Author's Note: The following story is based onfact. It is, however, a work of fiction. The names, places anddescriptions have been changed to protect the guilty. Anyresemblance to real people is purely coincidental. This story waswritten for the purpose of providing insurance professionalssufficient information to recognize a certain type of fraud whilebroadening public awareness and challenging perceptions that caninterfere with fair outcomes.

We begin with the story of an insured who has purchased, for thefirst time in his life, a policy of personal articles floaterInsurance (PAF) scheduling $125,000 worth of ladies' jewelry. Whenhe first acquired the insurance, he advised the insuranceagent that the jewelry was always kept in a class E safe (onethat requires at least 30 minutes to drill out the lock) at hisresidence. The insured claimed to be employedfull-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 hispolicy.

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

A Valuable Family Heirloom

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

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

A Trail of Lies

In truth, the insured did not own a service station. He was, infact, unemployed for two full years before the robbery. His fatherowned a service station, where he would sometimes, for no pay, helphis father. Further, just before the policy was issued, hisresidence was burglarized of jewelry not scheduled on thePAF. He claimed he somehow “forgot” to tell the insurer aboutthat burglary.

All things said, the insured had once owned a servicestation. However, he lost his franchise when thefranchiser found out he was running multiple credit card slips fromcustomers, and forging their signatures on the slips. He eventuallypleaded guilty to a forgery charge for which the court placedhim on probation.

The jeweler who appraised the jewelry stated to the insuranceadjuster that he could replace it all for 50 percent of theappraised value. It bears mention that the insured had, in thepast, suffered multiple losses of automobiles. It would seem theinsured was a very unlucky man indeed, as the same car was stolenthree times in 2 years. Additionally, thecar was involved in multiple accidents, which,coincidentally earned large sums of money. The insured and hisentire extended family were quite close: They were always togetherin the car and went to the same chiropractor for treatment wheneveran auto accident happened. The insured and the family used thesame lawyer to represent their interest against the insurers forthe parties who they claimed caused the accidents.

Claim Denied Due to Misrepresentation

As for the bling, the insurance company denied the jewelryclaim because the insured obtained the policy by means ofmisrepresentation of material fact and concealment of materialfact. The insured then sued the carrier for breach of contract andbreach of the covenant of good faith and fair dealing. He soughtboth compensatory and punitive damages, which the Court wasreluctant to strike, although evidence was ample that the insurerhad good cause to reject the claim.

Discovery in the lawsuit established that the insured and hisfather had reported the identical diamond ring stolen one yearapart. The duo had even made the mistake of having thering appraised by the same jeweler. The jeweler was willing totestify as to the identity of the stones. Discovery alsoestablished two warranty violations in the policy.

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

By this time, with interest at 10 percent per annum, buildingover time, the exposure was at least $200,000 in compensatorydamages and the possibility of excessive amounts in punitivedamages if the jury disagreed with the position of the insurer.Counsel for the insurer was obligated to point out to his clientthat the cost, in attorneys' fees and expert witness fees, neededto take the matter through a trial by jury would probably exceedthe $30,000 demand, not to mention the cost to resolve anynecessary post-trial motions and appeals.

Although advised of the fraudulent claim, police and prosecutorswere not interested. The insured had nothing to lose because henever owned the jewelry in the first place and concluded that$30,000 recovery—even after paying a contingent fee to hislawyer—was better than a judgment giving him nothing.

Bad Exposure

To the insurer, the exposure was too big and the potential gainwas too small. The insurer, convinced the insured had perpetrated afraud, especially after he made an offer to settle for less than 15percent of the amount of the insurance, paid. It was happy, infact, 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 hadpresented, at least, four apparently fraudulent claims. His fatheralso collected for the theft of the identical ring and they enjoyedthe proceeds of their fraud. If insurance fraud is to be stopped,then the profit must be taken out of it. Because prosecutors seemdisinterested, it is necessary for the insurance industry to takethe chance on a punitive damage award and try every case where theybelieve fraud is being perpetrated. If they continue to take theeasy, and least expensive way out, the cost to the industry as awhole will multiply.

Of course, insurers have shareholders who want to make a profiton their investment. Taking chances like those I propose will gainthe ire of the shareholders and that is why this jewel theftclaim—although nothing was owed—was believed to be a logical andprudent decision.

Prosecutors must be educated that insurance fraud is a seriouscrime that is taking multiple billions of dollars from theinsurance industry. The cost of fraud is too big to continuallypass on to the honest insurance consumer. If the prosecutors hadtaken note of the reports they received from the insurer theinsureds would have been arrested and convicted and the insured'slaw suit would have been immediately dismissed.

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