Author's Note: The following story is based on fact. It is, however, a work of fiction. The names, places and descriptions have been changed to protect the guilty. Any resemblance to real people is purely coincidental. This story was written for the purpose of providing insurance professionals sufficient information to recognize a certain type of fraud while broadening public awareness and challenging perceptions that can interfere with fair outcomes.

We begin with the story of an insured who has purchased, for the first time in his life, a policy of personal articles floater Insurance (PAF) scheduling $125,000 worth of ladies' jewelry. When he first acquired the insurance, he advised the insurance agent that the jewelry was always kept in a class E safe (one that requires at least 30 minutes to drill out the lock) at his residence. The insured claimed to be employed full-time as the owner of a gasoline service station. He also said he had neither suffered a previous (insured) loss, nor had a carrier ever canceled his policy.

Well, one month after the policy was issued, and just before the first installment of the premium finance contract was due, this insured reported a loss. A rather large one. At the time, he claimed two armed robbers came to his door at midnight—while his wife and child were fortuitously away helping a neighbor fill out immigration and naturalization forms—and forced him, at gun point, to open the safe. They allegedly removed only the jewels, striking him on the head with the weapon, and tying him up like a mummy with 56 feet of rope they just happened to have the foresight to bring with them.

A Valuable Family Heirloom

Upon investigation, the insurer learned the insured had owned the jewelry for more than 20 years. The insured had received the jewelry as a gift from his grandmother when he immigrated to the United States. The insured came from what was then known as Soviet Armenia with his entire family of six. His jewels had been stored in his closet without incident for the full 20 years. Neither the insured's father nor any of his relatives knew about the gift because “it was not their business to know.”

The insured, also because it was not his business to know, was in the dark as to whether his father or his brothers had received a similar gift from the grandmother. The insured had resided in an apartment building owned by his father for many years. But just two months before buying insurance, he had moved into this new residence (where the incident took place). Shortly after the robbery, he then moved back to the family owned apartment house.

A Trail of Lies

In truth, the insured did not own a service station. He was, in fact, unemployed for two full years before the robbery. His father owned a service station, where he would sometimes, for no pay, help his father. Further, just before the policy was issued, his residence was burglarized of jewelry not scheduled on the PAF. He claimed he somehow “forgot” to tell the insurer about that burglary.

All things said, the insured had once owned a service station. However, he lost his franchise when the franchiser found out he was running multiple credit card slips from customers, and forging their signatures on the slips. He eventually pleaded guilty to a forgery charge for which the court placed him on probation.

The jeweler who appraised the jewelry stated to the insurance adjuster that he could replace it all for 50 percent of the appraised value. It bears mention that the insured had, in the past, suffered multiple losses of automobiles. It would seem the insured was a very unlucky man indeed, as the same car was stolen three times in 2 years. Additionally, the car was involved in multiple accidents, which, coincidentally earned large sums of money. The insured and his entire extended family were quite close: They were always together in the car and went to the same chiropractor for treatment whenever an auto accident happened. The insured and the family used the same lawyer to represent their interest against the insurers for the parties who they claimed caused the accidents.

Claim Denied Due to Misrepresentation

As for the bling, the insurance company denied the jewelry claim because the insured obtained the policy by means of misrepresentation of material fact and concealment of material fact. The insured then sued the carrier for breach of contract and breach of the covenant of good faith and fair dealing. He sought both compensatory and punitive damages, which the Court was reluctant to strike, although evidence was ample that the insurer had good cause to reject the claim.

Discovery in the lawsuit established that the insured and his father had reported the identical diamond ring stolen one year apart. The duo had even made the mistake of having the ring appraised by the same jeweler. The jeweler was willing to testify as to the identity of the stones. Discovery also established two warranty violations in the policy.

Such facts were sufficient to establish fraud. However, when the defendant is an insurer, fraud is never easy to establish. The litigation dragged on for four and a half years; the trial court would not grant summary judgment. The judge wanted to give the insured his “day in court” to prove that he was none other than an innocent dupe of the insurer. The case was set for trial, and the insured/plaintiff made an offer of settlement that he would release the insurer of all liability in exchange for $30,000 cash.

By this time, with interest at 10 percent per annum, building over time, the exposure was at least $200,000 in compensatory damages and the possibility of excessive amounts in punitive damages if the jury disagreed with the position of the insurer. Counsel for the insurer was obligated to point out to his client that the cost, in attorneys' fees and expert witness fees, needed to take the matter through a trial by jury would probably exceed the $30,000 demand, not to mention the cost to resolve any necessary post-trial motions and appeals.

Although advised of the fraudulent claim, police and prosecutors were not interested. The insured had nothing to lose because he never owned the jewelry in the first place and concluded that $30,000 recovery—even after paying a contingent fee to his lawyer—was better than a judgment giving him nothing.

Bad Exposure

To the insurer, the exposure was too big and the potential gain was too small. The insurer, convinced the insured had perpetrated a fraud, especially after he made an offer to settle for less than 15 percent of the amount of the insurance, paid. It was happy, in fact, to be rid of the exposure.

Members of the public, and the insurance industry as a whole, lost as a result of this economic judgment. The same insured had presented, at least, four apparently fraudulent claims. His father also collected for the theft of the identical ring and they enjoyed the proceeds of their fraud. If insurance fraud is to be stopped, then the profit must be taken out of it. Because prosecutors seem disinterested, it is necessary for the insurance industry to take the chance on a punitive damage award and try every case where they believe fraud is being perpetrated. If they continue to take the easy, and least expensive way out, the cost to the industry as a whole will multiply.

Of course, insurers have shareholders who want to make a profit on their investment. Taking chances like those I propose will gain the ire of the shareholders and that is why this jewel theft claim—although nothing was owed—was believed to be a logical and prudent decision.

Prosecutors must be educated that insurance fraud is a serious crime that is taking multiple billions of dollars from the insurance industry. The cost of fraud is too big to continually pass on to the honest insurance consumer. If the prosecutors had taken note of the reports they received from the insurer the insureds would have been arrested and convicted and the insured's law suit would have been immediately dismissed.

Perhaps if fraud did not make insurance so expensive, then the number of honest consumers would be larger. Now, it appears to be a very small group. An insurance research group has found that more than 67 percent of all auto insurance claims in Los Angeles, Calif. are fraudulent to some degree.

Special Reports /

When the Defendant Is An Insurer, Fraud Is Never Easy to Establish

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