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Putting a claim on insurance fraud.

HOW DO YOU FIND THE FRAUD IN insurance claims? The answer is simple--just look for it, it is everywhere. It is not hard to identify items that justify further investigation.

Although no comprehensive study of losses within the industry has been conducted, the best estimates made by insurance professionals indicate that 15 percent or more of all insurance premiums paid by the public are lost to fraud. With yearly premium payments exceeding $200 billion, this means $30 billion a year is wasted on fraudulent claims.

Why has a problem of this magnitude been allowed to exist--and grow? Insurance fraud does not bear the stigma attached to other crimes. Many people think that no victim exists, that they are just getting back a little of the money they paid in. The insurance company, on the other hand, often finds it easier to pay fraudulent claims as long as they do not reach unacceptable proportions. Claims with a nuisance value of a few hundred to a few thousand dollars are often paid or negotiated downward because companies believe that in the end it is cheaper to settle than to pay legal, investigative, and other high-dollar defense costs.

A big part of the problem has been that claims adjustors are not investigators. To address the issue, many companies and some states have developed special investigation units (SIUs), which specialize in fraudulent claims.

Based on the success of SIUs, California has mandated that insurance companies that do business in the state have SIUs, and many other states are now examining the concept. Early studies indicate that SIUs recover $10 for every dollar spent on an investigation. Competent claims investigation pays, both by denying false or inflated claims and by reducing future claims by professional plaintiffs.

The dramatic rise in insurance fraud and the growing need to deter insurance defrauders has led several states to create government entities specifically addressing fraud. The first state fraud bureau was created as the investigations division of the North Carolina Insurance Department in 1945. Florida followed in 1976 with the Division of Insurance Fraud, and in 1978 California formed the Bureau of Fraudulent Claims. In the 1980s fraud bureaus were created in Idaho, Nevada, New Jersey, New York, and Ohio. Alaska formed an investigative bureau that performs many of the same functions as the fraud bureaus. Since 1990, Massachusetts, Georgia, Missouri, Texas, and Louisiana have created fraud investigation agencies.

The common goals of each of these agencies is the detection and deterrence of insurance fraud. Many of these fraud bureaus have computerized record-keeping systems. They use the databases of both law enforcement and the insurance industry to identify serial claimants and to search for claim patterns of groups conspiring to make a living off fraud.

Now that you know the players, what about the types of claims that involve fraud and the commonality in each type of claim?

Automobile accident schemes. Most fraudulent auto claims are made by people who pad legitimate accident claims to cover their deductible or make a little easy money. They may have just become unemployed or, worse yet, they may have been approached by a ring of professionals who bought their accident report through the police department and solicited their help through runners or the mail.

Four basic kinds of accident schemes exist: the caused accident, the intended accident, the staged accident, and the paper accident.

Caused accidents. Certainly the most dangerous and vicious auto fraud schemes is the caused action because it frequently involves innocent victims whose vehicles are targeted by the perpetrators. These schemers pile into an old clunker or obtain a car from their local rental agency and deliberately cause an accident with an innocent victim, usually by driving in front of the target vehicle and then quickly breaking, causing the victim to hit their car. This type of accident is commonly called the swoop and squat, so named because the claimant vehicle swoops in front of the target and then locks up the brakes. Frequently, the soon-to-be plaintiffs position friendly witnesses near the accident sight to add the perfect touch to their claim.

This type of claim is typically low in physical damages but off the chart in medical, injury, and lost wage losses. Most claimants allege serious injuries of a subjective nature, such as whiplash, muscle spasms, psychic trauma, and sprains, leaving them unable to work for many months and psychologically terrified to venture out again in a car--until the next accident.

Intended accidents. In this scam, all parties to the accident are part of the scheme. Common signs are the use of rental vehicles, which allow the fraudsters to change vehicles often and obtain quick and easy coverage in the process. These claims are often typified by the use of aliases and a lack of driver's licenses. If searched, the Department of Motor Vehicles or insurance fraud bureau records would quickly identify the offenders.

Staged accidents. The staged accident is one in which no actual collision occurs. Investigators frequently find that previously damaged vehicles were driven or towed to a remote accident sight that was salted with shattered glass, auto trim, and blood to make it appear that a driver was run off the road by a drunken driver or someone else terrorizing them. One of the common themes in this type of claim is to use the same damaged vehicle over and over in multiple claims. Frequently, body shops are knowingly involved in the scheme and participate by towing vehicles to the accident sight or verifying repairs that were not made. In typical staged accidents, more than one claim is submitted for the same damages. The fraudulent claimant may submit claims to several insurance agencies under his or her own name or he or she may use several aliases in submitting multiple claims for the same accident.

