MARINE INSURANCE SERVICES
PO BOX 224, MIDLAND, ONTARIO, L4R 4K8, (705) 526-9541, FAX (705) 526-1294

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The Effects of Fraud

Insurance is a Business: Insurers must deliver competitive rates and operate at a profit, give customers products they want, and have acceptable levels of service. Financial results can be seriously undermined by fraud.

Insurance Fraud is a ‘Hidden’ Crime: Few people talk about it & strongly disapprove of arson for profit and bogus claims. Less aggressive fraud--like inflating the claim--get mixed reactions. To qualify as a fraud, a claim usually must be grossly exaggerated. Use common sense in exploring any potential fraud. Approach a possible fraud cautiously as allegations of fraud carry serious implications. Any uncertainty and ambiguity must be clarified & resolved--in favor of the insured. Investigation methods must be periodically reexamined.

Extent of Fraud: 10-15% of insurance claims in Canada are fraudulent. Insurers pay more than $1B a year in fraudulent claims. 85% of consumers pay extra premiums to cover fraudulent claims. This does not include other possibly fraudulent transactions that cannot be quantified. E.g., cost of improper rating because underwriting information has been withheld. True costs can never be precisely determined. Insurance fraud has attracted professional criminals & opportunists and has brought high returns for limited risk.

Effects of Fraud: We have often heard that insurance fraud is acceptable because there are no victims. The "victimless" crime is an illusion. Fraud affects everyone, by:

• Economic loss through direct physical damage.
• Economic loss as fire departments, police and other public services are used.
• Indirect economic losses to enterprises because their clients have suffered damages.
• Death or physical injury to innocent victims, firefighters, police, etc.
• Indirect economic consequences from higher premiums.
• Emotional and psychological effects of fraud on victims.

• Divergent Attitudes: Campaigns waged to make consumers more aware of fraud must acknowledge the divergent attitudes that exist. Flexibility is required in order to communicate to each group effectively, and messages are delivered in different ways.
• Population Groups: Age, gender, and education affect how people perceive things. Cultural groups have collective biases. Culture influences attitudes, values, lifestyles, and opinions.
• Culture Trends: Media reports have shown a rising trend in North American culture--a loss of core values. North Americans, coined as the "me" generation, are preoccupied with materialism. They are likely to be involved in some sort of deceit or exaggeration. As insurance is based on trust and honesty, this trend affects the insurance industry.

Justification for Fraud: At least a third of insureds feel that if they do not file a claim during the life of their asset, their premium will be wasted. Some people think it is acceptable to increase the amount of a claim to make up for premiums paid. It is natural to want to maximize benefits. There is nothing wrong with this if policy conditions are respected and there is no fraud.

Premium Cost: The cost of fraud is passed on to all consumers as a component of premiums. Insurers and insureds are interested in seeing the lowest premium rate possible. Consumers have a right to expect insurers to minimize the payment of fraudulent claims. Insurers are motivated to minimize payments in order to maintain competitive premiums. Vigilance against fraud must be maintained. There will always be criminals seeking to defraud. Many otherwise honest claimants will be tempted to defraud when opportunities are too tempting to resist.

Building Knowledge about Fraud

Education: Education is key; one way to educate is to provide information. The insurance industry educates people about fraud. The challenge of reinforcing this message effectively has been taken up by the industry, certain public entities, and consumer groups. If consumers are told about insurance fraud they are more likely to take action against it.

Duties of Insurers: Insurers and others in the industry must conduct themselves responsibly and operate in the best interests of society. Condoning fraudulent activity is a form of encouraging it. Customers who understand the cost-controlling reasons for anti-fraud measures are likely to support insurers in their efforts. Setting up proper business practices can help to eliminate opportunities to commit fraud. When false claims are advanced they must be followed up. Typically, society deters crime by imposing penalties. Attempted fraud has not generally been "punished" in the past--though attitudes are changing.

Setting an Example: Communities become what we make of them. Insurance companies must not only maintain ethical standards but must practice what they preach. Insurers must adopt the code of conduct that they hope to see in consumers and employees.

