hard to say, I don’t know if anybody actually quantifies agent or broker activities,” said Nanci Kramer, a spokesperson for the California Department of Insurance. “It’s hard to estimate how big something like this is. … When it comes to what agents and brokers are doing it’s so hard because many times … where someone’s collecting premiums, giving a consumer what looks like a good certificate of insurance, if nothing ever goes wrong we don’t hear about it.”

Lee Jones, a spokesperson for the Texas Department of Insurance, agreed that it’s difficult to determine to what extent agents are committing theft and defrauding their customers. “It’s always hard to say how big a problem it is. It’s always a little hard to respond, because anytime a consumer loses money because of a dishonest agent, anytime a consumer has an auto accident and then finds out he’s not covered, it’s serious,” Jones said.

“We have approximately 200,000 individuals in Texas who hold agent licenses of one kind or another and if you measure the cases in a year’s time on which we take action because an agent was stealing premium, it’s a drop in the bucket. By far the majority of these people are honest and do their work and don’t do harm to their clients or policyholders. But there’s always some bad apples. It’s kind of like saying ‘how big a problem is theft?’ In general, most people don’t steal. We’ve got 20 million Texans and if you count the number of people who get arrested and sent up for theft, compared to the 20 million it’s not very big. I think it’s the same deal with agents. Anytime it happens, it’s severe, it’s bad, it’s serious. But a not a lot of agents do it and when we catch them we deal with them pretty severely.”

Whether or not insurance code infractions or criminal activity on the part of insurance agents are increasing with the downturn in the economy is also a difficult question to answer, due to the overwhelming fact that if nothing goes wrong, regulators never know about it. In addition, although most departments publish enforcement actions taken against agents, the departments don’t necessarily generate the kind of statistical information that shows amounts of premium dollars stolen by agents through the years.

Robert Wooley, Louisiana’s Acting Commissioner of Insurance, said his department issued cease and desist orders and/or summary suspension of licenses to 15 agents or agencies in his state in 2002. The department also had five arrests and 27 criminal referrals. However, Wooley was not sure that there has been an increase in the numbers of agents acting unscrupulously. “I think that we have been more active in looking for these problems and trying to do a better job of policing the agents,” he said.

James Quiggle, a spokesperson for the Coalition Against Insurance Fraud, thinks a sluggish economy and a hard market may offer increased temptations for agents to get into trouble. There has “always been a problem with a small percentage of insurance agents who willingly spend their clients’ premiums,” Quiggle said. But “with the economy still dragging agents are under pressure.” Cuts in commissions and declining profits may be causing agents to get involved in deals that they might otherwise have stayed away from.

But CDI’s Kramer said it works both ways. While it’s commonly thought that when economic times are hard, crime goes up, “this kind of crime can go up when economic times are good because there’s more money to take from people,” Kramer said. “But the issue now—when you look at difficult economic times—people are looking for value. They’re looking for the deal of a lifetime, so if someone throws up billboard or an ad that says …. ‘I do this cheap,’ then people might be attracted to it.”

According to Kramer, one of the biggest cases being worked by the California department concerns an agent whose company, Harbour Insurance, targets the entertainment industry. “AIG actually took out ads in the Wall Street Journal, Los Angeles Times, the New York Times, telling people to stay away from this guy because he was selling insurance saying that he was authorized under AIG and he was not. So they were concerned that people doing big events—this was post 9/11—people doing big events or film shoots or something like that thought they had insurance and they did not.”

Kramer explained that the agent, Clarence Joseph Hall, had a “certificate at one time, he was an okay agent I suppose. Or at least he was authorized, he isn’t anymore.” She said his Web site, www.harbourinsurance.com, shows the company “as being in Los Angeles, San Antonio and New York, with actual street addresses. But when we go there, there’s nobody there.” According to Kramer the Harbour Insurance Web site claims the company can save clients 20 to 30 percent on their insurance program. “These days when people are looking for value, this is the kind that would attract them,” she said.

TDI’s Jones confirmed that the department has received at least one complaint of a general nature about Harbour. It concerned the sale of an AIG policy, which the company is allegedly not authorized to market.

California also has a problem with unscrupulous agents targeting the state’s Spanish-speaking population. “We had a really big case in L.A. recently—in La Fuente, Pasadena area—with a guy who had been targeting Latinos,” Kramer said. “We found out he’d been in business for a couple of years. There were people who literally had been paying this guy for a couple of years and it wasn’t until people had to file claims that we found out about it. It was a huge case. It’s estimated this guy took more than $2 million from people.”

She said California’s migrant population are “often victims of this kind of scam. Especially because insurance is required if you’re going to have a car here. And so folks who are on a limited budget, work the service industry and are new to the country will often fall victim to someone who’s saying—’I can get it to you for even less money’ when nothing really ever even exists. Bogus insurance certificates are sold all over downtown Los Angeles. You can go to almost any corner in downtown L.A. and pick one up.”

ERISAs and MEWAs
The selling of unauthorized insurance, especially for employee benefits, is also one area of agent crime that has been on the rise. “One trend we do see that does involve, unfortunately, some fraudulent activity by agents is unauthorized insurance, particularly health plans,” TDI’s Jones said. “Because the rise in the cost in health insurance and health care in general over the last two or three years has made small employers really desperate to find ways to keep covering their employees without the cost going up.”

