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Internal injury.


INTERNAL FRAUD IN THE INsurance industry is not unlike fraud in any other type of business in which employees have access to employers' money or have authority to commit employers' money for expenditures. Some types of fraud are more common in particular departments. For instance, kickbacks are more prevalent in a claim department than elsewhere. Yet, kickbacks can be found in any situation in which employees dispense company funds or dispose of surplus company supplies, equipment, or recyclable material. This article will deal with internal frauds that are most usual to the insurance industry.

Investigating internal fraud in the insurance industry is much simpler than investigating external fraud because of the wealth of information available to the internal investigator - information not readily available to the external investigator, who must acquire much of it through dogged legwork, guile, persuasion, or subpoena.

Internal fraud at an insurance company most often means claim fraud perpetrated by a claim department employee. Other departments such as sales, underwriting, and operations are not free from fraud, but the opportunities presented to claim employees are much greater.

Sales employees can embezzle funds paid by customers and can commit frauds involving the manipulation of application acceptance criteria, rating factors, and policy effective dates. Underwriters can manipulate acceptance criteria or rating factors as well, and operations department employees can engage in vendor kickback schemes and can alter policy carry dates on their own policies or the policies of their friends and relatives.

Internal frauds in the claim department often involve a fictitious claim payment. To perpetrate a fraud of this nature and escape detection, an employee needs to overcome standard claim department controls. The employee must issue a payment in a manner unlikely to be discovered and, if discovered, unlikely to be traced to him or her. Thus, the employee must acquire usable coverage information and a usable claim file as well as develop a money-laundering method. The easiest way to acquire coverage and a claim file is to load the fraudulent claim onto an already existing claim in a way that it will not affect the customer by way of a rate increase by the underwriting department.

Two common internal frauds are often referred to as add-a-claimant and add-a-payment schemes. In the former, a claim handler will annotate the claim file to reflect that an additional automobile was damaged or an additional person was injured in an accident. In both of these situations the claim file is minimally documented and the additional claimant - the damaged vehicle or injured party - does not appear until after the basic claims are settled.

In add-a-payment schemes, the claim handler locates a claim that has been closed and reports that the policyholder or claimant has additional expenses to be compensated for. This type of scheme frequently involves automobile damage claims or homeowners' claims as the framework to which to add the additional payments.

Both schemes allow the employee the opportunity to operate alone, thus decreasing the likelihood that the fraud will be detected and obviating the need to split the proceeds with another person. However, having ordered or written the fraudulent draft or check, the employee will need a safe way to acquire it if the procedures call for all negotiable instruments to be mailed and a safe method for converting the check or draft into cash. Often, an accomplice is needed at this point. The accomplice may be a relative or friend who deposits the checks into a bank account or a business person whose enterprise handles a volume of cash and checks.

Some defrauding employees have been temporarily successful by selecting common names such as Smith or Johnson, and depositing the checks in a similarly named personal bank account for the sole purpose. Banks rarely care that the payee's given names vary as long as the surname on the account and the negotiable instruments are the same. Other employees have acquired fictitious identities either through the use of fraudulent documents or by taking over a former roommate's abandoned checking account.

ONCE THE INVESTIGATOR IS SUSpicious that a particular type of fraud has been perpetrated, he or she must move quickly but maintain strict confidentiality regarding the investigation. Confidentiality, even secrecy, is necessary so that the person responsible for the fraud is not alerted.

The first investigative step is to try to identify the most likely suspects. Usually, the claim handler who issued the payment under investigation will be the suspect. A careful review of the claim file involved and the check- or draft-cashing procedure normally will be enough to assure the investigator that the claim handler is a suspect.

After identifying the suspect or suspects, the investigator should review the company's relevant personnel records. The objective of the review should be to establish all the available usable names and addresses the suspect might have. Usable names include the names of beneficiaries, next of kin, children, spouses, and premarital names. Usable addresses include the current and former addresses of these people.

The personnel file might also give the investigator some insight into the suspect's character, which could prove useful when interviewing the suspect. The personnel file may also contain references to earlier peculations that were misperceived as procedural exceptions.

The next step involves searching for additional similar frauds. This involves reviewing the paid drafts or checks for the same or similar payee, address, or cashing method. Suspicious patterns in cashing methods include multiple endorsements and endorsements placed in the middle of the back of the instrument rather than at one end. In these latter instances, the endorser places the endorsement in a position where it might be obliterated by the bank's rubberstamp imprints.

Special attention should be paid to account numbers and other identifying material found along with the endorsements. It is not uncommon for the same account number to appear on checks purportedly payable to different people.

