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The fraud squad.


THIRTY MILES OFF THE COAST of south Florida, a 40-foot boat mysteriously sinks. Drugs are involved. Contracts are taken out on people's lives.

For agents of the Drug Enforcement Agency or coast guard, such encounters are par for the profession. Danger comes with the territory.

Few people, however, suspect the insurance business of being a dangerous occupation. But it can be. The above scene is a case in point.

The Insurance Crime Prevention Institute (ICPI) puts the cost of insurance fraud at roughly $11 billion annually but acknowledges that is a conservative figure. Insurance fraud is the number two economic crime committed in the United States today, second only to income tax evasion, according to ICPI Director Wendell C. Harness.

Insurance fraud has become a big business. Industry statistics show that staged automobile accidents are the number one insurance fraud scheme in this country. Other popular fraudulent schemes include slip-and-falls, residential and commercial burglaries, arson, and doctor/lawyer conspiracies.

ICPI, a national, nonprofit organization of more than 400 insurance companies, was formed to investigate and seek prosecution of fraud in connection with casualty and property insurance claims. Since ICPI started in 1971, its investigations have resulted in the indictment or arrest of over 13,000 insurance criminals. And since 1984 alone, the organization's investigations have resulted in an estimated $28 million in court-ordered restitution to victimized insurance companies.

These figures represent only the tip of the iceberg. Ralph Nunez, CPP, a senior investigator with The Travelers Insurance Companies in Fort Lauderdale, FL, believes, along with many others in the industry, that insurance fraud is so prevalent partly because it is not considered a serious crime.

"I think it's the pervasive attitude that insurance fraud is a victimless crime," says Nunez. "The attitude of both prosecutors and attorneys is that there are more important crimes impacting on the communities they serve. As a result, insurance fraud is downgraded to a minimum priority."

State laws on insurace fraud are evidence of this relaxed attitude. In many states insurance fraud is classified as a misdemeanor. Only eight states - California, Connecticut, Florida, Georgia, Massachusetts, New Jersey, New York, and North Carolina - have established insurance fraud as a felony.

In 1978, The Travelers Insurance Companies was one of the first companies to take a firm stand on the crime. The company formed a department in its Boston office called a special investigation unit (SIU), which was specifically charged with investigating suspected fraudulent claims. The unit was composed of retired law enforcement officials with extensive backgrounds in investigations.

The trial unit proved to be a great success. Today, the company has 22 SIUs in major metropolitan areas, with two more expected to open before the end of the year. Units are composed of individuals from federal, state, and local law enforcement agencies and insurance veterans with experience in claim investigations.

Nationwide, Travelers had 45 investigators. Each SIU has at least one investigator, and depending on an area's population, some units have as many as six.

In 1982, Nunez was hired to open an SIU in Fort Lauderdale. "There were very few insurance carriers that had special investigation units at the time when I came on board," notes Nunez, who came to Travelers from the US Postal Service, where he worked as an inspector investigating white-collar crime. "It was a field where, although crime was escalating, little was being done about it."

Nunez points out that many other insurance companies have now jumped on the bandwagon in an attempt to protect policyholders from insurance fraud.

The SIU in Fort Lauderdale is one of Travelers' larger units. Nunez has a staff of six investigators, including himself, and is responsible for a 200-mile area spanning from the Florida Keys to Vero Beach, located on the east coast. The department handles personal lines of insurance such as auto, homeowner's, liability, commercial lines, and workers' compensation. Fraud involving health and life insurance and employee benefits is handled by other departments in the company. Although, there have been occassions where Nunez's department has conducted investigations in these areas.

Nunez's unit alone handles an estimated 500 cases a year. Of those 500 cases, he and his staff are able to successfully prove that approximately 31 percent are fraudulent claims.

THE PROCESS OF INVETIGATING A case is involved, and it begins with the company's claim representatives. It is the claim representatives who are responsible for identifying what are known in the industry as "red flags" - signals indicating a case may be fraudulent. After reviewing a claim, if a representative has reason to suspect it may be fraudulent, it is referred to the SIU, where Nunez and his staff take over.

Nunez and his team are charged with investigating the case thoroughly to determine whether it is fraudulent. "We investigate the circumstances surrounding the loss. We get into the background of the individual. We get into the claim history of the individual. We investigate every aspect of the case," says Nunez.

At times, his job can be extremely difficult. Nunez points out that a case is only as good as the information a claim representative receives. "We take the information we are given," says Nunez, "and try to do the best we can." However, he adds, "Without adequate information, it is hard to prove a case is fraudulent."

