The Most Difficult Problem Facing Insurers
Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.
Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.
No one will ever be able to place an exact number on the amount lost to insurance fraud. Everyone who has looked at the issue knows – whether based on their heart, their gut or empirical fact determined from convictions for the crime of insurance fraud – that the number is enormous.
When insurers and governments put on a serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-government-based or funded insurers drops logarithmically.
Insurance fraud is not limited to the US. In Britain fraud costs the British economy amounts estimated in billions of British pounds. Since the amount of fraud actually detected is a small portion of what was actually found, the estimates published are little more than an educated guess.
In the United States a similar study by Aite Group speaks of a new report that provides an overview of the North American P&C insurance fraud battlefield, including its history and evolution. Based on July 2012 to March 2013 Aite Group interviews with North American P&C industry stakeholders and industry fraud-prevention organizations, the report sizes the cost of fraud, details fraud types and their perpetrators, and describes anti-fraud solutions being developed and deployed.
Aite group concluded that insurance fraud impacts not only every insurance company but virtually every consumer and taxpayer worldwide. The extent of insurance fraud shows no sign of easing. Aite Group estimated that claims fraud in the U.S. P&C industry alone cost carriers US $64 billion in 2012 and will reach US $80 billion by 2015. P&C carriers are just now beginning to focus their fraud management strategies and investments on solutions that enable fraud detection as early in the claims process as possible, before claims payments are made and valuable investigative opportunities are lost. The educated guesses don’t even try to estimate health, life, disability and workers’ compensation fraud. Better guesses for the extent of insurance fraud in the United States, not counting Medicare and Medicade fraud, approaches $300 billion every year.
As the industry attempts to keep pace with fraudsters’ varied, ever-shifting tactics, it must deploy more innovative, effective anti-fraud technologies or risk dire losses. Vendors and organizations mentioned in the Aite Group report include the Coalition Against Insurance Fraud (CAIF), CSC, Detica NetReveal, Equifax, Experian, FICO, IBM, Innovation Group, Insurance Bureau of Canada (IBC), ISO/Verisk, KPMG, LexisNexis, Mattersight, Mitchell, the National Insurance Crime Bureau (NICB), SAP, SAS, and TransUnion. Insurers must also generate a close relationship with the state insurance department’s fraud division or fraud bureau, local police agencies, the FBI, the ATF, the Postal Investigation Service, the local fire department’s arson unit, local prosecutors, and the local U.S. Attorneys.
Wherever insurance is written insurance fraud exists. It is an equal opportunity fraud committed by people of every race, religion or national origin.
Insurers who do not exercise serious anti-fraud efforts often complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud. No matter how seriously the insurers work to prove fraud the authorities often ignore them. In response, police and prosecutors complain that the insurers do nothing that police and prosecutors can use to prosecute the crime of insurance fraud while insurers complain that prosecutors ignore them when they present evidence of a fraud. There is truth in both complaints.
This E-book is written to make it clear to insurers, police and prosecutors that it is necessary to stop complaining and start working together to reduce the extent of insurance fraud. If they do not work together the crime will continue to metastasize until it will be impossible to write insurance at a profit or for a price anyone can afford.
The logarithmic growth of fraud against insurers and government based programs like Medicare and Medicaid, will eat away any chance insurers – and their shareholders – not to mention the tax burden of those who pay taxes to support Medicare and Medicaid will be insufferable.
Insurers are almost universally ignored by police agencies when the insurer victim reports the crime. When insurance criminals are caught in the act they are seldom arrested, even less often prosecuted and almost never punished seriously.
Police and prosecutors must deal with insurers who are not equipped to perform an adequate criminal investigation. Insurer employees seldom have police or prosecutorial experience. They are in business to provide to those who buy insurance the benefits promised by the policy. When faced with fraud employees of insurers are only qualified to conduct the investigation necessary to protect the insurer from civil litigation by a fraud perpetrator.