Acknowledging Ambiguity: Handling claims involves a certain amount of ambiguity. Determining the amount of a claim is not an exact science. Some negotiation is often required. A reasonable variation in amounts is expected. The value depends on many factors, e.g. where an insured goes to price material, the level of expertise hired, or how much an insured will do personally. However, when claim amounts are above an acceptable range of values--a fraud is being perpetrated. 2 types of insurance fraud:

• Opportunistic Fraud: dishonesty on a claim that has legitimately occurred. Insureds or others take the opportunity to inflate the amount claimed or otherwise commit fraud. Claimants may exaggerate the amount or claim for things that do not exist. They may connive with contractors to get more repaired than was damaged. In an injury claim they may pass off an injury suffered before the accident as part of the claim.
• Planned Fraud: fabricating a claim to defraud an insurer. I.e., inventing a claim, committing arson, or staging an automobile accident. Insureds may purchase duplicate insurance for claiming twice for the same accident. False appraisals may be provided for non-existent property. Buildings may be burned to the ground to make up for business losses.

• third party claimants;
• insureds;
• agent or broker personnel;
• insurance company staff;
• any other professional;
• service suppliers;
• anyone else remotely involved in an insurance transaction, acting alone or in collusion.

Good faith refers to a state of mind--honest belief, absence of malice, and absence of design to defraud or to seek an unconscionable advantage. One should not use technicalities of law or lack of full information to take unfair advantage of another. The utmost good faith doctrine has shifted its focus from full disclosure of the risk to protecting an insured against unfair treatment.

Strategies to Restrict Fraud: The insurance industry develops strategies to reduce & control fraud—with co-ordinated efforts & shared resources. An anti-fraud protocol is necessary. The Canadian Coalition Against Insurance Fraud was formed. 2 techniques to control fraud--those that prevent losses and those that reduce losses. Some strategies do both. Prevention is the more desirable line of defense.

• Promoting fraud awareness informs consumers and others what fraud is and how it can be prevented. Education must be ongoing to reinforce the information. Fraud is hard to rationalize when inappropriate behaviour is clearly defined. Messages to consumers are transmitted in a way that is readily understood. All media can be used—including, newspapers, radio, television, videos, mail, and the internet. Many of the next generation of insurance consumers have watched a program called Scruples. It was designed to get Canadians thinking about the costs and consequences of personal ethical decisions, including insurance fraud. The package includes a video from the TV program, "Street Cents". Young people were presented with commonplace situations and asked what they would do.
• Teamwork is a key element in managing fraud. Many groups work together—including insurers, brokers, adjusters, experts, lawyers, police, fire authorities, the courts, the legislature, neighbourhood groups, educators and the general public.
• Communication skills are important for all insurance personnel. All people who work in insurance and deal with the public must communicate professionally--including being respectful and polite. Insureds may become frustrated if they perceive stalling techniques are used. There may be some delay in settling a claim; however insurers should not do so intentionally. Any delay, for some people, is justification to engage in a "revenge" type of activity against an insurer. Fraudsters often exert pressure on insurers to pay a claim quickly. Some claims take longer to investigate. Where fraud is suspected, claims should be supervised closely by senior staff. Strategies differ according to each case. Whatever course of action is adopted it is always important to treat claimants and insureds fairly.
• Consumer "hotlines" operated by organizations like Crime Stoppers, government, or insurers provide citizens with a means to report circumstances that they consider suspicious or fraudulent. Blowing the whistle on crime is a way people can help others.
• Detection strategies in claims and underwriting must be adopted. Adjusters must recognize and deal with fraudulent claims. Many checklists, called red flags, have been developed in identifying the factors that should alert to investigate further. Red flags are items known about fraudulent situations. They are signals. They are not proof a fraud has been committed but they should generate questions.
• Reward conscientious consumers when they produce a better environment for insurance to operate effectively. Some insurers reward claim-free policyholders by reducing insurance premiums. This is not to imply that people who submit claims are dishonest. It encourages consumers to reduce the possibility of having a claim.
• Train agents, brokers, customer service representatives, claims handlers, adjusters, and any other staff to effectively control the exposure to fraud. Training and education are key to professional conduct and optimum job performance. Fraudulent claims need to have specially trained claims handlers and investigators. The complex factors that govern the investigation of fraudulent claims require special knowledge.
• Verify information to ensure the correct facts about an insured or a claim are recorded. E.g., insurers can verify certain information with the Insurance Crime Prevention Bureau (ICPB).
• Data banks are created and shared to record useful information and track claims history. Appropriate persons must have access to the data banks. Such information is not to be treated lightly. One of the freedoms of our society is the right to privacy. It is essential to respect the right to privacy, dignity and autonomy of each individual. At no time should confidential information be divulged in an inappropriate or unlawful manner. The reputation of colleagues, employers, insureds and claimants must never be maliciously injured.
• Evaluate service providers and experts utilized for claim work. Building contractors, automobile repair shops, and medical services providers must be investigated to ensure that they are responsible & competent. Billing practices must also be evaluated.
• Analyze the scope and cost of repairs or treatments to ensure that only repairs or treatment relevant to the claim are paid. Accounts received should always be checked and billing practices should be reviewed to ensure that abuses do not occur.
• Security systems and practices that improve residential, commercial and automobile security systems help to prevent claims. Just encouraging consumers to think about protecting their property is likely to make them more careful.
• Penalties for fraud must be appropriate. Consumers must be made aware that there are unpleasant consequences for any attempt to defraud. Fraudsters will flock to areas where they are not challenged. Insurers also take civil action against those perpetrating fraud to recover their losses. Each case must be considered individually.

