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Is your insurance company doing enough to fight fraud?

In California, they were known as the Alliance, a group of more than 20 attorneys who represented both plaintiffs and defendants in workers' compensation-related lawsuits and who bilked the insurance industry out of more than $100 million. However, the Alliance scandal is not an isolated case: Reports from various states confirm that the activities of the so-called medical and legal "mills," who stage phony accidents or orchestrate the filing of false injury or workers' compensation claims, are helping to bleed billions of dollars out of the workers' compensation system. Add to these criminal activities the increasing number of workers who file their own fraudulent claims, and the result is an enormous problem that seems to threaten the system's very foundations.

But just how costly is the fraud crisis? The Insurance Information Institute (III) estimates that in the area of property/casualty insurance alone, insurance fraud costs over $17 billion a year. If insurance fraud were a business, the III reports that it would rank among the Fortune 500 companies. Approximately 10 percent of claims dollars paid out is attributable to fraud. This translates into about 8 percent of all premium dollars paid by insureds.

Regardless of the size or nature of their companies, risk managers can play a pivotal role in the fight against workers' compensation and other forms of employment-related fraud. Since risk managers are usually the first ones to become aware of suspicious claims, they are in the best position to take the appropriate steps to deal with potentially fraudulent activities. And, as the corporate purchasers of insurance services, risk managers can also help reduce fraud-thereby lessening their premium rates-by choosing to work with carriers that have instituted the measures needed to win this war.

The analogy to war is not used cavalierly. For example, during a recent investigation of an insurance fraud case in Southern California, some of Fireman's Fund's potential witnesses were found dead, executed mob style. On a recent field investigation in New York City, one Fireman's Fund investigator visited numerous parking garages that had walls covered with bullet holes. Some investigators bring guard dogs along for protection, while others conduct their investigations during the early morning hours to avoid detection. As evidenced by these examples, fraud investigators often conduct investigations where there is at least some possibility of physical harm. Despite these risks, they do so because they are committed to winning the war against fraud. And to help them in their efforts, risk managers and insurers must develop a corporate culture that fosters intelligent risk taking and support of these front line troops.


Since risk managers are familiar with the day* to-day operations of their companies and are often the first ones to become aware of questionable claims, they are in a good position to help their companies develop such a corporate culture. However, identifying spurious claims is greatly complicated by the fact that many of them fall into a grey area in which fraud is difficult to prove. Therefore, to increase the likelihood of detecting fraudulent activity, risk managers must carefully analyze these claims.

For example, in many states, such as California, employment-related stress is a compensable injury. This means that as long as even 10 percent of the claimant's stress is job-related, the workers' compensation carrier must pay the claim. This situation has led to widespread abuse of the system and a large number of fraudulent claims, especially in an era characterized by numerous plant closings and layoffs. Therefore, as soon as the risk manager becomes aware of a possible plant shutdown or massive layoff, he or she should contact the insurer so that both parties can be on the lookout for suspicious claims. Throughout this process, insurers and risk managers should share information, and their prior experiences with this type of fraud, in order to reduce the number of potential stress claims.

Fraudulent workers' compensation claims are also common in the event of a mass layoff or office or plant dosing. In such cases, the risk manager should ensure that employees who are affected receive work-related counseling. Fireman's Fund has found that in the case of layoffs, the human resources department needs to get involved very early on in any decisions that involve the employees who will lose their jobs. By doing so, the human resources department will have the opportunity to conduct counseling sessions that help the employees deal with declining morale and self-esteem, as well as to assist them in finding new jobs. Often, by merely providing this support, the company will reduce the number of fraudulent workers' compensation claims.

Risk managers should also closely examine any claims related to illnesses allegedly caused by poor ventilation or air conditioning; video display terminals; or ergonomically incorrect chairs, desks or other types of furniture. Risk managers should therefore alert their insurers concerning any failures of such equipment or decisions regarding its replacement. By doing so, both the insurer and the risk manager can work in tandem to determine if the claims could conceivably arise from the alleged faulty equipment, or if replacing the devices will reduce complaints. Risk managers should also be on the lookout for worker injuries that allegedly occur on a Monday morning. Such claims can be suspect since the injury may have actually occurred sometime over the weekend in a non-employment-related activity.

