Insurance fraud continually takes more money each year than itdid the year before from the insurance buying public. There is nocertain number because most attempts at insurance fraudsucceed.

Experts estimate insurance fraud in the United States takes fromthe industry amounts ranging from a low of $87 billion to more than$300 billion every year. Lack of sufficient investigation andprosecution of insurance criminals is endemic. Most insurance fraudcriminals are not detected until they become greedy and the fraudbecomes so obvious it cannot be ignored.

Certified Fraud Examiners (CFEs) can reduce the extent ofinsurance fraud because they are the best trained and mostknowledgeable about fraud of all kinds and should recognizeinsurance as a major market for the services of a CFE.

Insurers who do not exercise serious anti-fraud efforts oftencomplain that the local district attorneys and police agencies givea low priority to the crime of insurance fraud. No matter howseriously the insurers work to prove fraud the authorities ignorethem. In response, police and prosecutors complain insurers donothing that police and prosecutors can use to prosecute the crimeof insurance fraud.

It is necessary that CFEs, insurers, prosecutors and policeagencies work together as a team dedicated to reduce the crime ofinsurance fraud. Each must know and apply the various weaponsavailable to deal with suspected cases.

Insurers are compelled by state statute and regulation tomaintain Special Fraud Investigation Units, publish and fulfill adetailed anti-fraud program and train all of their anti-fraudpersonnel. Compliance by insurers is less than constant across theindustry. Some have effective fraud units while others simplyidentify one employee as its anti-fraud director although his orher work is almost totally adjusting claims and not investigatingfraud. Those that employ the services of CFEs often have the mosteffective anti-fraud efforts.

Do insurers get their money's worth from fighting fraud? Theanswer is “yes” and “no.” The more difficult question to answer ishow to quantify the savings, if any.

What is Insurance Fraud?

Next to tax fraud, insurance fraud is the most practiced crimein the world. It is perpetrated by members of every race, religionand nationality. It is found in every profession. The possibilityof a tax-free profit, when coupled with the commonly held beliefthat criminal prosecution will probably not occur, is sometimes toodifficult for normally honest people to resist.

Insurance fraud is a tort, a civil wrong. Black's LawDictionary, 6th Edition, defines fraud as:

An intentional perversion of the truth for the purpose ofinducing another in reliance upon it to part with some valuablething belonging to him or to surrender a legal right; a falserepresentation of a matter of fact, whether by words or by conduct,by false or misleading allegations or by concealment of that whichshould have been disclosed, which deceives and is intended todeceive another so that he shall act upon it to his legalinjury.

In simple language, fraud can be defined as a lie told for thepurpose of obtaining money from another who believes the lie to betrue. Civil insurance fraud exists if an insured:

• Makes a representation to the insurer that the insured knowsis false.

• conceals from the insurer a fact he or she knows is materialto the insurer.

• Makes a promise he or she does not intend to keep.

• makes a misrepresentation on which the insurer relies inissuing the policy, that results in the insurer incurringdamage.

Next page: The 7 weapons to fightfraud

Weapon 1: The Interview

The beginning of a thorough insurance fraud investigation is theinterview. An interview is not an interrogation. It can beperformed best by a CFE, an experienced insurance lawyer, a claimsperson or a private investigator. The interview should be informal.The interview is a structured conversation. Everyone has beeninterviewed. Everyone has, at some point in his or her life,interviewed someone.

By interviewing insureds, claimants and independent witnessesthe CFE can obtain important background information on the witnessthat the CFE could not obtain by hours of investigation. Knowledgefrom sources of information will give the CFE the ability to detectprevarication and direct the interview toward truth.

Weapon 2: Rescission

Rescission is an equitable remedy that has existed since 1766.California, New York and a few other states have enacted statutesthat follow a House of Lords decision, Carter v. Boehm,S.C. 1 Bl.593, 3 Burr 1906, 11^th May 1766, and allow forrescission of a policy whenever the insurer is deceived even if theinsured did not intend to deceive the insurer.

The remedy of rescission was created by the ecclesiasticalcourts of ancient England who were charged with reaching fairresults rather than giving a money judgment. As courts of equitythey voided contracts that were obtained by mistake,misrepresentation, concealment or fraud.

