When the economy began to sour in 2007, there was an expectation that insurance fraud would increase. Indeed, we did see some cases of people torching or "giving up" their cars to thieves in an effort to get out from under their loan payments. In some cases, people faced with foreclosures resorted to arson in an attempt to recoup insurance money rather than losing their investment.
These desperate acts by people who normally would not think of committing insurance fraud have drawn attention to the problem, but are relatively rare compared with the everyday deliberate fraud that takes place across the country. Our statistics indicate that in spite of the stories about torched houses, businesses and cars, the big-time insurance crimes remain the same as they've always been: auto theft, cargo theft, medical fraud and claims padding.
Auto theft
In the summer of 1912, the theft of a single five-passenger Chalmers automobile from a Chicago street set in motion a chain of events that eventually led to the creation of the Automobile Protective and Information Bureau and, ultimately, today's National Insurance Crime Bureau.
The vehicle was insured by the Boston Insurance Co., and it wanted the automobile back. The task fell to Fred J. Sauter, Boston's man in Chicago. With no rapid communications or glossy color photo capability in those days, Sauter's first task was to obtain a woodcut of the auto from the local Chalmers dealer. While that was being prepared, word arrived that two additional Chalmers had been stolen and their insurers also wanted a woodcut from that same Chalmers dealer. Sauter suggested to the others, John Gallagher of Aetna Insurance and Frank Meinel of London and Lancashire Insurance, that it would be more economical and efficient to include their loss data on his "reward card," which would be mailed to surrounding law enforcement agencies.
Shortly after this episode, the three men agreed that communication, cooperation and collaboration were going to be essential elements for insurance investigators and they formed the Automobile Protective and Information Bureau.
Various other associations and bureaus came into existence under the auspices of the National Automobile Underwriters Assn. and the Independent Automobile Theft Bureau, leading to confusion among the law enforcement officials as to which agency was the single point of contact for information.
In 1927, the National Automobile Theft Bureau was created to consolidate the groups and solve the confusion. Fred Sauter was elected chairman, a position he held until his retirement in 1962. In 1992, NATB merged with the Insurance Crime Prevention Institute to form the National Insurance Crime Bureau. The merger combined the vehicle investigation expertise of the NATB with the insurance fraud prevention knowledge of ICPI in establishing the premier not-for-profit insurance crime investigation company.
NICB special agents, most of whom are former law enforcement officers, are a tremendous asset for establishing relationships with local, state and federal law enforcement agencies. Those relationships form the foundation for the information exchange that is critical to successful investigations. Prosecutors and investigators benefit as well because NICB special agents are often obtaining claims, policies and other information from insurance companies to help prosecutors build a case.
Over the years, NICB built a reputation as the only organization whose special agent investigators define the term "subject matter experts" when discussing stolen vehicle identification.
NICB agents are routinely requested to find hidden vehicle identification numbers (VIN) or to "raise" identification numbers that have been removed by auto thieves attempting to hide the true identity of a stolen vehicle.
U.S. auto manufacturers began using VINs, which describe the vehicle for purposes of identification, in 1954. Beginning with the 1981 model year, the National Highway Traffic Safety Administration (NHTSA) mandated the use of 17-character alphanumeric VINs.
In the early days, stolen vehicles resold to innocent purchasers were often disguised using VIN plates that had been removed from similar salvaged wrecks. Although crude by today's standards, VIN switches do still occur–only they are much more complex and easily pass the typical cursory inspection by an untrained eye. Today it's called cloning and technology makes it quite simple to accomplish yet difficult to detect.
A clone is simply a stolen vehicle that assumes the identity–the VIN–of an identical vehicle that is not stolen. Only through detailed records examinations and secondary VIN inspections can we determine a clone's true status.
But technology cuts both ways. With the introduction of "bait cars" and license plate readers, law enforcement is gaining the upper hand against their most prolific auto thieves. Now, with the audio and video evidence provided by bait cars, thieves are getting nabbed in the act and cooling their heels in jail for long periods of time.
Technology, more aggressive enforcement and prosecution, effective legislation and public awareness are all having an impact on vehicle theft. This may help explain the sharp decline in vehicle thefts seen in 2009–the sixth consecutive year of national vehicle theft reductions. In 2003, there were 1,261,226 vehicle thefts in the U.S. In 2004 the number dropped to 1,237,851 and in 2009 it was 794,616–a 40 percent decline from 2003.
Medical fraud
While the battle against vehicle theft is far from over, the good news for the insurance industry is that declining vehicle thefts allow NICB to apply additional resources to emerging and more insidious kinds of insurance crimes–specifically medical fraud.
Central to the majority of medical fraud is the staged or caused accident, which is simply a trigger event that unleashes a cascade of other fraudulent activities involving street-level operators, medical clinics, durable medical equipment providers, chiropractors and lawyers. Rings of organized criminals find a welcoming environment in no-fault states like Florida and New York, but they are at work in many other states as well. Although the fraud that they commit enriches them, it is coming out of the pockets of all insurance consumers who underwrite that criminal activity by paying higher premiums for their coverage
Earlier this decade, NICB questionable claims analysis showed a dramatic increase in medical fraud associated with auto policies. The activity was most concentrated in two states–Florida and New York–prompting NICB to establish in 2002 its first Major Medical Fraud Task Force (MMFTF) operations in south Florida and New York City.
Consisting of dedicated NICB special agent and analytical resources, these task forces also host law enforcement and insurance company special investigation unit personnel. The task force environment puts those resources under one roof where communication, cooperation, collaboration and coordination are easily and effectively accomplished. The result is a more coordinated and comprehensive attack on the most egregious kinds of medical fraud occurring within the task force's jurisdiction.
