Indicators of Insurance Fraud
Suspicious claims have common attributes. Insurers have collected into lists those attributes to assist their claims staff. The lists of red flags or indicators of insurance fraud should be used to determine whether further investigation is required. Continually growing as fraud perpetrators add to their fraudulent schemes, the lists, known as the “red flags” or “indicators” of fraud are important tools in the effort to reduce insurance fraud. There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit.
If, when investigating a claim, three or more red flags are found, the insurer should consider the need for further, more thorough, investigation. The existence of red flags does not mean a fraud has occurred. It is only a signal to the adjuster to investigate further to remove the suspicion from the insured or claimant or confirm that fraud is being attempted. A single indicator does not alert the adjuster to the possibility of a fraudulent claim. It is only when the investigation reveals a combination of three or more red flags that a suspicion of fraud that requires further investigation is raised.
Although the existence of multiple red flags should trigger a thorough investigation, failure to investigate has been held to be reasonable as long as there are no patent inaccuracies or actual knowledge of false representations. Branham, 126 Bankr. 283, 292 (S.D. Ohio, 1991). Also note Bomis v. National Union Fire Insurance Co., 25 F. 3d 1047 (6th Cir., 1994).
In a Missouri case, the following “red flags” were found to be a reason for an insurer to suspect arson for profit: “more than one mortgage, late payments, divorce, prior claims, multiple claims, problems affecting title to the property, over-insurance, an increase in insurance coverage right before the claim, recent cancellations of insurance held with prior insurers, liens, threats of foreclosure on the property, lawsuits, and recent job transfers.” [O’Donnell v. Allstate Insurance Co., 734 A.2d 901, 1999 PA Super 161 (Pa. Super., 1999); and LeForge v. Nationwide Mut. Fire Ins. Co., 82 Ohio App. 3d 692 (Ohio App., 1992)].
As the Nebraska Department of Insurance states in its booklet, Fraud Detection Hints, it is “important to remember that the … possible ‘red flags’ [indicate] that there may be some evidence consistent with an insurance fraud scheme. Any one or two of these by themselves may not raise your suspicions; however, when you have several of these hints (red flags) present or a pattern begins to emerge, you should investigate further or forward your suspicion to the Insurance Fraud Prevention Division.”
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
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