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Combating insurance fraud.

IS ABANDONING a car and then reporting it stolen to collect on the insurance acceptable behavior? For roughly 6 percent of those polled in a recent Insurance Research Council (IRC) survey, the answer was "yes." The survey, conducted by the Roper Organization for the IRC, revealed the general population's negative attitude toward the insurance industry. Yet, worst of all, it also revealed society's propensity to undertake fraudulent activity when insurance was involved. More than 20 percent of the respondents felt that it was alright to pad insurance deductibles and claims, while 14 percent believed it was acceptable to withhold information about traffic accidents, tickets and claims when applying for auto insurance.

In the face of these disturbing figures, several organizations have now made it possible for law-abiding citizens and companies to strike back. After all, it is society who ultimately pays for insurance fraud in the form of higher prices for the goods and services of those companies faced with higher premiums. For defrauding the workers' compensation system in California alone, the estimated price tag runs over $1 billion per year, according to George Stepan, a managing director for Industrial Indemnity, one of the largest workers' compensation insurers in the Western United States.

Partly due to the law's inability to effectively deter this form of crime, not-for-profit groups such as the National Insurance Crime Bureau (NICB), with regional offices in Chicago, Atlanta and Glendora, California, and the Southern California-based We Tip Inc., have instituted anonymous tip fraud hot lines. "Almost all successful investigations are based on witnesssupplied information. We provide an outlet for such information when people are not willing to work directly with law enforcement personnel," says We Tip's founder and executive director, Bill Brownell. "Unfortunately, we've reached a day when citizens can no longer assume that crime can be fully controlled by law enforcement agencies in the public sector," Mr Brownell continued.

The seriousness of the situation goes far beyond the staged accidents and theft scares that highlight automobile insurance fraud. For example, the NICB reports that the estimated cost of insurance fraud in the United States has risen from $13.5 billion in 1986 to $17.5 billion in 1990. And roughly 10 percent of all property-casualty claims are judged to be either completely fraudulent or highly inflated. According to Comp Management Associates in Long Beach, California, direct out-of-pocket workers' compensation costs exceed $70 billion per year nationwide, and "minimum estimates place 20 percent of this cost in the fraudulent arena. There are those who estimate that as much as 60 percent of costs are unnecessary."

The cost to companies in terms of lost production and foregone investment in new equipment and technology further raises fraud's price tag for society. Also, the effects of high premiums or lack of available coverage on small or new manufacturers can squeeze al-ready borderline profit margins, while charitable organizations may be forced to cut public facilities or services due to the "burgeoning costs of insuring them against potential liability," Mr. Stepan notes.

We Tip, with its 24-hour-a-day nationwide hot line numbers to combat various forms of crime, is commonly referred to as the grandfather of all anonymous tip agencies. The 2O-yearold organization conveys anonymously supplied information to law enforcement officers of local police, sheriff and fire departments, as well as federallevel investigators. Arrests are made as a result of verified law enforcement investigations, however, not on the basis of the anonymous tip alone. Upon conviction of a suspect, a tipster is eligible to collect a reward of up to $1,000.

The NICB's corporate-supported 1-800-TEL-NICB hot line installed this past January works much in the same way. Unlike We Tip, however, the NICB routes legitimate calls to one of its regional office investigators who then look for evidence of fraud themselves before handing the cases over to local law enforcement officials. The telephone line is manned during regular business hours.

The 1-800-US-FRAUD number established by We lip in 1988 was expanded this past February to encompass a special workers' compensation fraud program that was designed in conjunction with Industrial Indemnity, based in San Francisco. This particular campaign was initiated in light of "an emerging trend, particularly in California, for some employees to claim a job-related injury or illness, such as stress or back pain, in order to take time off from the job and still receive some compensation," Mr. Stepan explained. Some of the abuses range from where and when the injury took place to the true medical extent of the injury. We Tip frequently develops customized programs for private corporations; insurers; and county, state and federal agencies.

What has been the efficacy of such anonymous tip hot lines? To date, the NICB has received over 3,000 calls, over 10 percent of which "have led to active investigation follow-up," according to John Maes, NICB assistant communications director. At We Tip, the numbers likewise speak for themselves: for every 16 of the more than 175,000 crime tips the organization has received, an arrest is made; and for every 2.2 arrests, a conviction. On workers' compensation fraud alone, We Tip received over 400 calls nationwide in its first six weeks of operating the new hot line.

Legislative Efforts

ATTEMPTS HAVE also been made to legislatively combat the wave of insurance fraud. Just this past January the State of California enacted an anti-fraud bill. Though the bill targets those doctors and lawyers who directly or indirectly encourage fraud, it also requires that insurers, self-insurers and third-party administrators report suspected fraudulent acts to the Bureau of Fraudulent Claims or to the local district attorney within 30 days of knowledge. A fraudulent act, now considered a felony, covers anyone who knowingly makes a false statement to obtain or support a claim for benefits.

A law such as California's that requires a self-insurer to report suspected fraudulent acts could further expose a company to criminal liability. This applies if the company's management is judged as not being forthcoming with what they may have originally perceived to be a trivial matter. Thus, either formal internal investigation procedures or the use of independent investigators may be deemed necessary.

At ION Inc. of Tempe, Arizona, which provides a toll-free resource line network of investigators across the country, calls are usually received from companies wishing to have an activity check done on "red flag" claimants. According to Leroy Cook, ION's president and founder, "our corporate clients call when it is too early to involve the insurance company."

Aggressively investigating one's own claims rather than relying on the insurance company can also play a powerful role in claims management. Mr. Cook notes that investigators tend to get involved far beyond the overworked insurance adjusters. It should not be surprising then that a large portion of ION's clients are selfinsurers. "The risk management selfinsured underwriters have turned out to be our best market," Mr. Cook added.

One user of investigative services is Alamo Rent-a-Car's director of security and safety, Ed McArdle. Alamo spends most of its time investigating theft, personal effects (i.e., lost luggage, camera equipment, etc.) and staged accident fraud, which "is more endemic than most people realize," he says. Like other companies with operations scattered across the nation, Alamo sometimes sees a need for local investigators to ferret out workers' compensation and other forms of fraud.

Despite government's best attempts, insurance fraud cannot simply be legislated out of existence, particularly if its law enforcement arm is budgetarily constrained. The "invisible" effects of the crime further make it immune to detection. Unfortunately, without methods to educate or coax an indifferent public to report insurance fraud, companies and individuals will continue to be forced to divert resources away from potentially beneficial pursuits in order to pay higher premiums.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Kurland, Orin M.
Publication:Risk Management
Date:Jul 1, 1992
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