Paper accidents. The most sophisticated scheme is the paper accident in which the vehicles rarely exist, except on paper. Sometimes the vehicle identification number of a wrecked car is removed and switched to a vehicle matching the description of the car in the claim. The photographs sent to the insurance company will be of the damaged car. The police reports, repair estimates, and bills are often false.

The losses due to these schemes have escalated in recent years by the addition of lawyers, doctors, and other medical practitioners to the injury schemes. These insurance crime professionals add new layers to the frauds by false billing, over-billing, and multiple referrals, which each generate more expenses and another layer of professional credibility to the claim.

Property and casualty fraud. Fraudulent burglaries and thefts are America's most popular types of insurance fraud. With real crimes of this nature increasing dramatically, police departments have little time to investigate potential scams.

Residential burglaries. Many burglaries never take place or grow in value after the police officers leave the scene. Typically, the victim minimizes his or her losses to the police department and later supplements the losses to cover his or her deductible.

A routine check of the Property Insurance Loss Register (PILR) shows that many claimants are not satisfied with just one false claim. Their early success leads them to try again and again, resulting in a history of burglary and theft claims in the PILR database. The addresses and cities will change, but the claimant's name remains the same.

Commercial burglaries. Commercial burglaries frequently occur in businesses that are overstocked with outdated inventory, obsolete machinery, or overvalued goods for their business. Claim inflation is the most common element in this type of fraud. Stores that participate in such scams run huge clearance sales just prior to a burglary or fire. While the store lowers the price for the sale, the store's stock value is inflated on the insurance claim submission, reflecting the original value, not the sale price. Investigators should check local newspaper classified sections for advertised going-out-of-business sales or gigantic inventory reduction sales that appeared within a week or two of the loss.

ALL CLAIMS REQUIRE DOCUMENTATION TO prove the insured's losses. While investigation techniques recommended earlier are crucial, so too is the examination of the paperwork involved in claims. By verifying the records, the investigator can separate the good from the bad. In the case of a burglary, such papers may include appraisals or purchase receipts for items reportedly stolen. For physical damage to an automobile or other property, these documents might include repair estimates or repair invoices. Concerning cases of personal injury, these statements may include not only the medical bills but also narrative reports detailing the purported findings of the doctor.

A fraudulent document may be produced through the alteration of a legitimate voucher, such as a receipt in someone else's name, or it may be a total fabrication.

Sometimes blank forms may be stolen from the place of business of a vendor or service provider, completed by the claimant, and submitted to the carrier. Conversely, the claimant may solicit the assistance of someone at that place of business to prepare the fictitious documents.

One of the best tools available to the document forger is a photocopy machine. He or she can take a legitimate receipt, for instance, cover or white-out key pieces of information while copying it, and create a new, blank document. Fictitious information can then be inserted, the document copied again, and the alterations in the final product may hardly be detectable.

A legitimate-looking but totally fabricated record can be created through piecing together parts of other official papers and photocopying the composite. A forger may list the name of a nonexistent business on a letterhead or billhead; in other cases, however, he or she may use the name of a legitimate business but change the address or phone number to one under his or her own control. The apparently typeset letterhead or billhead can be created with transfer, or rub-on, lettering, readily available in art supply stores. The transfer lettering is difficult to distinguish from actual typesetting once it is photocopied. Of course, any part of a document, or even an entirely new document, can be designed and typeset easily on a PC.

Insurance carriers should insist on receiving original documents rather than photocopies. When only copies are made available, they should be carefully scrutinized for any indications of alteration. Such indications can often be found in the fine, typeset lines on certain forms, immediately adjacent to the areas where key information is entered, such as name, quantity, and price. These fine lines are easily obliterated when the adjacent information is altered. Also, any sequential numbering on forms should be checked to see if multiple documents were created from a single original.

Both handwritten and typewritten entries should be checked for inconsistencies suggesting that specific entries were prepared by a different person or a different machine. Any single document that contains both handwritten and typewritten entries is suspicious; likewise, multiple documents from a single source should raise suspicions when some are typewritten and some handwritten. The handwriting or typewriting on documents from different sources should be checked to see if it is similar, suggesting that the records were prepared by the same person or machine.

For sales invoices and receipts, the sales tax should be checked to see if it was accurately calculated, based on the listed prices. Forms bearing sequential numbering should be checked to see whether those numbers chronologically correspond to the listed dates.

Also, many standard business forms, including credit card charge slips, are carbon or carbonless multicopy forms. The documentation submitted by the claimant must be the customer copy of that form. When a document lists specific dates of service or sale, a calendar should be checked to see whether any of those dates fall on a holiday or other day that one would normally expect that business to have been closed. Similarly, when the claimant's schedule or availability is known, such as in a personal injury claim where the claimant was reportedly hospitalized during a specific period of time, the dates of service or sale should be examined to see if any of these conflict with the claimant's availability.

