Investigating Fraud

What the Fraud Trained Adjuster Needs to Know

The purpose of an insurance fraud investigation is to gather evidence to establish whether a suspected fraudulent claim is legitimate or is, in fact, an attempt to defraud the insurer.

If the facts reveal the claim is legitimate, the fraud investigation stops and the claim is paid. If the facts support the suspicion, then further evidence must be gathered to allow the insurer to successfully deny the claim and refuse to pay.

Training the Investigators

The introduction of the tort of bad faith resulted in the insurance industry running scared for many years from investigating fraud. Insurers avoided denying claims fearful that they would subsequently be sued for bad faith. Insurers discouraged their adjusters from looking too closely at claims. As a result, knowledgeable personnel either looked for another career or were laid off by companies interested in improving their bottom line by hiring the less experienced personnel.

Insurance fraud investigations are often expensive. The extent of insurance fraud, depending on which of the various estimates are believed vary from $80 billion to $300 billion dollars every year. The sum is so enormous as to defy understanding. Insurers are finding that they cannot increase premiums to honest insureds fast enough to cover the amounts lost to fraud. They cannot afford to let such an enormous amount of money deplete their assets and destroy their profits without a fight.

The first line of defense to stop the hemorrhage of billions of dollars to fraud perpetrators is a staff of well-trained experienced and professional adjusters and investigators.

Although many adjusters will never witness the sorts of frauds described in this book they must be trained to recognize fraud, and thus be equipped with enough knowledge to separate the suspicious from the honest claim. States are, like California, requiring that insurers train all of their claims personnel to recognize insurance fraud, attempted insurance fraud and the indicators or red flags of insurance fraud. The laws and regulations attempting to force the victim of the crime, insurers, to investigate and prepare prosecutions for the state, are unfortunately honored more in the breach than in the following.

What A Fraud Trained Adjuster Must Understand

To turn a claims person into a fraud trained adjuster, the adjuster must become familiar with all of the following:

  • all insurance policy contracts used by the insurer;
  • the rules applied by the courts for the interpretation of insurance contracts;
  • the Fair Claims Practices Act of the jurisdiction in which they work;
  • the regulations promulgated by the Department of Insurance in their state to enforce the Fair Claims Practices Act;
  • The statutes in their state compelling the existence of a Special Investigation Unit (SIU);
  • The regulations established by their state concerning the training and operation of the SIU and claims personnel;
  • the law of contracts;
  • the law of torts;
  • the law of fraud;
  • the obligations of an insurer to pursue anti-fraud activities;
  • specialized knowledge for different types of claims, such as:
  • sufficient medical terminology to understand the diagnoses of physicians;
  • treatment of traumatic injuries;
  • cost of reasonable medical treatment for traumatic injuries;
  • methods for determining the extent of damage to structures or vehicles and the cost of repair or replacement;
  • methods for establishing the fair market value of items of personal property, including vehicles;
  • interview techniques that facilitate the obtaining of detailed information;
  • negotiation skills required for obtaining fair, reasonable, and acceptable settlements; and
  • the red flags of fraudulent claims.

This training does not occur overnight. It is a tall order that requires commitment by each insurer to thoroughly train their adjusters and other claims personnel concerning the indicators of fraud. Fraud training, by computer assisted training programs, is available for minimal costs from private vendors like, National Underwriter Company, IRMI, A.D. Banker, IRMI’s WebCE, the book Insurance Fraud and Weapons to Defeat Fraud, and other materials published by the author. In addition various insurer produced programs exist as well as programs by independent adjusting firms.

Basic classroom type training for insurance personnel is available across the country in local colleges and universities. Local colleges, community colleges, universities and law firms will provide training at little or no cost. The training programs should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce and supplement the information learned.

The insurer should also institute a regular program of auditing claims files to establish compliance with the subjects studied to see how effective the training was to discover and defeat fraudulent claims. Monthly meetings should be held with claims staff to reinforce what was learned in the training sessions and to discuss current investigations where fraud is suspected.

There is no quick and easy way to create insurance claims professionals who are knowledgeable about insurance fraud. The training takes time. The learning takes longer. Those adjusters and other personnel who take the fraud training seriously and apply it to existing claims should be rewarded and honored for their skill. Without applying the training to actual claims the training is wasted.

Red Flags of Fraud

Suspicious claims have common attributes. Insurers and their anti-fraud organizations have collated the common attributes into lists of indicators or red flags of fraud. The lists were created as training aids and to be used to determine whether further investigation is required to determine if a claim is legitimate or false and fraudulent. Continually growing, these lists are known as the “red flags” or “indicators” of fraud lists. 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 assessing a claim, three or more red flags are found the need for further investigation should be considered and evaluated by the claims person, a supervisor and the insurer’s special investigative unit. The existence of red flags does not mean a fraud has occurred. Red flags are only a signal to the adjuster to investigate further so that the suspicion may be either removed or confirmed. It is not any single indicator that alerts the adjuster to the possibility of a fraudulent claim but a combination of the red flag or red flags discovered coupled with the results of the thorough claims investigation.

Although the existence of multiple red flags should trigger an investigation, failure to investigate has been held to be reasonable as long as there are no patent inaccuracies or actual knowledge of false representations.

Multiple Red Flags Require Referral to the SIU

Once an adjuster identifies a possible fraudulent claim, it is often passed on to a Special Investigation Unit (SIU). Most states require insurers, by statute, to maintain an SIU. On average, 3% to 10% of claims should be referred to an SIU for further investigation. An industry study conducted during the mid-1980s revealed that by 1983, 47 of 399 insurers had SIUs in operation a number that has grown tremendously up to today where it approaches 100%.

Although this figure represented only 10% of the companies participating in the survey, the 47 companies with SIUs accounted for over 50% of the industry’s premium volume at the time. Today, as a result of statutory compulsion, almost every insurer has an SIU. An effective SIU has a major return on investment and gives a competitive edge to the insurer with an effective SIU over the insurer with no SIU or an ineffective SIU.

Specific to the training requirements of the state of California is Barry Zalma’s e-Book, Insurance Fraud and Weapons to Defeat Fraud available at Volume One available as a Kindle book and a paperback. Volume Two Available as a Kindle book and a paperback

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 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.

“Arson-For-Profit Fire at the Cowboy Bar & Grill”

A true crime novel based on the experience of the author, Barry Zalma, who for more than 51 years has acted for insurers who were faced with arson-for-profit, one of the most dangerous insurance fraud schemes. The book explains how an insurance claims adjuster, working with a fire cause and origin expert, a forensic accountant and insurance coverage lawyer, were able to defeat an arson-for-profit scheme and obtain a judgment requiring the perpetrator to take nothing and repay the insurer all of its expenses in defeating the claim.

Available as a paperback.

Available as a Kindle book.

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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