Facts raising rescission usually appear as part of a claimsinvestigation. When a proposed insured lies to obtain the insurancethe insurer may seek equity from the court and have the contractdeclared void from its inception. To do otherwise would be unfairand allow a fraud to profit from wrongful conduct.

Rescission is an important equitable remedy hoary with age. Whenan insurer learns it was deceived into insuring someone it wouldnot have insured, it should be able to legitimately exercise theright provided to parties to an insurance contract without fear ofa tort action. Rescission is not, as some members of theplaintiffs' bar would have courts believe, post loss underwriting.Underwriting is based on a belief that the facts presented by aninsured in an application is presented truthfully and with utmostgood faith. When it is not, rescission is a method to put fairnessinto a contractual relationship and put the parties to the contractback in the place they were before the contract was made.

The insurer should analyze the findings of its thoroughinvestigation, and obtain competent legal advice whether:

• It can rescind in writing, return the premium, and accept thecosts of its investigation.
• It can rescind in writing, return the premium, and—if theevidence available warrants—file suit against the broker whopresented the false application to recover its investigation andlegal costs.
• It can rescind in writing and file a declaratory relief toconfirm the rescission and obtain restitution of expenses and legalfees incurred.

Weapon 3: Computer Databases

Databases, such as those operated by the Insurance ServicesOffice, Equifax, Lexis/Nexis or NICB, allow an investigator tocollect information from public records. Searches of property orbankruptcy records, court filings, and any criminal convictionrecords can give a complete picture of the person underinvestigation. Uniform Commercial Code (UCC) filings will revealsecurity interests in personal property. Securities ExchangeCommission (SEC) filings also contain information concerningbusiness acquisitions, liabilities, and any significant pendinglawsuits.

Credit bureaus are often a source of information concerning aninsured's or claimant's credit history. When using thisinformation, insurers must be aware of the potential applicabilityof the federal Fair Credit Reporting Act (FCRA) and the limitationsthis act places upon the use of credit reports.

Courts have recognized the value of index reports to insurersinvestigating claims. In Tucker v. Colonial Ins. Co., 195Ga. App. 842 (1990), the claimant told his auto carrier that heonly had one prior accident. However, an index bureau searchrevealed he had at least four, and further investigation revealedhe had about 20 prior accidents. The auto carrier counter-sued forinsurance fraud. The Georgia Appellate Court cited the index bureaureport as strong evidence that the claimant was committing fraud,and that the jury in the claimant's trial for insurance benefitsunder the auto policy was properly instructed on the fraudissue.

Weapon 4: Verify Information

The CFE must verify every material fact provided by the claimantor insured in the application for insurance and in the presentationof a claim.

If investigating a crime against the insured a major autoaccident where police responded, or a fire the police or fire-causeinvestigators must be interviewed in person to learn if anysuspects have been identified, arrests made, or property recovered,or if the police investigators have issued any supplementalreports.

A network of doctors and medical companies were allegedlyinvolved in a scheme aimed to entice people from across the countryto partake in unnecessary medical procedures to bill millions ofdollars to the Blue Cross and Blue Shield insurance companies

Even if the insurer catches the insured or claimant in theattempt and refuses to pay the fraudulent part of the claim, theentire policy is void. An insured or claimant who commits fraud inpart of his or her claim loses the entire claim and cannot collectfor the honest part of his claim because, regardless of size, fraudmakes the entire policy voidable.

Weapon 5: Proactive Fraud Investigation

If fraud is suspected, further investigation techniques,conducted carefully and in compliance with local law, can be used.Some proactive investigative techniques follow:

Surveillance—If the initial investigationsuggests that a fraudulent claim has been made, surveillance may beuseful. Investigators follow or watch the insured, oftenphotographing, filming, or videotaping to establish whether theclaim is valid. Most often this technique is used to investigateclaims in fraudulent bodily injury and workers' compensation casesto prove that the insured or claimant is not injured as he or sheclaims.

Electronic Eavesdropping—Eavesdropping is anancient practice which at common law was condemned as a nuisance.Electronic eavesdropping is generally illegal under federal law,subject to two exceptions:

• A business extension exception that applies to intercepts madeby use of a business telephone extension in the ordinary course ofbusiness.
• Consent of at least one party to the conversation.

Some states require the consent of both parties to a recording;others do not. Before a recording is made with single-partyconsent, careful research of the law of the jurisdiction where therecording is to be made should be completed with the advice ofcompetent counsel.