The Texas department currently has 250 cases pending against agents who represented unauthorized health plans. “A lot of times these are agents that haven’t had any other black mark on their record, and somehow either through greed or stupidity they began representing some of these people,” Jones said.

“We’ve issued orders or taken some action in the past year or year and a half against 12 different cases … (although there are) many more than 12 entities. We issued a cease and desist order last week against 33 different entities and individuals. They were all part of the same problem, or the same enterprise … so we take them as one, but there were actually 33 entities there,” he said.

The agents representing these plans who are “not just doing it out of pure avarice could be doing it out of ignorance because part of the spiel of these unauthorized guys is … ‘this is an ERISA (Employee Retirement Income Security Act) plan and as an ERISA plan it’s not subject to any regulation or licensing by the state.’ And our response is, a true ERISA plan is one that’s a single employer plan—it may be a multiple employer plan through a labor union, but in these cases the employer has a collective bargaining agreement. So it’s something that is generated at the level of the employer and the labor union. It’s not something that is sold, a true ERISA plan is not something that’s sold.”

Louisiana has also had a problem with a surge in unauthorized health plans, although according to Acting Commissioner Wooley, his state has not has been hit as hard as Texas. “We work on a task force together with the commissioners in Texas (and) Arkansas. … We’ve seen a lot of activity in the past year out of illegal MEWAs (Multiple Employer Welfare Arrangements). And you normally see that happen when you have large increases in the amount of the cost of healthcare insurance.”

Wooley noted that the plans gain a foothold because employers “are looking for a deal. They want to try to lower their costs. … So when somebody comes in and is offering you healthcare insurance at half the price, that’s a pretty good cost savings and you’re obviously going to be interested. And you don’t usually do a whole lot of checking into whether it’s a proper vehicle.

“… I usually refer to the MEWA people as like fire ants. If you pour poison on a fire ant mound then they just move their nest to your neighbor’s yard. That’s the way MEWAs do. You can shut ’em down and six weeks later they’ll be operating in Georgia or Arkansas or someplace else.”

Some of the agents involved in selling these plans are knowledgeable and “some of them are not,” Wooley said. “They are also looking for a product they can sell so they don’t do a whole lot of checking, too, into whether this is something legal that they should be offering to their customer base. Or whether it’s something that is illegal. So they probably don’t do as good a job as they should because they’re lured by the same thing: ‘here’s a cheap product, everybody wants to buy it, I want to be a part of it.’ They really should check before they sell these health products.

“Anytime you see an association, that should be a warning sign to an agent that they ought to check it out to make sure that the association has other benefits of membership other than just insurance. Because if it’s solely for purpose of insurance it’s probably an illegal MEWA, if it has no other benefits of being a member.”

Cracking down
Agents who get caught, and are proved to be operating unethically and/or illegally face repercussions that run from suspension or revocation of their license, to fines and/or jail time. California, Louisiana, Texas and most, though not all, states have fraud units dedicated to investigating not only infractions by agents and unauthorized insurers but insurance fraud committed consumers by as well. The state departments generally work in tandem with district attorneys and other state agencies to conduct investigations and prosecute the offenders, if it comes down to that.

In Texas, the Travis County District Attorney has jurisdiction over insurance fraud cases statewide. However, cases can sometimes be prosecuted by the local DA in the jurisdiction where the alleged crime occurs. TDI’s fraud unit and legal department operates in a somewhat bifurcated manner, according to Jones. The fraud unit consists of licensed, commissioned peace officers whose total focus is criminal. The legal department performs investigations, as well, although their cases tend not to result in criminal prosecution. The legal department can share information with the fraud unit, but not the other way around.

Louisiana’s fraud unit consists of department employees who work with the Louisiana state police and a section of the Attorney General’s office. In the case of criminal action, district attorneys in the parishes where the crime is committed generally prosecute the case. “The state police does a lot of the legwork of the investigation and carries out the arrest,” Wooley said. “Our department does a lot of putting the evidence together, working with the Attorney General’s office so that we can then turn it over to either the district attorney or, if necessary, a U.S. attorney. But most of them are state actions that involve the local parish district attorney.”

“We have 18 different fraud investigative offices statewide,” Kramer said, referring to California. “Plus our three headquarter-type offices in L.A., San Francisco and Sacramento.” She explained that CDI works very closely with local district attorneys and participates in a grant program that helps fund a partnership between the department and local DAs. “Because it’s hard … once you’ve done all this investigative work you turn it over to the prosecutor. And whether or not they pursue is then in their hands. So we work very closely with the DA from the beginning of our investigations to make sure that we are crossing all the t’s and dotting all the i’s that they would need to have a successful prosecution.”

Consumers and other agents are the departments’ most common sources of information about agents who’ve gone bad. When claims don’t get paid, consumers who think they’re dealing with a real insurance entity contact the state departments. And agents who think they’re being competed against unfairly are also quick to complain. In the case of the unauthorized health plans, an employer who’s been burned before will sometimes contact the department about being approached by a plan that smells a little funny.

“We’ll get complaints from consumers, is the way we get most of them,” Wooley said. “Sometimes we get complaints from their competitors, the other agents in the area. In fact, we get a lot of them from agents who pick up on this through a meeting with customers and finding out these things and then they report it to us.”

Topics California Texas Fraud Agencies Excess Surplus Louisiana