Besides closely examining any suspicious worker injuries, risk managers must also be on guard against motor vehicle-related fraud. This is especially true for risk managers who work for companies that have large fleets of motor vehicles. Currently, there are various auto fraud rings that operate throughout the United States, utilizing many different scares in order to win fraudulent injury suits. In one variation, a group of ring members will be out on the highway, driving in separate cars, looking for a company van or truck that they believe is likely to be well insured. After locating their prey, one of the cars will pull in front of the truck, and the second car will then pull in front of the first car. The driver in the first car then slams on the brakes, as does the second driver. However, the truck, which cannot stop in time, rear-ends the second car. The first car then escapes at a high speed-and leaves the innocent truck driver behind with a car full of passengers who all claim soft tissue injuries. Because of the prevalence of these scams, risk managers must emphasize to their drivers to be on the lookout for suspicious accidents and to immediately report them to the carrier with as many details as possible.

In fact, risk managers should emphasize the importance of preserving evidence concerning all alleged work-related injuries. The more information that can be gathered immediately after the accident-such as witnesses' names, addressees, phone numbers and sworn statements-the more likely it is that fraudulent claims will be revealed.

Risk managers should also inform their employees that fraud is illegal-and that if found responsible for fraudulent claims, employees will be prosecuted. A number of states, including California, have significantly increased criminal penalties for insurance fraud. Employees should also be warned that disreputable attorneys and doctors sometimes entice employees into an illegal scare but, under the guise of shell companies and other such techniques, insulate themselves from prosecution while leaving the employee vulnerable to stiff penalties.

The importance of directing an injured employee to a qualified doctor cannot be overstated both for the employee's protection and to ensure that he or she is returned to work as soon as possible. It is also important for the risk manager to submit the First Report of Injury to the insurance carrier immediately after the accident. Since many carriers are aware of the legal and medical mills that are responsible for generating claims, immediately referring an injured to the insurer allows them the opportunity to direct the employee to a doctor or a lawyer that has the employee's best interests in mind.


When deciding whether or not their carriers are doing enough to fight fraud, risk managers should carefully examine their operations. First, and most importantly, risk managers must determine if their insurer has the type of corporate culture that fosters the decision making and risk taking that is necessary for the investigation of potentially fraudulent claims. Even though the insurance industry is losing billions of dollars to fraud, some insurers have a risk-averse corporate culture in which this type of decision making is avoided. Although it is wise for insurers to avoid extreme risks or the making of careless decisions, insurers should nevertheless work to create a corporate culture that encourages their personnel to report and actively investigate suspicious claims, pursue litigation against fraudulent claimants and publicize its victories against these defendants.

Risk managers should also find out if their carriers have set up a special fraud unit. These units contain personnel who have the time and resources necessary to intensively investigate potentially fraudulent claims. Risk managers should also ascertain whether or not their insurers have established a computerized system to assist in the detection of questionable claims. These computerized programs analyze claims and generate a warning, or "red flag," for any claims that contain a certain number of suspicious characteristics, or indicators (see sidebar). Investigators from the special fraud unit can then examine each suspicious claim more closely to determine its legitimacy.

Additionally, risk managers should attempt to determine if their insurers tend to merely deny any fraudulent claims, or if they characteristically file civil lawsuits against the medical or legal mills responsible for fraudulent claims. This decision to pursue lawsuits is very important because simply denying suspicious claims focuses only on the symptoms of fraudulent claim activity, and does not deal with its root causes. Some insurers are reluctant to litigate for fear of being countersued for defamation or conspiracy, even in cases where they have a good chance of winning. However, proactive insurers will pursue legal action against these criminal rings. And if insurers are successful in bringing lawsuits against these groups, the money obtained can be passed on to the insured in the form of lower premiums.

Insurers that are committed to the antifraud war will also publicize their court victories against crooked claimants and therefore should not enter into confidentiality agreements when they settle or win any of these lawsuits. If an impartial trier of fact has determined the civil liability of various attorneys or doctors, then other insurers, the insureds and the general public should be made aware of this fact.