Weapon 6: The Examination Under Oath

An examination under oath is an oral interview taken under oathbefore a notary or certified shorthand reporter. The reasons forthe examination under oath is to allow the insurer tocross-examine, as it were, the documents submitted by the insuredin proof of his or her loss. [Claflin vs. CommonwealthInsurance Company of Boston, Mass. 110 U.S. 81, 94-95, 3 S.Ct.507, 28 L.Ed. 76 (1884); Hickman vs. London AssuranceCorp. 184 Cal. 524, 529-530, 195 P. 45 (1920).]

The New York Standard Fire Policy provides as follows:

“The insured, as often as may be reasonably required, shallexhibit to any person designated by this company all that remainsof any property herein described and submit to examination underoath by any person named by this company, and subscribe thesame; and as often as may be reasonably required, shall produce forexamination and copying all books of account, bills, invoices, andother vouchers…”

A false answer as to any matter of fact material to the inquiry,knowingly and willfully made, with intent to deceive the insurer,would be fraudulent. The position taken by the U.S. Supreme Courtin Claflin has been upheld by every court that hasconsidered it to date. For example, in Gipps Brewing Corp v.Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13(C.A. 7, 1945). In Kisting v. Westchester Fire InsuranceCo. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967the District Court granted summary judgment because of the refusalof the insured to answer material questions. The courtstated:

“It is well settled in other jurisdictions that noncompliancewith a provision in an insurance policy requiring the insured tosubmit to an examination under oath precludes recovery by theinsured.”

Weapon 7: The Insurer's Right to Documents & ThingsIs the Civil Equivalent of a Search Warrant

The Mississippi Supreme Court in Southern Guaranty InsuranceCo. v. Dean, 252 Miss. 72, 172 So.2d 553 (1965) denied theinsured recovery for failing to produce documents pertinent andmaterial to her insurance and the loss. That documentation can berelevant to the insurance and have no relevance to the loss, butmust still be produced.

Most Insureds (who have something to hide or who believe intaking stands on principle) will refuse to disclose tax returns.Usually they state the taxpayers' privilege which is a court-madeprotection in some states. The court-made protection is against acourt compelling production. The policy language acts as a waiverof the so-called privilege or protection against disclosing taxreturns.

CFEs, like everyone else, can become frustrated. Every CFE,adjuster and fraud investigator have had “gut feelings” about acase that are not supported by the evidence. Before recommendingthe declination of an insurance claim the CFE must establish thathe or she has collected sufficient admissible evidence that willestablish the elements of civil fraud.

Beware:

• Violate the rights of an insured.
• Falsely accuse someone of fraud.
• Succumb to frustration and create evidence of fraud that isfalse.

Such conduct can be dangerous to the insurer's bottom line. Inaddition, the individual employee may find himself or herself adefendant of a civil or criminal action. The only protectionagainst the overzealous investigator or claims person is toproperly train and support the insurer's claims and anti-fraudpersonnel. An ethical fraud investigator will do a thorough andcomplete investigation. He or she will never accuse an insured offraud without first obtaining sufficient information to defeat acivil case or cause a prosecutor to bring a criminal case orboth.

Next page: When fraud voidscoverage

Insurance fraud in the presentation of a claim, by definition,voids insurance. In 1884 the U.S. Supreme Court considered theissue and decided that a fraud in the presentation of a claim, evenif it was not intended to deceive the insurer and would have hadlittle effect on the indemnity paid, still caused the policy to bevoid and the claim to be denied.

In Claflin & Others v. Commonwealth Insurance Company.;Same v. Western Assurance Company.; Same v. Franklin InsuranceCompany, 110 U.S. 81; 3 S. Ct. 507; 28 L. Ed. 76; 1884 U.S.LEXIS 1661, after a loss, Murphy assigned his claims againstseveral companies under the policies to the plaintiffs.

Defendant insurers issued insurance policies on certain goods.Plaintiffs were assigned the goods and brought suits under thepolicies against defendants as assignees of the original insured.After determining that the lower court had jurisdiction over thematter, the court affirmed judgment for defendants because therecord showed the assignor had made false statements and thereforeplaintiff assignees could not prevail.

