These statements make it clear that the carrier can deny claims once fraud has been discovered on a policy that has already been issued.

 

Statistics

 

However, this is just the beginning. A study conducted in 2014 by the Coalition Against Insurance Fraud states that 95 percent of carriers surveyed use anti-fraud technology, compared to 88 percent in 2012. Fifty-three percent of carriers stated that lack of IT resources was their biggest challenge in implementing anti-fraud technology; the benefits of such technology are more and better referrals, uncovering complex and organized fraud, and improving investigator efficiency. This highlights just how important IT technology is. The most commonly used technologies were automated red flags/business rules, link analysis; and anomaly detection; 85 percent of carriers expected funding for such technology to remain the same.

 

Fraud received little attention however until the 1980s; increasing costs of insurance and the growth of organized crime lead to stronger antifraud laws and carriers to develop special units to investigate fraud. One of the problems in fighting insurance fraud is the public's attitude towards it. The Insurance Research Council (IRC) in 2013 reported that 24 percent of Americans believe it is acceptable to increase an insurance claim by a small amount to make up for deductibles they are required to pay. While lower than the 33 percent found in 2002, it is still one quarter of the population. Additionally, 18 percent believe it is acceptable to increase a claim to make up for premiums paid in previous years when they had no claims. Not only that, but a bad experience with a company or its staff may make an insured more apt to pad a claim as revenge against the company. Many honest people deceive their insurers. They think the deception is just harmless fudging.

 

Younger respondents, especially young men, were much more likely to view claim padding as acceptable. For example, among males age 18-34, 23 percent agree it is all right to increase claim amounts to make up for premiums, compared with just 5 percent of their older male counterparts and just 8 percent of females aged 18-34.

 

The IRC study, “Insurance Fraud: A Public View, 2013 Edition,” also found that 86 percent of Americans agree with the statement “insurance fraud leads to higher rates for everyone,” while 10 percent agree that “insurance fraud doesn't hurt anyone.”

 

Industry Actions

 

In response to increasing fraud expenses, the industry responded in numerous ways. Many carriers developed Special Investigative Units (SIUs) with staff trained to investigate, gather data, and interview claimants to detect fraud. Carriers trained underwriters and claim staff on what red flags to look for that might indicate fraud so that the file could be referred to SIU. SIUs are staffed by very well trained adjusters, many with law enforcement backgrounds, to thoroughly investigate any suspicious claims. The SIU adjusters will take recorded statements, review proof of loss documents, receipts, verify information with vendors, talk to witnesses, neighbors, and friends to verify information, and even conduct surveillance on insureds to verify where the insured works and where the insured actually lives, depending on the nature of the fraud suspected.

 

States have developed legislation against fraud and require carriers to report instances of fraud. Some states have specific fraud divisions, some assess carriers to support the fraud division, some require carriers to use standard reporting forms, some states classify insurance fraud as a felony—there are a myriad of regulations against insurance fraud throughout the fifty states. States encourage the reporting of fraud or suspected fraud by both professionals and consumers, and most provide immunity to those reporting as long as the report is made in good faith.

 

Various organizations have been created to help fight fraud. The National Insurance Crime Bureau (NICB) is one of the oldest organizations with a 100-year history. In 1992 the National Automobile Theft Bureau and the Insurance Crime Prevention Institute combined to form the NICB. It has worked with carriers, law enforcement, state legislators, and the public to prevent and combat insurance fraud.

 

The National Society of Professional Insurance Investigators was formed in 1983 as a nonprofit organization focused on furthering investigative techniques and procedures. They sponsor annual seminars, publish a newsletter, and conduct regular meetings.

 

The Coalition Against Insurance Fraud was formed in 1993 with the goal of bringing consumers, insurance companies, legislators, regulators, and others together in order to fight fraud, develop best practices, and enact laws and regulations.

 

The Association of Certified Fraud Examiners was founded in 1988. The mission is to reduce the incidence of fraud, and the association has 75,000 members. It provides training on all types of fraud and maintains a certification.