If prosecution of insurance fraud is to be successful it is necessary that insurers, prosecutors and police agencies work together as a team dedicated to defeat the crime of insurance fraud. To do so the insurers must train their staff to recognize the elements of both the crime of insurance fraud and the elements of the civil tort of insurance fraud. If well trained, insurance personnel collecting information about a potential insurance fraud, will know the type and quality of information that either a prosecutor or a civil defense lawyer will need to prove fraud was attempted.
Some estimates indicate that more money goes out fighting fraud than is saved. Others show that every dollar spent by insurers to defeat fraud save the insurer as much as seven dollars in fraudulent claims. Although insurance fraud is a crime in almost every jurisdiction in the United States, it is the only crime where the victim is required to perform the investigation from its funds and to pay special taxes to support investigation and prosecution by public agencies of crimes committed against it. The Departments of Insurance across the country continue to add taxes on insurers and the insurance buying public to pay for the state’s portion of the fight against insurance fraud.
Insurers are compelled by statute and Regulation to maintain Special Fraud Investigation Units, publish and fulfill a detailed anti-fraud program and train all of their anti-fraud personnel. Compliance by insurers is less than constant across the industry. Some have effective fraud units while others simply identify one employee as its anti-fraud director although his or her work is almost totally adjusting claims and not investigating fraud. The expense of staffing and pursuing the anti-fraud efforts required by statute and regulation reduces the profits earned by the insurer and is believed to be offset by the lack of payment to fraud perpetrators. Of course these efforts are also made difficult by the imposition of fair claims settlement practices regulations that require quick, complete, thorough investigations and fair treatment and prompt payment of insureds even when fraud is suspected. The two opposing sets of laws create a Catch-22 from which insurers find difficulty complying with both.
The Departments of Insurance audit insurers regularly to be sure that each insurer works hard to train its people to investigate and seek prosecution of the crime of insurance fraud. Failure to do so sufficiently allows the state Department of Insurance to fine the insurer for not doing the work traditionally the duty of the state to investigate and prosecute crime.
In addition, adding insult to the injury, courts and juries assess tort and punitive and exemplary damages against insurers who under the compulsion of the Departments of Insurance to defeat fraudulent claims and, as required, accuse their insured’s of fraud. If the insurer fails to prove the fraud and the police agencies, including the Departments of Insurance, fail to prosecute following the direction of the Departments of Insurance in reporting the loss can dangerous and expose the insurer to litigation.
Similar businesses in the financial sector, who are also regular victims of fraud and other crimes, are not taxed or compelled to investigate crimes committed against them. No state agency or person demands that a local or national bank pay for prosecuting embezzlers or armed robbers. No state agency or person demands that convenience store owners pay for prosecuting people who hold up 7-11 stores. No Regulator requires stockbrokers to investigate money laundering or fraudulent transactions.
The imposition upon the insurance industry – and the attendant cost passed to the insurance consumer – is unique. Insurers are treated differently than all other businesses in the United States. George Orwell was right when, to paraphrase what he had a character in “Animal Farm” say, “all businesses are equal, some are more equal than others.”
Clearly, insurers are less equal with regard to crimes perpetrated against them than are other businesses. They are the only business required to pay for special investigators and prosecutors to investigate crimes against them. They are the only business required, by statute, to investigate crimes against them and produce the evidence to the prosecutors. Without the power and immunity available to police agencies insurers are damned and fined if they don’t comply and are damned with tort and punitive damages plus the cost of defending bad faith suits if they comply with the statutes and regulations.
This article is an excerpt from a book I am working on called “Insurance Fraud & Weapons to Defeat Fraud.” I hope to have the book, presently about 2000 pages, published soon. It will cover insurance fraud from the claims investigation to the end of litigation with full cases of important appellate decisions in the text so that readers can understand how courts deal with the issue and the evidence necessary to effectively deny a claim for fraud.
Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.
Mr. Zalma’s new e-books “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;” “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.
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