Fraud among friends: some unscrupulous insurance agents break the bonds of trust and steal from policyholders and carriers.

Key Points

* Based on industry, occupational fraud in the insurance business ranks sixth in the United States, according to the Association of Certified Fraud Examiners.

* The insurance industry figured in 46, or 9.1% of the cases reported to the association, and the median loss in insurance cases was $172,500. Insurance losses in the association's 2004 report totaled more than $761 million.

* Leaders of agent groups condemn agent fraud, but also say this behavior is unusual.

Most cautionary tales about fraud and insurance focus on scams perpetrated by people out to bilk money from insurance companies. But there's another angle to the fraud story, this one centering on agents and brokers who use their positions to steal from policyholders and carriers alike.

On an industry basis, occupational fraud in the insurance business ranks sixth in the United States, said the Association of Certified Fraud Examiners in its 2004 Report to the Nation on Occupational Fraud and Abuse. Through an online survey, the association compiled information on 508 fraud cases in which its members had been involved. The losses totaled more than $761 million. The insurance industry figured in 46, or 9.1% of the cases reported, and the median loss in. insurance cases was $172,500, the association said.

Leaders of agent groups condemn this conduct, but also say these cases are unusual. "I don't think fraud has been a major issue in the brokerage business or the distribution business ever," said Ken A. Crerar, president of the Council of Insurance Agents and Brokers. "At the core of it, this is an industry that has not been riddled with fraud."

"In any industry, there are always some bad apples." said Dick Poppa, chief executive officer of the Independent Insurance Agents & Brokers of New York. "'But this is minuscule in relation to all of the business that agents and brokers transact."

Madelyn Flannagan, vice president of education and research for the Independent Insurance Agents & Brokers of America, said she has seen very little larceny among the independent, Main Street America agencies that largely make up her organizations membership of 39.000 independent insurance agencies. "When we do hear about it, it tends to be employees of agencies, not agency owners," she said. In her 25 years in the insurance business, Flannagan said she has never heard of an agency owner committing fraud.

Crerar maintains that when agent fraud occurs, the system often outs the larcenous agent. State insurance regulators have been "incredibly vigilant" in rooting out these guilty parties, he noted. "We can criticize regulators for lots of things, but the one area that they have focused their attention on has been the issue of fraud and fraudulent behavior," he said.

Pocketing the Premium

Statistics on the type of fraudulent practices that an agent or broker may engage in are difficult to come by. But Poppa suspects that one of the easiest crimes that an agent can commit is to accept a premium from a customer, then fail to turn it over to a carrier. New York state has strict laws applying to agent trust accounts, he noted. "Agents are required to keep any premiums that they receive on the behalf of an insured in their trust account," he said. "So there are certainly safeguards there that would keep an agent trying to do the right thing from getting into trouble. But if somebody has the intention to defraud a client, there still are ways of their doing that" through, for example, doctored and falsified documents, Poppa said.

In some ways, it's tougher for an agent to commit fraud these days, Poppa said. There are more levels of scrutiny than before, particularly in the life business, with significant changes recently applied to disclosures and replacement policies, for example. In the wake of corporate scandals, "there is probably a higher awareness of accountability by all professionals," he said. But he added one caveat: imaging technology gives an unscrupulous person, no matter what the industry, more tools to work with.

News that an agent has defrauded a policyholder and/or a carrier can mean that the vast majority of honest agents and brokers are painted with the same broad brush, Poppa said. That does happen, even in small town America, Flannagan acknowledged. "When you see it hit the local newspapers that some independent agent has been involved in a theft of premium dollars, which is typically what it is, all consumers are going to look at agents a little bit differently for a while," she said. "But the one good thing is that a lot of these people have long-term relationships with their agents in these towns. They go to church with these people; they sit on bank boards with them. It's that kind of relationship."

One bad actor makes all the players in the industry lose credibility, Crerar said. When that happens, his members go out, client by client, to assure each one that they are professionals, are trustworthy and are providing the client with what they promised, he said. These are people who have worked hard to achieve a level of professionalism, only to find that they can be tainted when a peer commits fraudulent acts, Crerar said. "It's a challenge. It's an emotional challenge," he said.

Uniform Standards Needed

Crerar thinks regulators should set the bar as high as possible to ensure the professionalism of brokers and agents. The CIAB dislikes having disparate standards, meaning one state's standards are different from another's, and it has always called for the highest uniform standard of conduct for agents and brokers, "because this is a profession, this is an industry, where it takes a lot of knowledge in order to sell the products properly and to give the client the kind of advice you need to give him," Crerar said.

Since the 1960s, the IIABA has had a membership ethics code that stresses professionalism, honesty and integrity, Flannagan said. The CIAB doesn't have an ethics code per se, but its member firms have mission statements that emphasize their commitment to clients, Crerar said. "To be honest, the real reason a code of ethics is such a challenge is as soon as you adopt it, the trial lawyers are all over you and it's just one more complication," he said.

In processing applicants, the Council is very mindful that its new member firms must have good reputations, Crerar said. "One reason is our members do business with each other. They get advice and counsel from each other," he said.

Poppa thinks that insurance professionals have a solemn duty to make sure that they are doing what is best for their clients and are always promoting the highest ethical and business standards. "That's why we have a responsibility as an association and as individual agents to do everything we can" to not let agent fraud occur, he said.

Fraud by Industry

The insurance industry ranked sixth in the number
of occupational fraud cases that certified fraud
examiners handled in late 2003 and early 2004.

                                   Number      Percent
Industry                         of Cases   of Cases *   Median Loss

Manufacturing                    65         12.9%           $125,000
Banking                          56         11.1%           $101,000
Service                          56         11.1%           $139,000
Government                       53         10.5%            $45,000
Other                            47          9.3%           $145,000
Insurance                        46          9.1%           $172,500
Retail                           40          7.9%            $35,500
Health Care                      37          7.3%           $105,000
Education                        31          6.1%            $31,000
Construction                     17          3.4%           $145,000
Transportation                   17          3.4%           $225,000
Oil & Gas                        16          3.2%           $101,500
Communication                    13          2.6%           $150,000
Utility                          13          2.6%            $30,000
Real Estate                      11          2.2%           $385,000
Agriculture                      6           1.2%         $1,080,000

* The sum of percentages in this column exceeds 100%
because some victim organizations were characterized as
belonging to more than one industry category.

Source: The Association of Certified Fraud Examiners