 

These are just a few of the organizations whose creation stemmed from the growing issue of insurance fraud. Such organizations are dedicated to the improvement of investigative techniques and training and the reduction of insurance fraud as a whole.

 

Commission of Fraud

 

When people think of insurance fraud, claims fraud most often comes to mind. Fraud may be committed at all stages in the insurance transaction and not just at the time of a claim. From the application, to submission of a claim, to proof of loss reports, loss inventories, services offered to insureds, and repairs of property, fraud can be committed at any stage, by any party. Application fraud is becoming more prevalent due to online application processes. It is much easier for someone to lie online, and there is no guilt factor of looking an agent in the face. Fraud can be committed by many different parties, including the follow:

 

·applicants for insurance

·policyholders

·third-party claimants

·professionals who provide services to claimants

·organized criminals who steal large sums through fraudulent business activities

·insurance claim mills

·professionals and technicians who inflate the cost of services or charge for services not rendered

·people in need of cash who are recruited, for a fee, to be “victims” in an auto accident

·agents

 

 

Health care, workers compensation, and auto insurance are believed to be the sectors most affected by insurance fraud. However, insurance fraud comes in all shapes and sizes. They include the following:

 

·staged auto accidents

·arson-for-profit

·faked disability

·exaggeration of value of property lost or damaged

·claims for non-existent property

·health insurance fraud (corporate)

·health insurance fraud (individual)

·faked death

·insurer fraud

·faked thefts

·murder for life insurance proceeds

·workers compensation fraud

·ordinary people who want to cover their deductibles

·ordinary people who view filing a claim as an opportunity to make a little money

 

Some insurance professionals divide insurance fraud by the intent of the deceiver. They segregate insurance fraud into “hard” and “soft” fraud.

 

Hard Fraud

 

When someone deliberately fakes an accident, injury, theft, or intentionally commits arson or some other loss in order to collect money wrongly from insurance companies, it is considered a hard fraud. The person has deliberately fabricated a claim or faked an accident. “Hard fraud” is defined as a type of fraud committed by criminal organizations with the intention to defraud an organization. Hard fraud involves criminal activities such as staging a car accident, injury, arson, loss, break-in, or someone writing false bills to Medicare to illegally receive money from insurance companies.

 

For example, a chiropractor may make claims for treatments and procedures never committed. Hard fraud is intentional and premeditated. It may also be committed by criminal organizations with the intent to defraud the insurance company.

 

False Swearing

 

False swearing is when the insured lies under oath at any time during the policy, whether it is on the sworn proof of loss statement or at an examination under oath. Policies have provisions that allow them to void policies if this occurs. The difference between fraud and false swearing is that since false swearing involves a false statement made under oath, it is harder for the person to back off from the false statement when confronted.

 

False swearing (sometimes called “perjury”) is a crime in all states. An insured who is guilty of false swearing is subject to the possibility of criminal liability. The person swearing falsely also destroys the right to recover under a policy of insurance by its clear and unambiguous terms.

 

An insurer can assert false swearing as an affirmative defense to an action brought by an insured. To prove the defense, the insurer must prove that the false statement was made under oath with knowledge that it was false and the insured or witness intended that the person to whom the statement was made would rely on it. The insurer is not required to prove actual reliance—only the intent that the insurer rely on the statement. To establish a defense to a claim or a suit on a policy, the insurer must prove that the statement was false and material to the claim.

 

The false swearing defense requires less evidence than the fraud defense. It gives the fraud investigator a basis for denial that is easier for a jury—the trier of fact—to understand since almost every person has lied or been lied to in the course of their lives. If the adjuster or investigator cannot prove all of the elements of fraud but can prove that the insured lied under oath, the insurer can effectively deny the claim for breach of the contract term voiding coverage for false swearing.

