The setting: Waters off the coast of Florida. The action: Ahigh-speed boat chase across choppy seas. The players: HomelandSecurity agents, the Coast Guard, smugglers, illegal aliens, and aninsurance agent.

In an alarming new trend financed heavily by our industry,illegal alien smugglers are insuring their high-performance boatsbefore embarking on their ventures, then collecting big payouts.Insurers have identified this trend through information from U.S.Customs, Border Patrol, Coast Guard, and law enforcement. Insurancecompanies' special investigative units are sharing this informationwith their respective agents and underwriters to avoid this adverseselection among their boat policies.

The “Innocent” Bystander

The scheme is simple. The smugglers approach a “straw owner” topurchase the boat. The buyer has been chosen because he has a cleanrecord and doesn't “look like a smuggler.” The smugglers give thebuyer enough money for the down payment for a boat that can costfrom $70,000 to more than $180,000. After the boat is purchased,the buyer is told to obtain theft coverage from an insurance agent.The buyer easily obtains coverage from his agent because of hisgood record. He may even offer to pay the first month's premium incash.

The smugglers soon tell the buyer that they'll be “borrowing”the boat. They then use the new boat for human trafficking, usuallymaking runs between Florida and Cuba, or even Mexico. The“innocent” buyer simply reports the boat stolen, making a claim forpolicy limits.

The initial outlay is minimal. The boat is purchased with onlythe first down payment. The policyholder pays the first month'sinsurance premium, then makes a claim report and collects themoney. Imagine a $110,000 boat with a $400 per month premium. Itwould require 275 such polices to pay just one theft claim!

Why Is Smuggling on the Increase?

Incredibly, human trafficking has less-severe criminal penaltiesthan drug smuggling. There are nominal penalties for first-timealien smugglers compared to zero-tolerance punishments for drugsmugglers. A smuggler can board 25 refugees on a boat at $10,000per person, making more than $250,000 per run with almost no risk.If they're caught by authorities, they may claim they “saved” therefugees while fishing.

If a boat is confiscated by a foreign government and not one ofour officials, the insurance company has no remedy. We'll never seethese boats again — at least on our own waters. U.S. authoritieshave observed the Cuban military using Florida-registered boats fortheir own use. Some Cuban resorts have U.S. boats available forrent to tourists.

Even if American authorities confiscate the boat, it typicallyhas little salvage value (after limits have been paid). The boatsare operated so rigorously, the engines and fiberglass hulls do notlast. The smugglers view the boats as disposable.

Protecting Your Business

Your agency needs to avoid being a target of these illicitoffenders. By questioning and diligently underwriting (or avoiding)the most popular models of high-performance boats, you can minimizeyour exposure.

When considering a new boat applicant, your first questionshould be, “Does it make sense?” Some of the bogus owners arefragile, elderly individuals who've never owned a boat in theirlives. When questioned, one elderly woman thought the boat could bestarted by “pulling a string.” Many times the applicants areinsolvent or poor, certainly unable to afford a $150,000 boat.

Questions for the applicant should include, “Have you ever owneda boat before?” “Who is the primary user of the vessel?” and “Haveyou had any formal boat training?”

Also important is the type of vehicle the applicant owns. Theseheavy boats require large trucks to tow them. What kind of vehicledoes your applicant drive? In one case, a new applicant had an oldHonda Civic. The agent asked, “Do you plan on pulling your 38-footRenegade with your Civic?”

Indicators of Application Fraud

Smugglers choose boats for consistent speed, large gas tanks,and cargo areas. Based on the boats that have been recovered,models have included Renegade, Carrera, Avanti, Concept, andAvenger, usually between 27 and 39 feet in length.

Of course, not everyone who owns one of the above models isinvolved in illegal activity. You may have long-time customers whoare avid speedboat enthusiasts. When in doubt, you should considerthe following:

?Is the boat being insured with an agent far from theapplicant's home? This should warrant a question as to why youragency was chosen. Perpetrators learn quickly which agents andcompanies are easy targets.

?Is it the applicant's only policy with your agency or carrier?Is he a long-time, multi-line customer, or did he just walk in offthe street?

?Sometimes another (more knowledgeable) person assists thecustomer when applying for coverage. Who is this person? Why is hehelping?

?Does the boat have triple (or even quadruple) engines?

?Is the person applying at 5:00 pm or just before lunch to avoidscrutiny?

?Does the insured live part-time in South Florida but uses ahome address elsewhere (also for underwriting/rating issues)?

?Does the applicant have documentation for the boat's value — ordoes he want you to take his word for it?

?Does the boat have only hand-held electronics instead ofinstalled devices (such as GPS?) Smugglers have thrown hand-helddevices overboard to conceal where they've been.

Amusing but true: A detained smuggler threw his GPS overboardnot knowing it was a floating, waterproof model. Authorities savedthe GPS and it showed the vessel had been to Havana.

Recommendations

Smugglers are hoping that your agency and staff are not boatexperts. Here is how you can further guard against fraudulentbusiness:

?Make inspections of boats mandatory. Smugglers hope to avoidscrutiny. You or your staff should verify the Hull ID Number (HIN)and thoroughly photograph the vessel. This may curtail insuringstolen vessels.

?Perform background checks on applicants. Are they knowledgeableabout boats? Is a stranger answering questions or attempting tohelp with the application?

?Require proof of ownership and purchase price. They may try toinsure the boat for more than what it actually costs.

?Require mandatory checking of pricing guides (such as NADA orBlue Book) for proper policy limits. Do not accept a verbal pricefrom the applicant.

Some boat dealers have obtained policies over the phone fortheir customers. They offer to complete the application for you andreturn it by fax to save you the trouble. Establish rules that donot allow this! Have a properly trained person complete theapplication and personally inspect the vessel.

An honest, true boat enthusiast will have no problem with a fewextra questions.

Industry Considerations

The insurance industry should evaluate its own underwritingcriteria.

?Why are most boat policies “stated value,” with noconsideration for depreciation? Only a few carriers write boatpolicies for ACV. Some companies require the bill of sale and anappraisal from a certified appraiser, and then a reappraisal everythree years.

?Could an ACV policy create more competitive rates for your corepolicyholders (such as with auto polices)? Boats are a specialtymarket and the risk is greatest to new consumers due to theirhandling characteristics.

?Does the carrier require you to personally inspect theboat?

?Some state-approved forms include a question about priorconvictions. Should this be added to your boat applications?

Moral and Liability Issues

The threat of insurance fraud should not be our only concern.Smugglers carry hundreds of extra gallons of gasoline for theirvoyage. Authorities call the boats “rolling fire bombs,” as they'retransported on our roads. Imagine the liability if a boat was toignite near other people. Equally as important, human traffickinghas resulted in the injury and even death of defenseless refugees.Recently off the coast of Key West, a grossly overloaded vesselstuffed with 36 migrants tried to outrun authorities. By the timethey were caught, one woman was dead of head injuries and threeothers required medical attention.

Strict examination of new applications and proper underwritingmay at least make the smuggler's endeavors less manageable andpractical. Consider the following:

?Time may be of the essence. One detained smuggler said, “Weknow where every twin-engine boat in Florida is, and we plan ontaking them all.”

?Border Patrol authorities approximate that only 35 percent ofthe smugglers are caught. If the predicted exodus occurs afterFidel Castro dies, it could be less then five percent.

?Your business needs to be strategically prepared for suchscenarios. Don't let your agency or business be an easy target tothe bad guys. The good guys never mind answering a few extraquestions.