The complexity of a case often determines how many investigators will become involved. "If the case is large enough [generally anything over $100,000], we often do it as a team effort," states Nunez. "Everybody is assigned a certain portion of the claim to investigate. Then we put it all together and provide the final product for evaluation."

If the investigation reveals a potential fraud is in the making, attorneys then enter the scene. Travelers retains staff counsel as well as outside attorneys.

Sometimes the insured may be required to submit to a sworn statement, which Nunez says is much like a deposition. "Sometimes we take the statement ourselves. Sometimes our attorneys do it," he comments. "It all depends on where we feel the case is headed. If we feel the need to protect all our policy defenses early on, the attorneys will usually take statements."

Other times, Travelers never receives a claim. The first notice, instead, is a lawsuit, which means someone is filing a claim. If that is the case, the SIU may become involved.

"Travelers is faced with having to answer that suit," explains Nunez. "And the job of the SIU is to secure a positive defense or at least provide our attorneys with enough information so they can properly address the case in court."

Once an investigation has been completed, Travelers is required by law to turn over suspicious claims to the state division of insurance fraud. In Nunez's case, suspicious claims are sent to the Florida State Division of Insurance Fraud, an organization of state agents who investigate and assess cases. Besides Florida, seven other states have fraud bureaus - California, Idaho, Nevada, New Jersey, New York, North Carolina, and Ohio. What happens next is up to the state.

"Some of the cases are investigated. Some of them get prosecuted. Some of them don't," Nunez says. "It's strictly their determination as to what happens with that particular claim after they receive it."

Nunez stresses that his investigators don't have the same power as law enforcement officials. "We cannot prosecute. We can, however, build a case that may go to the appropriate local, state, or federal prosecutor's office.

The entire process of invetigating a claim from start to finish can be enormously time-consuming. While a case takes an average of two months to complete, some have taken as long as two years. Nunez and his staff frequently work in cooperation with various law enforcement agencies.

To say that the costs of investigating a case are high is an understatement. The figure Travelers usually cites for cases that go to court is $50 an hour, but Nunez claims that is an extremely conservative estimate. More complex cases, which involve the work of several investigators, cost considerably more.

Costs not only affect the company, but also have a tremendous impact on the community in the form of higher premiums. "Much too great a percentage of an individual's premiums go to cover fraudulent claims," notes Nunez. One industry source estimates that figure to be as much as 30 percent. The high cost of fraud, no doubt, explains senior management's firm commitment to SIUs.

"They have a strong desire to suppress the crime." And they will not hesitate to give us the necessary tools to see to it that we identify insurance fraud whenever possible," says Nunez.

COMBATING FRAUD AT ALL COSTS is not without risk. Says Nunez, "Being an insurance investigator is somewhat of a dangerous position. We are required to go into areas at all times of the day or night that are less desirable and often dangerous."

Nunez notes that investigators face similiar dangers as police officers, yet they do not have the same protection. "The community cannot identify the private sector from the public," comments Nunez, adding that sometimes the mere presence of someone who looks like an investigator in a community is enough to provoke an attack.

Travelers investigators, however, do have one big advantage over their counterparts in law enforcement - resources. "Many times our investigations are more detailed than theirs because they don't have enough time or resources to dedicate to a specific crime. Sometimes we can do a much more in-depth investigation and come up with evidence the police haven't uncovered.

"We also have contractual provisions that allow us to ask more specific questions," continues Nunez. "We do not have some of the limitations imposed on the police, such as Miranda warnings. Therefore, we can ask more precise questions."

The types of cases Nunez and his staff handle are as diverse as the people who commit fraud. "We handle a variety of cases where people from all walks of life are involved," says Nunez. "Whether they are doctors, attorneys, engineers - we have dealt with just about everybody I can think of."

There is no typical profile of an individual who commits insurance fraud. At one time it was thought the majority of fraud was committed by 28-year-old males. "But," Nunez notes, "there is really no validity to that. I've investigated claims where juveniles have been involved up to people in their 80s."

Nunez tells of one fraudulent claim involving a 15-year-old girl who reported her parents' car stolen. "The car was recovered within a mile and a half of the residence, which immediately raised suspicion as to the validity of the claim because the parents were out of town.

"The day of the accident a neighbor saw her leaving from home in the car and returning on foot," notes Nunez. "It was just a stroke of luck that this witness happened to be a neighbor who was probably concerned for the girl's safety.

"With the parents' permission, we interviewed the girl, who finally admitted she had driven the car and lost control. She said she panicked and decided to report the car stolen because she couldn't face her parents."