Claim files may be reviewed either before or after the drafts or checks. The order in which these reviews are undertaken depends on the nature of the fraud and the information available. For instance, if a listing of claim payees is available and reflects several instances of similarly named payees whose claims were processed by the suspect, it would be appropriate to review the claim files before the paid checks.

The following items in the claim files are indicators of fraud: * any names, addresses, or phone numbers that resemble their counterparts in a known fraudulent file * a series of files with no documents originating from exterior sources * the same series of files with elaborate explanations * pattern of reported claimant activity or demands that results in personal delivery or other unusual handling of the checks

When the investigator has uncovered a pattern of fraud, a few additional steps should be taken before interviewing the suspect. The first step in pinning down the fraud and the suspect's role in it is to establish the fraudulent nature of any documents and assertions supporting the suspicious claims. The truth of both documents and assertions can be established by checking the original sources. Doctors' bills and wage verifications can be checked easily by telephoning or visiting the source's place of business. Usually the documents in the claim file are altered photocopies of legitimate documents submitted in support of other claims. Also, receptionists or bookkeepers supposedly contacted by the claim handler may turn out to be unknown.

Armed with all this information, the investigator should search for dissimilar frauds by the same individual. These can be found by a careful review of the subject's personal claims if he or she is insured by the employer. These claims will frequently reflect add-a-payments, similarly numbered receipts in multiple files, similar documents from diverse sources, and simple mistakes such as misspellings of words rarely used outside specific businesses or professions. If such frauds are found, whether they are proven or not, they can be used with devastating effect during the interview of the subject.

OTHER TYPES OF INTERNAL FRAUDS involve fictitious vendors, fake or paper accidents, staged accidents, and kickbacks. All but the kickbacks can be investigated in a similar manner as mentioned earlier. The key to establishing these frauds will usually be found in the check cashing patterns.

The most pervasive and difficult type of insurance fraud to detect is kickbacks. Kickbacks range from something as simple as a tip for expediting the settlement of a claim to an active partnership in the fraudulent inflation of a claim.

Kickbacks can be paid in a variety of methods. They can be paid in the services of the firm doing the kicking back such as free service work on an adjuster's automobile or home repairs by a contractor. They can be paid through the services of others - a subcontractor, an airline, a resort hotel, or a prostitute. They can be paid through unusual hospitality - free resort condominium use, expensive dinners or entertainment, or invitations to sporting events (especially sold-out events and hunting or fishing trips). Of course, kickbacks can be paid in cash - the preferred choice for the discriminating kickee. Noncash kickbacks are merely sanitized versions of a cash payment or the early steps in the compromising of the adjuster.

Kickback cases are difficult to develop. This is especially true when developing a case to support a prosecution since all the parties involved have a personal interest in hiding the claim inflation and resulting kickback. This is true of the customers - insureds and claimants - as well because in a well-conducted scheme the customer will have received something he or she feels is not warranted. Often the customer receives nothing more than a waiver of the deductible or a slight betterment such as a complete auto body paint job when a partial painting would have been appropriate. In a home repair fraud, the customer may benefit through a modernization of a part of his or her house. The customer often may turn out to be the key stumbling block in the development of a kickback claim.

To pierce insurance frauds involving kickbacks and other external frauds, the investigator needs to know how legitimate profit is earned in the various arenas and how the factors involved in legitimate profit can be manipulated.

In the auto body repair industry, the major factor determining the profitability of a repair job is the amount of money charged for labor. Traditionally, the body shop worker gets 50 percent of the labor charge, and the remainder goes to the body shop operator, who uses it to pay overhead costs and earn a profit. A slight profit is occasionally made by charging a markup of 10 to 15 percent on the cost of new or used parts purchased to repair an automobile.

Illegitimate profit can be made by purposely increasing the damage before an adjuster inspects the car. However, far greater profit can be made if the adjuster is willing to artificially increase the labor costs. This can be done in several ways. When pricing remove and replace (R&R) operations, an opportunity exists to charge twice for the same operation through what is known as overlap. Flat rate repair manuals show the labor time required to R&R various parts of an auto. Frequently, the same operation is involved in removing adjacent parts of a vehicle. For example, the flat rate labor hours for removing a front fender will include some of the work necessary to remove the front of the car or perhaps the grill assembly.

An easier method to inflate repair labor costs is artificially to increase the labor time necessary to perform certain functions known as judgment items. The time needed to straighten a damaged sheet metal part is such an item. Fraud in this area is particularly difficult to establish because the time required to perform this type of repair cannot be established until the repair is actually made. This cost - before the fact of repair - is a matter of opinion; considerable benefit of doubt is given to the higher estimator.

