From the October 2008 issue of Claims Magazine •Subscribe!

Protecting Adjusters from Fraud Traps

The NAIC model regulations and act were designed to ensure that the claim process was transparent, moved promptly, and reached an equitable result. All of the adopting states imposed upon carriers requirements to report to first- and, in some instances, third-party claimants as to the progress of the insurer's investigation and the date by which a resolution of the claim may be expected fulfill these goals.

Adjusters face a significant problem when they encounter a claim where there exists a suspicion that the insured either contributed to the loss or has intentionally exaggerated the estimate of damages. How does one handle the claim consistent with the policies embodied in the regulations and statutes?

A total of 19 states provide some form of guidance and protection for the claim adjuster. Those states are listed below:

The protections fall generally within two classifications: extensions or waivers of the time limit by which the investigation must be completed, the claim accepted or denied, and what the insured must be told regarding the evidence of potential wrongdoing.

One common requirement is that the evidence supporting such suspicions must be documented in the claim file. In other words, a "gut hunch" is not sufficient. Additionally, some states -- for example, Alabama, New York, New Jersey, Minnesota, Maryland, Pennsylvania, and West Virginia -- specifically require that the evidence be available for inspection by state authorities. In all other states, the states' ability to review the file is implicit.

Case In Point

Examples of protection are as follows: Alaska and Maryland require that insurers advise as to the status every 45 days and state the reasons why more time is needed while the investigation is in process. [3 AAC 26.070; MD ADC and MD ADC] However, "if there is a reasonable basis supported by specific information for suspecting that a first-party claimant has fraudulently caused or wrongfully contributed to the loss, and the basis is documented in the claim file, then this reason need not be included in the written request for additional time to complete the investigation or the written denial."

In three states, a reasonable basis, supported by specific information that the insured has fraudulently caused or contributed to the loss, converts the time for completion of the investigation from a specific deadline to a "reasonable" time frame. No mention is made of what the insured must be told as the basis for the extension of time. These states are Alabama in 482-1-125-.07(1); Kentucky in 806 KAR 12:095 ? 6; and Nebraska in 210 NAC ? 60-008. 03. Oklahoma also extends the time limit for acceptance or rejection of a first-party claim. [36 Okl.St. Ann. ? 1250.7(C); OK ADC 365:15-3-7(c)] Absent such evidence of fraud, the maximum is 120 days from the notice of claim.

Four states relieve the carrier of the time limits and the requirement to advise the first-party claimant of the reasons for the extension where there is specific information that the insured has fraudulently caused or contributed to the loss by arson. These states are:

  • Arizona [AZ ADC R20-6-801(G)(1)(c)]
  • Arkansas [AR ADC INS 43 9(b)]
  • Kansas [KS ADC 40-1-34 ; N.A.I.C. 902-1 (January 1981 ed.); KS ST 40-2404(9)(e)]
  • Texas [V.T.C.A., Insurance Code 542.056(b)]

The limitation as to arson appears to leave open the question of what an adjuster should do where there is no specific evidence of incendiary origin but the lost property descriptions or valuations are very questionable.

Four states extend both the time limit for acceptance or rejection of the first-party claim and the requirement to inform the insured of the reasons for the extension if there is a "reasonable basis" to assert fraud or causation by the insured. These states are:

  • West Virginia [W. Va. C.S.R. 114-14-6.7]
  • Iowa [IA ADC 191-15.41(3)]
  • New Jersey [N.J.A.C. 11:2-17.7(g)]
  • Pennsylvania [31 PA ADC 146.7]

In all four states, the carrier must advise the insured as to acceptance or rejection in a reasonable amount of time.

New York is similar to West Virginia, Iowa, New Jersey, and Pennsylvania with the added requirement in 11 NYCRR 216.5(b) that the insurer must submit a specific report to the Insurance Fraud Bureau when fraud or causation by the insured is suspected.

California extends the waivers to both first- and third-party claims; statute 10 CA ADC 2695.7(b)(1) extends the 40-day time frame for accepting or rejecting the claim to 80 days or, given undefined circumstances, indefinitely if the carrier has a "reasonable basis supported by specific information for belief that claim is false or fraudulent." Under the 10 CA ADC 2695.7(b) (2) statute, the insurer is "not required to disclose information that could be reasonably expected to alert the claimant that the subject claim is being investigated as a suspected fraudulent claim."

Additionally, Rhode Island extends the waiver of the time to complete the investigation to both first and third-party claims. [RI ADC 02 030 073]

Minnesota also extends the protection to both first- and third-party claimants and appears to allow for a more liberal interpretation of the quality of the evidence by stating "where evidence of suspected fraud is present, the reasons for failure to complete the investigation within the time period need not be specific." The drafters did not require that the evidence be "specific." [M.S.A. ? 72A.201 Subd. 4(3) (i) - (4)]

New Hampshire simply requires that when the reason for delay in completion of the investigation is suspected fraud a "delay letter shall be deemed sufficient if it indicates that the reason for the delay is that further investigation is needed to determine the validity of the claim." [NH ADC INS 1002.05]

In the next article, we'll further examine the handling of suspicious claims in these jurisdictions and in the states that do not provide for waivers of regulatory requirements.

Tim Lynch and Anne Bandle are insurance defense attorneys with Lynch and Associates in Anchorage, Alaska. They also are members of the Council on Litigation Management. They can be reached at 907-276-3222,,,

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