The setting: Waters off the coast of Florida. The action: A high-speed boat chase across choppy seas. The players: Homeland Security agents, the Coast Guard, smugglers, illegal aliens, and an insurance agent.

In an alarming new trend financed heavily by our industry, illegal alien smugglers are insuring their high-performance boats before 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. Insurance companies' special investigative units are sharing this information with their respective agents and underwriters to avoid this adverse selection among their boat policies.

The “Innocent” Bystander

The scheme is simple. The smugglers approach a “straw owner” to purchase the boat. The buyer has been chosen because he has a clean record and doesn't “look like a smuggler.” The smugglers give the buyer enough money for the down payment for a boat that can cost from $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 his good record. He may even offer to pay the first month's premium in cash.

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

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

Why Is Smuggling on the Increase?

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

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

Even if American authorities confiscate the boat, it typically has little salvage value (after limits have been paid). The boats are operated so rigorously, the engines and fiberglass hulls do not last. The smugglers view the boats as disposable.

Protecting Your Business

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

When considering a new boat applicant, your first question should be, “Does it make sense?” Some of the bogus owners are fragile, elderly individuals who've never owned a boat in their lives. When questioned, one elderly woman thought the boat could be started by “pulling a string.” Many times the applicants are insolvent or poor, certainly unable to afford a $150,000 boat.

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

Also important is the type of vehicle the applicant owns. These heavy boats require large trucks to tow them. What kind of vehicle does your applicant drive? In one case, a new applicant had an old Honda Civic. The agent asked, “Do you plan on pulling your 38-foot Renegade 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, and Avenger, usually between 27 and 39 feet in length.

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

?Is the boat being insured with an agent far from the applicant's home? This should warrant a question as to why your agency was chosen. Perpetrators learn quickly which agents and companies 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 off the street?

?Sometimes another (more knowledgeable) person assists the customer when applying for coverage. Who is this person? Why is he helping?

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

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

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

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

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

Amusing but true: A detained smuggler threw his GPS overboard not knowing it was a floating, waterproof model. Authorities saved the GPS and it showed the vessel had been to Havana.

Recommendations

Smugglers are hoping that your agency and staff are not boat experts. Here is how you can further guard against fraudulent business:

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

?Perform background checks on applicants. Are they knowledgeable about boats? Is a stranger answering questions or attempting to help with the application?

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

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

Some boat dealers have obtained policies over the phone for their customers. They offer to complete the application for you and return it by fax to save you the trouble. Establish rules that do not allow this! Have a properly trained person complete the application and personally inspect the vessel.

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

Industry Considerations

The insurance industry should evaluate its own underwriting criteria.

?Why are most boat policies “stated value,” with no consideration for depreciation? Only a few carriers write boat policies for ACV. Some companies require the bill of sale and an appraisal from a certified appraiser, and then a reappraisal every three years.

?Could an ACV policy create more competitive rates for your core policyholders (such as with auto polices)? Boats are a specialty market and the risk is greatest to new consumers due to their handling characteristics.

?Does the carrier require you to personally inspect the boat?

?Some state-approved forms include a question about prior convictions. 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 their voyage. Authorities call the boats “rolling fire bombs,” as they're transported on our roads. Imagine the liability if a boat was to ignite near other people. Equally as important, human trafficking has resulted in the injury and even death of defenseless refugees. Recently off the coast of Key West, a grossly overloaded vessel stuffed with 36 migrants tried to outrun authorities. By the time they were caught, one woman was dead of head injuries and three others required medical attention.

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

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

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

?Your business needs to be strategically prepared for such scenarios. Don't let your agency or business be an easy target to the bad guys. The good guys never mind answering a few extra questions.

Special Reports /

Do You Insure High-Performance Boats?

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