Because the opportunities to include overlap and inflate judgmental repair time in a repair job are limited, another method of inflating costs is frequently used. That is for the cooperating adjuster to call for the repair or replacement of undamaged parts. It is in this inclusion of undamaged items in the repair costs that the adjuster or body shop operator gives the investigator the best opportunity to prove a fraud took place.

The fraud investigation technique used to uncover fraud in the auto repair industry is basically similar. In this industry, legitimate profit is derived by charging 10 percent for overhead and 10 percent for profit on top of the cost of a repair job. The costs of the repair jobs are most often computed in terms of unit costs, which are the costs of performing an operation on a finite area such as a square foot or a square yard.

Illegitimate profits result from inflating measurements so that the number of units increases. For instance, roofing is figured in squares, which are 100-square-foot areas. If a roof measuring 15' x 40' needs to be replaced, the contractor would charge for six squares of shingles - 15 times 40 divided by 100. If the measurements were changed to 20' x 45' the number of squares would be increased to nine. Assuming a $100 cost per unit, the inflation of five feet in each direction would result in a fraudulent profit of $300.

IN BOTH THE BUILDING REPAIR AND auto body repair industries, illegitimate profit can be made by an adjuster calling for or the vendor charging for the replacement of an item that could be repaired more cheaply. This, too, is an opportunity for the insurance fraud investigator.

To establish that a kickback has taken place, the investigator need not prove that money or value changed hands; he or she need only prove that both the adjuster and repair service vendor - be it a body repair shop or a building contractor - were involved in establishing a fraudulent cost. The only effective way to do this is through postrepair inspections coupled with the accumulation of documents establishing the players' involvement and the money paid.

Postrepair inspections require the cooperation of the customer - the owner of the item repaired. Acquiring this cooperation can sometimes be a dicey matter if the customer perceives he or she received an undue benefit. The investigator must assure the customer that there is no intention to cost him or her any money or involvement.

While the inspection is being conducted, the customer should be interviewed and a statement should be taken of the damage incurred in the accident or incident. This works better if two investigators are involved - one to deal with the customer and the other to conduct the actual inspection. While the customer normally will know the total cost of the repairs, he or she usually will be unaware of the details and will express shock if allowed to become aware of them. Because indignant customers will often alert the investigation's subjects by telephoning them to complain, it is best to reveal as little as possible to the customer.

The investigator or inspector's main objective when inspecting repaired autos is to identify and establish those items that were undamaged and not repaired but were included in the cost of the repairs. These items should be documented with the assistance of photographs and the customer's statement. While pointing these items out to the customer runs contrary to the theory against revealing too much to the customer, if revealing aspects of the fraud is the only way corroborating documentation can be established, it should be done.

Even though the inspector is concentrating on the undamaged and unrepaired items, the judgment and overlap items should not be ignored. Standing alone these items would not support a finding of fraud, but they are very telling when added to the undamaged and unrepaired items because they show the full extent of the fraud.

When all the postrepair inspections are completed, the inspector should prepare a chart or spreadsheet that not only emphasizes the undamaged and unrepaired items but also includes the other findings as well. This can be done by listing the former in a separate column from the latter and listing the total overpayment in a third column. The chart should also include figures and percentages reflecting what should have been the true repair costs.

When conducting postrepair inspections of buildings, the inspector should look for inflated measurements, repair functions purportedly performed on nonexistent parts of the building (perhaps a fictitious wall or second stairwell), and multiple functions performed on the same item such as washing and painting a wall. The same documentation and reporting process used for building inspections should be used for auto inspections.

The final steps in the investigation involve interviewing the adjuster and the body shop operator or contractor. While some inspectors prefer to interview the adjuster first, the sequence of these interviews is not particularly important. What is important is that the weaker of the two should be interviewed first in the expectation that he or she may implicate the other.

Proving kickbacks in bodily injury claims is very difficult unless the investigator is able to establish evidence that the adjuster was actively involved in preparing or verifying fictitious or inflated damages - the injured party's direct costs resulting from the accident.

Occasionally an adjuster will be able to change the liability in a case by finding a witness. The found witness is usually marginally identified in the adjuster's report and will normally be depicted as an itinerant individual. If there is a kickback scheme and if the investigator has enough files to review, it will likely become apparent that the scheme is limited to one or two attorneys in addition to the adjuster.

The final and most critical step in the investigation is interviewing the employee. This should be done by a trained and experienced fraud interviewer and never by one of the suspect's superiors. A careful, well-documented investigation and a well-planned and thorough interview should result in the best evidence of all, a confession.

Walter D. Maule is president of Maule Enterprises, a consulting firm specializing in internal security for insurance companies. He is a member if ASIS.
COPYRIGHT 1989 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:internal fraud in the insurance industry
Author:Maule, W.D.
Publication:Security Management
Date:Sep 1, 1989
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