The MMFTF model has been so successful that is has been replicated in Houston, Los Angeles, Washington, D.C., Edison, N.J. (serving the Philadelphia area and Delaware) and a second Florida task force was recently added in Tampa, where Florida's no-fault law enables auto policy medical fraud to thrive.
On Oct. 13, 2010, federal law enforcement officials in New York announced the indictment of 44 alleged members and associates of the Mirzoyan-Terdianian Organization, a New York-based Armenian-American organized crime enterprise. The defendants were charged with operating at least 118 medical clinics located in 25 states that submitted more than $100 million in bogus claims to Medicare. The alleged $100 million scheme is the largest single Medicare fraud ever charged.
In a separate indictment announced the same day, at least two members of the Mirzoyan-Terdjanian Organization were charged with operating a multi-million-dollar scheme to defraud insurance companies in the New York area by submitting millions of dollars in claims for medically unnecessary treatments. These schemers bribed a hospital employee to steal names of patients, then recruited these patients, sometimes by posing as a hospital referral service charged with helping accident victims.
In some cases, the defendants allegedly staged auto accidents to generate fake patients, who would then undergo unnecessary and expensive treatments that would be billed and reimbursed. Patients were provided medical treatment, including painful nerve-conduction examinations, without reference to their actual medical need. After insurance companies paid for these unnecessary medical costs, the fraud proceeds were laundered through multiple accounts, including an escrow account belonging to an attorney. An attorney, as well as several doctors, was among the 18 individuals charged and arrested in connection with this scheme.
NICB agents and analysts provided support to this investigation by obtaining claim files, providing medical clinic details and performing analysis of relevant data.
Cargo theft
NICB investigators also are seeing increased theft and fraud activity relating to commercial policies, namely, cargo theft and heavy equipment. Every day millions of tons of merchandise are shipped by truck, train, rail and plane to destinations across the nation. While most arrive without incident, a growing number of shipments are stolen in transit by organized groups or individuals who sell the items through an established network of illicit brokers with direct access to black markets.
When the cargo involves computers or high-definition televisions, the loss to insurance companies and manufacturers is significant; when the cargo is a load of insulin, which must be refrigerated at all times, the loss can be deadly. If the product is stolen and stored improperly, it can be a serious health threat to unsuspecting consumers.
In November 2006, representatives from insurance carriers, law enforcement and transportation companies held a meeting in Orlando to discuss ongoing cargo theft initiatives and to solicit ideas and proposals with the goal of having a national impact on cargo theft. The overwhelming nationwide participation provided an opportunity to define and adopt a national commercial vehicle and cargo theft prevention strategy, which includes developing cargo theft task forces nationally, securing funding, producing threat assessments, intelligence databases and sharing information.
In addition to developing the national strategy, a national commercial vehicle and cargo theft prevention task force was formed, comprised of law enforcement, insurance carriers, and transportation companies from across the country. The task force is co-chaired by the NICB and the Marion County, Fla., sheriff's department.
Little noticed–except by the companies that insure their losses–are thefts of heavy equipment, primarily at construction sites. In 2009 there were 13,452 heavy equipment thefts logged into the National Crime Information Center–only 18 percent of those were recovered. That compares with the 57 percent recovery rate for other vehicles. Two-thirds of all heavy equipment thefts occur away from their owners' facilities, usually at a job site.
"Soft" fraud
Insurance fraud has been with us as long as insurance has been available. There always has been–and always will be–an element in society who acts entitled to something that is not his. That feeling is often magnified when the target of his greed is a corporate entity, a company that "owes" them for years of premium payments without ever experiencing a loss that justifies those payments.
As warped as that thinking is, it is nonetheless a large part of the motivation for what we know as claim padding, or "soft" fraud. Companies end up passing through much of the cost of soft fraud because it is difficult to identify and hard to prove. That helps explain how insurance fraud just within the property and casualty industry amounts to about $30 billion each year.
A good example is contractor scams. In the annual cycle of natural disasters and lesser events, many homeowners and business people sustain real damage that is covered by their insurance policies. We have seen a more aggressive response to these events on the part of contractors that descend upon an area in the wake of a hailstorm, fire, flood, or some other tragedy. Most of these contractors are legitimate, but many are not and their services are often fraudulent and unnecessary.
Of particular interest are roofing contractors that go door to door offering "free" roof inspections and, should they be necessary, repairs that will not cost the homeowner one cent. Some advertise that they will cover any insurance deductibles as part of their service.
Not surprisingly, NICB agents are finding cases in the nation's "storm belt," where these contractors have caused the roof damage themselves, and then submit their repair bills to insurance companies as legitimate storm-related repairs. Indeed, insurance fraud in its many forms is with us today as it has been since the beginning. Driven almost as much by individual greed as by organized groups, insurance crime is causing economic harm to the nation, the insurance industry and to individual consumers. The schemes have evolved and have become more complex, but there is one constant through the ages: someone is getting something to which they are not entitled and for which all of us must pay.
In 2012, the NICB celebrates 100 years of service. One philosophy is as central to our continued success as it has been since the beginning and that's the exchange of information. It is more important than ever that all of us responsible for fighting insurance fraud continue to communicate, cooperate, collaborate and coordinate.
Frank Scafidi joined NICB as public affairs director in August 2004, after 20 years in the FBI. He is responsible for NICB's day-to-day media relations and public awareness activities. He can be contacted at fscafidi@nicb.com. If you suspect insurance fraud, contact NICB at 800-83506422.
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