Nunez admits some cases stand out in his mind because they are so bizarre. "One of the unit's most unusual cases involved one of the rare instances where we investigated a life insurance claim where a shark attack was reported," he says.

"In this case, a boy and his girlfriend purchased two life insurance policies. The boy staged a shark attack, had his girlfriend pick him up at a nearby pier, and had a third friend act as a witness to the shark attack.

"Through a trail of stolen credit cards, we learned the attack had been staged to collect the insurance proceeds. The girlfriend had been named as the beneficiary on the policies."

There is also the case of an individual's stolen coins - dating back to the BC era - that were never stolen and never even owned. Explains Nunez, "In reality the individual never owned the coins because they are, to this day, still in a museum where they are kept as a collection. The individual had taken pictures of the coins in a book and insured the pictures!" Nunez explained the individual was able to insure the pictures by telling the agent the coins were far too valuable to take out of the safety-deposit box.

While there is a lot of satisfaction uncovering a fraudulent claim after spending weeks, months, or sometimes years investigating a case, disappointments also accompany the job.

"My greatest frustration is the inability to investigate each and every insurance claim that is filed to the best of my ability," says Nunez. "The system is not conducive to an in-depth investigation into every claim filed. And," he adds, "my unit can only begin to function when the red flags are identified by claim representatives."

Other frustrations of the job arise when people file a fraudulent claim, but it cannot be proven. One case in particular stands out in Nunez's mind.

"There was a case where an individual filed a claim saying that his home was burglarized and that a very expensive collection of guns was stolen," recounts Nunez. "I knew from the way the loss was reported that no thief in his or her right mind would go to the extent this one did to remove the collection without removing other valuable items in the home.

"I knew the claim was totally fraudulent, but I could not prove it," Nunez states emphatically. "I had nothing that would disprove this man's word. In my estimation, this individual was a true professional. He could sell a blind person a used car!" As a result, Travelers had no choice but to pay the claim.

THE ONLY WAY TO MAKE INSURANCE fraud level off and eventually decline, in Nunez's opinion, is to change people's attitudes toward the crime through education. He stresses that insurance fraud is not a victimless crime. "The consumer is a victim. The consumer ultimately has to foot the bill."

Nunez acknowledges the insurance industry has a tough job ahead. "It's difficult to educate the public on insurance fraud," he says. "They don't take it seriously enough. People don't realize how deeply it is affecting their pocketbooks."

Yet, Nunez has hope. "Travelers is very much a participant in trying to educate people about this crime," he explains. "We have spoken throughout the state on insurance fraud at the request of the attorney general's office. We talk to various law enforcement organizations and community groups and try to educate them about how they're being affected by insurance fraud and the impact it has on the community.

"We're trying to educate not only the public," continues Nunez, "but also prosecutors to let them know it is not a victimless crime. It is a very real crime that is affecting us all."

Nunez himself is an active speaker on the public circuit, addressing numerous community and association groups, including ASIS chapters. Currently, he is vice chairman of the South Florida Action Council Alliance, a public awareness group that began in Dade County to combat neighborhood theft. One of the council's goals is to educate people about insurance fraud through the media.

Nunez concedes that some of his efforts fall on deaf ears. But since he joined Travelers seven years ago, Nunez has noticed a change in the way people view the crime. "The attitude is slowly changing," he observes, "but it's going to take a while."

In the meantime, Nunez and his staff continue to persevere. Many times persistence pays off, which was what happened in the case involving the mysterious boat that sank off the coast of Florida, mentioned at the start of the article.

After more than a year of investigation and a great deal of coordination with state and federal agencies, efforts paid off. "We discovered the boat did not sink at all," Nunez explains. "It was stashed two and a half blocks away from our insured's location where the boat was normally docked.

Nunez's investigation also uncovered that the incident was the result of a drug deal gone sour. The insured got too greedy and tried to cover his losses by causing an insurance claim to be filed with Travelers. In the course of the investigation, a contract was placed on the lives of two Travelers' investigators.

This case, unlike many others, has a happy ending. States Nunez, "The individual who caused the filing of this claim is currently serving time on a variety of crimes, some of which are violent crimes, in the state penitentiary."

The result: Another case is closed and Travelers is spared the expense of paying out a hefty sum to cover the loss due to insurance fraud.

About the Author . . . Karen K. Addis is staff editor at Security Management and editor of Dynamics.
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:special investigative units at The Travelers Insurance Companies; includes related information
Author:Addis, Karen K.
Publication:Security Management
Date:Sep 1, 1989
Previous Article:The other industrial security programs.
Next Article:The invisible drain.

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