The importance of publicizing these cases, whether through television, the newspapers or through other forms of the media, cannot be underestimated. The insurer should name the medical and/or legal mills that were involved, thereby educating other insurers and the public as to the identities of these criminals. Also, by publicizing fraud cases, the insurer will demonstrate to the public, its clients and the various state insurance commissioners that it is taking aggressive action to stop fraudulent activity. Fireman's Fund firmly believes that the various state insurance departments and sophisticated insureds will start to ask insurers some very hard questions in regard to the steps they are taking to reduce fraud-and thereby premium costs. It is also likely that insurers' shareholders and the general public will be asking similar questions. By continually publicizing its victories, the insurance industry will be answering these questions.

Finally risk managers should determine if their carriers have developed aggressive advertising strategies for publicizing the issue of insurance fraud. Most of the advertisements that insurers put out today take three general approaches: they either complain about the fraud problem, promise to get tough with spurious claimants or make appeals to the government to assist them in the war against fraud. Average citizens do not want to hear about the problems of the multi-billion-dollar insurance industry, nor do they want to hear about its promises to get tough with fraud; instead, they want the industry to take action against this problem, and they don't want tax dollars to be used to accomplish it. Therefore, anti-fraud advertisements should focus on the specific measures the insurance industry is employing to fight fraud, as well as educate the insurance consumer about how to identify legal or medical mills.

Given the limited resources of governmental authorities, insurers and insureds must realize that they control their own destiny and that they, and not the government, have the resources needed to solve the fraud problem. In some instances, the methods used to fight fraud can be simple, and include a toll-free telephone number to report cases of suspected fraud, a fax number to send First Report of Injury forms, and posters that warn of the criminal penalties for making fraudulent claims.

Successfully fighting insurance fraud requires risk managers, insurers, doctors and employees to work together as partners. Each member of this partnership will benefit from reducing fraud. For the risk manager and his or her employer, reducing fraud can lead to lower premiums, whereas for insurers, it can mean improved profits. Employees and physicians also benefit - the former by being returned to work as active, productive members of society and the latter by having the criminal element removed from their profession. For all members of the partnership, this last issue cannot be overstated. The growing numbers of physicians, attorneys and other professionals who tolerate or participate in insurance fraud can lead to an increase in public disrespect for these and all social institutions; such a situation represents a significant threat to social order. Therefore, the risk manager has a real opportunity to both achieve substantial economic benefit for the employer and improve social cohesion by choosing the proper insurer and actively participating in the anti-fraud effort.

Some insurers, including Fireman's Fund, have established a list of indicators for workers' compensation fraud. At Fireman's Fund, a claim that contains six or seven of these indicators is transferred to the company's Special Investigation Unit for further analysis. These indicators include the following:

* The Index Bureau shows that the claimant has filed many claims in the past.

* The claimant's company has been subject to labor-management problems, or a strike is imminent,

* The claimant's company is about to go out of business, close the plant or the work season is about to end.

* The employee's alleged soft tissue injuries are more severe than would be expected from the accident.

* The employee's injury complaints do not jibe with the results of objective medical evaluation.

* The employee has undergone repeated hospitalizations for minor or negligible injuries.

* The employee refuses to undergo diagnostic procedures to confirm the injury.

* The incident was not or cannot be verified by witnesses.

* The initial medical report describing the accident conflicts with the employee's later statements.

* The employee's family members are receiving workers' compensation, unemployment, Social Security, welfare or other such aid.

* The employee's income from workers' compensation and collateral sources (such as long-term disability and Social Security) meets or exceeds wages.

* The employee recently procured one or more disability policies.

* The claimant and/or spouse have a business on the side.

* The employee, coming back from parental leave, becomes injured shortly after rejoining the work force.

* The claimant's health provider and/or attorney are known for handling suspect claims.

* The employer or the claimant's fellow workers have heard rumors that the accident or injury wasn't legitimate.

* The incident or accident was not promptly reported by the employee to his or her supervisor.
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
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:includes related article
Author:Schratz, James P.
Publication:Risk Management
Date:Jul 1, 1993
Previous Article:How to keep people from becoming a corporate liability.
Next Article:Safety management.

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