 

In Parasco v. Pacific Indem. Co., 920 F. Supp. 647 (E.D. Pa. 1996), the insurer suspected arson and denied the claim. The insurer could not prove the insureds intentionally burned their property but proved they lied as part of the claim investigation. The court concluded:

 

With respect to the first contention, we conclude that the record establishes beyond reasonable dispute that Mr. Parasco made misrepresentations under oath regarding both the bank fraud he committed in connection with the loan applications and the attempts he made to sell the house prior to the fire. In reaching this conclusion, we are mindful that the summary judgment standard requires us to view the evidence in the light most favorable to the nonmoving party. We also note, however, that the party opposing the motion cannot “simply rest on mere denials,” but must instead point to specific facts showing that there is a genuine issue for trial.

 

The insurer's presentations of proof of misrepresentations made by the insured under oath were undisputed. The court found that during the course of Pacific's investigation of the loss, the Parascos' “misrepresentations concerning both the fraud they perpetrated on the banks during the loan application process” and efforts to sell the house prior to the fire “concerned issues material to the investigation. Thus, there can be no dispute that the Parascos breached the fraud and concealment clause of the insurance policy; and as a result, they cannot recover under the contract.”

 

Fraud and false swearing, while a question of fact for the jury, becomes a question of law when an insured's misrepresentations to the company cannot be seen as innocent in any way. In Lykos v. American Home Ins. Co., 609 F.2d 314 (7th Cir. 1979), the evidence presented at trial was overwhelming that the insured had committed arson and had sworn falsely in the presentation of the claim.

 

The U.S. Supreme Court has long held that false statements about the acquisition of insured property are material as a matter of law when the existence of an insurable interest or ownership is at issue. In Claflin v. Commonwealth Ins. Co., 110 U.S. 81 (1884), the Supreme Court affirmed the trial court's instruction to the jury that the insured's answer concerning the manner in which he paid for the insured goods was material as a matter of law.

 

The materiality of a misrepresentation or concealment of a material fact is usually a mixed question of law and fact that under most circumstances should be determined by the trier of fact. However, if reasonable minds could not differ on the question, then materiality can be decided as a matter of law.

 

A misrepresentation will usually be considered material if a reasonable insurance company, in determining its course of action, would attach importance to the fact misrepresented or concealed. Most courts have construed materiality broadly, emphasizing in their holdings that the subject of the misrepresentation need not ultimately prove to be significant to the final result of the claim. All that is needed is that it should be reasonably relevant to the insurer's investigation at the time.

 

For instance, in Fine v. Bellefonte Underwriters Ins. Co., 725 F.2d 179 (2d Cir. 1984), the court held that materiality should not be judged by what facts later turn out to be, but whether a false statement “concerns a subject relevant and germane to the insurer's investigation as it was then proceeding.” The court also held that a falsely sworn answer is material if it “may be said to have been calculated to discourage, mislead or deflect the company's investigation in any area that might seem to the company, at that time, a relevant or productive area to investigate.”

 

A slight misstatement of value normally will not be sufficient to allow an insurer to void an insurance policy for fraud unless the insured knew at the time the misstatement was made that the statement was false and the insurer can prove that the misstatement was made with the intent to deceive it. Misrepresentation, concealment, and fraud are not limited by the amount of the fraud but by the intent of the person making the claim. An insured who presents, with the intent to defraud, $1,000 in false invoices is as culpable as an insured who presents, with the intent to defraud, $1,000,000 in false claims. In both cases, if proved, the policy of insurance, by its terms and conditions, is void and the claim is forfeited.

 

If the differences in numbers between those presented by the insured and those presented by the insurer are honest differences of opinion or calculation errors a policy cannot, and should not, be declared void. The insured must intend to deceive, and the insurer must be in a position to prove that intent and that it was deceived before it can void the policy.

 

For example, if an insured values her computer at the price she paid for it, not knowing that a replacement could be bought for $2,000 less, there is probably no willful misstatement. However, if an insured claims his $50 Timex watch is a Rolex valued at $26,000, the misrepresentation is clearly material and willful.