In any view, there was a fraud attempted upon the insurers, andit is not lessened because the motive that induced it was somethingin addition to the possible injury to them that it might work. Thesupposition proceeds upon the very ground of the false statement ofa material matter, knowingly and willfully made, with the intent todeceive the defendants in error; and it is no palliation of thefraud that Murphy did not mean thereby to prejudice them, butmerely to promote his own personal interest in a matter notinvolved in the contract with them. By that contract the companieswere entitled to know from him all the circumstances of hispurchase of the property insured, including the amount of the pricepaid and in what manner payment was made; and false statements,willfully made under oath, intended to conceal the truth on thesepoints, constituted an attempted fraud by false swearing which wasa breach of the conditions of the policy, and constituted a bar tothe recovery of the insurance.

Intentional Misrepresentation

When an insured lies during the course of a claim investigation,like Murphy did in the Claflin case, the prudent insurer,if the lie is discovered, will declare the policy void and deny theclaim. A lie in the course of a claim investigation is a clearbreach of the covenant of good faith and fair dealing by theinsured.

Almost every insurance policy issued in the United States has aclause equal to or similar to that in the New York Standard FireInsurance policy, that like the standard fire policy in moststates, provides, that provides in relevant part, as follows:

Concealment, fraud

“This entire policy shall be void if, whetherbefore or after a loss, the insured has willfully concealed ormisrepresented any material fact or circumstance concerning thisinsurance or the subject thereof, or the interest of the insuredtherein, or in case of any fraud or false swearing by the insuredrelating thereto.”

An insured who lied intentionally about a claim to prevent hercriminally violent son from harming her physically sued the insurerwho denied the claim when it learned she had lied to them. Shefailed to recover any benefits because the concealment or fraudprovision of her policy effectively barred her claim.

In Cummings v. Fire Insurance Exchange, 202 Cal. App.3d 1407, 249 Cal. Rptr. 568 (Cal.App.Dist.2 07/22/1988) Mary L.Cummings, (plaintiff), appealed from a summary judgment granted todefendant Fire Insurance Exchange (defendant) on her complaintseeking damages from defendant for its failure to pay a propertydamage claim and its allegedly malicious instigation of anunsuccessful criminal prosecution of plaintiff. Because the recorddemonstrates (1) that plaintiff knowingly and willfully filed afalse claim on a casualty policy issued by the defendant and (2)that defendant had a reasonable basis for believing that plaintiffhad violated the law in so doing.

Claflin holds that the materiality of a statement isnot defined and determined by the effect it has on the outcome ofthe investigation. Rather, a question and answer are material whenthey relate to the insured's duty to give to the insurer all theinformation he has as well as other sources of information so thatthe insurer can make a determination of its obligations.

In Fine v. Bellefonte Underwriters Ins. Co. (2d Cir.1984) 725 F.2d 179, 182-184 (citing Claflin), the courtheld that a statement is not material only if it relates to amatter which ultimately proves to be significant in the ultimatedisposition of the claim. Rather, if the misrepresentation concernsa subject reasonably relevant to the insured's investigation, andif a reasonable insurer would attach importance to the factmisrepresented, then it is material.

Plaintiff admits that she knew she was lying to the defendantand did so with the intent that defendant not find out the actualfacts. Second, under Claflin, the intent to defraud the insurer isnecessarily implied when the misrepresentation is material and theinsured willfully makes it with knowledge of its falsity. Thus,plaintiff's intent to deceive was established as a matter oflaw.

This conclusion is in no way avoided by plaintiff's contentionthat she was motivated to make such false statements by her veryreasonable fear of her son. In the context of this case, that meansthat plaintiff's motive of fear of her son's violence wasirrelevant to the question of whether she intended to deceive thedefendant.

As plaintiff's misrepresentations were material and wereintentionally made with knowledge of their falsity and with theintent to deceive defendant, the trial court was correct in rulingthat, as a matter of law, they were a defense to the breach ofcontract causes of action since they voided the insurance contract.Summary judgment was therefore proper.

Cummings committed fraud under duress. She was frightened thatif she told the truth to her insurer she would lose her life at thehands of her evil, violent son.

She later admitted that she lied to her insurer and that she didso with intent to deceive the insurer. That is why she had no case.She made a decision to lie. Whether she had a good reason to lie ornot, she lied and she did so with knowledge of the lie with intentto deceive the insurer to its damage. Cummings' conduct, bydefinition, is common-law fraud.