Prior to contacting the vendor or service provider directly, the carrier should first evaluate some alternate avenues of investigation. For example, when documentation is submitted for the alleged purchase of some product, the manufacturer can often be consulted to verify the validity of the listed model number and serial number, the dates that the product was available in the retail market, and whether the listed price is appropriate. The manufacturer can advise whether the claimant, or purchaser, has filed the warranty registration for this product and whether the listed vendor is an authorized dealer.

In the case of medical reports, the state licensing authority can verify the existence of the physician, the fact that he or she is licensed and currently in practice, and his or her field of specialization. The carrier should also consult the industry's appropriate claims database system to determine if this claimant has filed any similar claims in the past. If any prior claims are identified, those carriers should be contacted to see if the claimant has submitted copies of the same documentation.

When contacting the vendor or service provider, the investigator should not rely on the information listed on the letterhead or billhead. Either the local telephone directory or the directory assistance operator should be consulted to obtain or confirm the telephone number and, if possible, the address. When contacting the vendor or service provider, the investigator should speak to someone other than the individual who prepared or signed the document.

Before discussing the actual document, it should be ascertained whether this source actually provides the goods or services listed, whether the listed prices are accurate, and whether documents of the type in question are normally handwritten or typed. The vendor should be shown the document and asked if it appears authentic and if the individual who prepared and signed the document is authorized to do so. Next, the investigator should address any questions or concerns that arise during the examination of this or other related documents. Finally, the investigator should ask to see a copy of the vendor's or service provider's copy of the same document for comparison.

Obviously, the contact with the vendor or service provider is best handled in person; however, where this is not practical, the investigation can often be completed through a telephone interview, with the document in question being faxed to the interviewee and the comparison copy of the document being faxed to the investigator.

CERTAIN INDICATORS, BY THEMSELVES, are not proof of fraudulent activity. They suggest, however, that a loss is suspicious and requires further investigation. If, for example, the loss occurs shortly after the effective date of coverage, shortly before termination of coverage, or shortly after an increase in coverage, the claim is suspicious. Also suspicious is the claimant's behavior prior to the loss, for example, if he or she contacted the agent at that time to verify coverage. If the loss occurs after a reduction in coverage, it may be a ploy to avoid suspicion or a legitimate indication of financial difficulties. It is also suspicious if the claimant diverts from his or her normal routine shortly before or at the time of the loss.

A suspicious eyebrow should be raised if the involved property is significantly over-insured, multiple policies covering the same loss exist, a long delay in submission of the claim occurs, or the insurance agent is completely avoided and the loss is reported directly to the company. If seriously conflicting stories concerning the loss exist or if false and misleading information is discovered in the policy application or claim, the case requires further investigation.

The insured or claimant behavior at this stage is also critical. The investigation should be suspicious if the claimant is unusually familiar with insurance terminology and procedures, overly cooperative and accommodating, anxious for a quick settlement, difficult to contact by telephone, or refuses to provide a telephone number. Other signs of trouble include unusually detailed or unusually vague information and documentation concerning the loss, or a refusal to give a statement or discuss the details.

Questions the investigator should ask include: Does the claimant have a history of prior claims? Is the claimant experiencing financial difficulties or legal expenses unrelated to the claim, such as gambling and other vices, business declines or defaults, or past-due debts? Does the claimant offer a gratuity to expedite the claim?

Once problems with the claim are identified, does the claimant express a willingness to accept a significantly reduced settlement? Does he or she submit photocopies rather than original documents in support of the claim? Do the documents appear to be altered? Are the invoices and receipts consecutively numbered and do they correspond to alleged dates of services or purchases? Are they on plain stationery rather than letterhead or billhead? While the invoices or receipts may originate from different sources, do they exhibit similar handwriting characteristics or similar typefaces? Do they lack appropriate sales tax figures? If expensive property was involved in the loss, was it recently acquired or incompatible with the claimant's residence, occupation, or income? Are the members of the claimant's household aware of the claim?

A shrewd examination of the information reported on the claim filing, coupled with a little technical verification of the claimant, can reveal which claims are meritorious. Putting the extra effort into each case will ultimately go a long way toward clearing up the rampant spread of insurance fraud.

Edmund J. Pankau, CCP, CLI (Certified Legal Investigator), CFE (Certified Fraud Examiner), is chairman of Intertect, Inc., based in Houston. Frank E. Krzeszowski, CFE, is corporate security manager at Continental Insurance Company in New York City. Both are members of the ASIS Standing Committee on Insurance Fraud.
COPYRIGHT 1993 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Investigations
Author:Pankau, Edmund J.; Krzeszowski, Frank E.
Publication:Security Management
Date:Jul 1, 1993
Previous Article:Time for security to bite the bullet.
Next Article:The three factors of fraud.

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