 

Soft Fraud

 

A soft fraud is no less a crime than a hard fraud and is far more frequent, adding more to overall claims cost than hard fraud. The difference is premeditation. Soft fraud is considered an opportunistic fraud. Soft fraud occurs when a policyholder exaggerates an otherwise legitimate claim or when an individual applies for an insurance policy and lies about certain conditions or circumstances to lower the policy's premium. The padding of a legitimate claim with items that were not really damaged or claiming injuries that were not sustained are soft fraud. Businesses may list fewer employees or misrepresent the work they do in order to obtain lower premiums. For example, a legitimate loss occurs and an insured adds an extra television, an iPod, or a cellular phone to the loss to cover the deductible or claims that the standard kitchen was a custom kitchen with granite counters and custom cabinets. Both hard and soft fraud, if proved beyond a reasonable doubt, are crimes.

 

Padding

 

Padding is found when injuries or damages are exaggerated to increase a claim's value. It is what has been called “an insidious type of fraud difficult to detect and often considered harmless by insureds, claimants, police, and prosecutors.” Padding can come in a variety of forms. In first-party claims, an insured is generally considered to be in the best position to know the value of property for which he is making a claim. An insurer depends on the insured to provide an honest description and estimate of the value of the property, and most courts hold an insured to a high level of honesty when reporting a loss to an insurer.

 

Padding is found in property insurance when insureds inflate the number of items lost or destroyed or exaggerate the value of the items claimed damaged, destroyed, or stolen. This can be as simple as increasing the size of a stolen television from thirty-two inches to forty-two inches; from a cathode ray tube to flat screen; lost cash from $100 to $500; or from two pairs of jeans to five pairs.

 

On third-party claims the padding can be as simple as adding a week of lost earnings that, in fact, was not lost; allowing the doctor to bill for three visits not made; or going to a chiropractor who charges for x-rays not taken.

 

Standard fire insurance, all-risk property insurance, package first-party property policies, and most third-party liability policies state that the policy is void if the insured intentionally conceals or misrepresents any material fact or circumstance about the insurance or a claim, whether before or after the loss. When an insured submits fraudulent invoices to inflate a claim the insurer has the right, under the policy wording, to void the entire policy. Any argument from the insured that the nonpadded part of the claim should be paid is irrelevant; the insured committed fraud, therefore the policy is void and no part of the claim is paid.

 

An insurer that finds facts indicating fraud by exaggeration must prove the following to deny a claim:

 

·The insured intended to overestimate the value of the property.

·The overestimate is material.

·The insured intended to deceive the insurer.

·The insured actually deceived the insurer.

 

Some evidence is convincing on its face. An insured's willful overestimation of value in a proof of loss form is sufficient to prove intent to defraud, as is an overestimation made with reckless disregard for the truth. “Reckless disregard” can be defined as stating something as a fact that the insured has no reliable knowledge about. The insured may state the sofa was worth $8,000 without having knowledge of its true value but knowing that it is not worth $8,000. Reckless disregard ignores any potential consequences of stating a falsehood. If, on the other hand, the insured makes an innocent overestimate, the policy will not be void.

 

Summary

 

This is just an introduction to the basics of insurance fraud. There are many varieties of fraud, but the desired result is the same: the fraudster is after money he does not deserve. If prosecution of insurance fraud is to be successful it is necessary that insurers, prosecutors, and police agencies work together as a team dedicated to defeat the crime of insurance fraud. To do so the insurers must train their staff to recognize the elements of both the crime of insurance fraud and the elements of the civil tort of insurance fraud. If well-trained insurance personnel, while collecting information about a potential insurance fraud, know the type and quality of information that either a prosecutor or a civil defense lawyer need to prove fraud was attempted, then the case has a chance to be prosecuted.

 

Insurers are compelled by statute and regulation to maintain special fraud investigation units, publish and fulfill a detailed anti-fraud program, and train all of their anti-fraud personnel. Many states require insurers to report all suspected fraud activity to the state. Insurers can be audited to be sure that their people are trained to investigate and seek prosecution of the crime of insurance fraud.