Fighting Fraud Anew.

The insurance industry has been focusing on preventing fraud for a long time, but it's still difficult to get consumers fired up.

There has never been a more important time or a better opportunity to do something about auto insurance fraud. In New York, organized criminals are manipulating the no-fault insurance system to steal directly from policyholders. And, ludicrously, because of the state's no-fault regulations and legal system, insurance companies have been unable to stop it.

In 2000, no-fault fraud in New York state grew more than 35% from the previous year. One company describes the situation as the worst ever seen in any state in such a short time.

Unfortunately, the current law not only enables the buildup of fraudulent claims, but it almost encourages it. Medical-care providers have 180 days--about six months--to file up to $50,000 in Personal Injury Protection claims, while claims examiners have only 30 days to scrutinize bills. If insurance companies don't pay within one-sixth of the time limit to file, they can be accused of bad faith.

This system helps fraud flourish in other ways. Because practitioners of alternative medicine gained access to the pot of no-fault medical coverage, clinics linked to crime rings can submit claims for daily sessions of aromatherapy, biofeedback and other nonprimary-care treatments.

Of course, insurers have been talking about insurance fraud for a long time. While progress has been made, it's very difficult to get consumers fired up. But as New York moves to take over the No. 1 spot as the most expensive state in the country for auto insurance, consumers will sit up and pay attention.

The presence of organized crime also increases media interest in the insurance industry's plight. Insurers are fighting for and with policyholders--to stop their hard-earned money from flowing into mobsters' bank accounts. So the first step in getting the system changed is to alert the public that the way things are run now leaves it wide open to crooks and swindlers.

Up until now, our efforts have been thwarted by trial lawyers, chiropractors and other professional groups feeding at the insurance trough. These groups thrive on the status quo. And lawmakers obviously would prefer not to upset members of these professions, because many are big campaign contributors. But if public outrage over footing the bill is strong enough, politicians will act--especially in an election year.

The Insurance Information Institute is working with insurance companies and other industry organizations to tell the insurers' side of the story to the media and will continue to focus on fraud until the public is as concerned about it as the industry is.

Remember, medical fraud is not a problem only for New Yorkers. Fraud mills spring up anywhere that shady operators see a chance to make money. When New Jersey tightened its no-fault laws a couple of years ago, operators there began to look for easier prey. They found it just a short distance away in New York City. Florida, California and Colorado as well as urban areas in many other states, also are trying to rid themselves of these crime rings.

Fraud is a threat to the insurance industry, not just because it eats at the bottom line but because it affects the industry's public standing, which is closely tied to the affordability of auto insurance. Over the past few years, insurance companies' favorability ratings have reached the highest point in decades, in part because auto insurance rates have been dropping. But public hostility could escalate quickly, especially if policyholders are required to bear the full rising cost of PIP coverage in New York state. In the most fraud-ravaged parts of New York City, annual premiums for a basic policy could exceed $4,000--four times as much as the average New York state driver now pays.

It is essential that insurers tell the frightening facts about fraud's impact on prices, before the industry is forced to significantly raise rates to combat the effects of fraud. Insurers have a strong story to tell. They must take advantage of it now. If the industry fails, lawmakers will react only to the inevitably rising rates--and make a bad situation much worse.

Gordon Stewart, a Best's Review columnist, is president of the Insurance Information Institute, New York.