Defining Insurance Fraud: The Canadian Task Force on Insurance Fraud creates a unified action plan to deter & control fraud. It formed the Canadian Coalition Against Insurance Fraud.

Insurance fraud is any act or omission with a view to illegally obtaining an insurance benefit. Acts or omissions may be false or misleading statements, or suppression of the truth. The illegal benefit may be insurance protection, or payment of a claim--obtained by deception. There must be intent by the person committing the fraud. The mental intent required for the commission of a crime is called mens rea--guilty mind. This differentiates a mere mistake from intent to defraud.

Criminal Law: It is an offence to commit a fraud. The Criminal Code of Canada provides that:

Section 380 Everyone who, by deceit, falsehood or other fraudulent means...defrauds the public or any person...of property, money or valuable security...is guilty of an indictable offence.

The ordinary meaning of fraud should be used to interpret the Criminal Code. Fraud has been defined as the use of deceit, trickery, or breach of confidence to gain unfair or dishonest advantage. Case law is also a resource for interpreting the law. The key elements of fraud were identified as dishonesty and deprivation in R. v. Olan, Hudson and Hartnett:

• arson
• bribery;
• criminal breach of trust;
• fabricating evidence;
• forgery, or making a false document (includes computer records);
• fraudulent concealment;
• fraudulently destroying or falsifying documents of title;
• impersonation;
• making false statement by affidavit;
• misappropriating money.

1. Those developed by insurers that are an integral part of the policy wordings.
2. Legislated conditions that are: a) expressly designed for certain types of policies; b) generally applicable to policies other than those dealt with specifically.

Certain legislated conditions are mandatory for certain types of policies. E.g., property policies providing fire coverage are subject to fire statutory conditions outlined in Common Law. In Quebec they are ‘general conditions’. Fire Policy Conditions include:

• Misrepresentation
• Material change
• Termination
• Requirements after loss
• Fraud
• Entry, control, abandonment/salvage
• Notice to police
• Misrepresentation

2) Material Change: The insured must promptly report any material change in risk while the policy is in force. Just because the insured does not report a material change does not mean that a fraud has occurred. It is a serious breach that can void coverage. In Common Law the contract may be void as to the part of it affected by the change; in Quebec the entire policy may be void.

Morton v. Canadian Northern Shield Insurance Co.: fire destroyed a house. The insured had decided to demolish his rental property. Tenants vacated and the insured turned off utility services but did not notify the insurer. A few days later the home was destroyed by fire. The insurer argued that insurance did not cover because it was no longer a rental property. The home was unoccupied for less than 30 days; a material change had not yet occurred. There was insufficient evidence the insurer would have refused to insure or change coverage.

3) Termination: To effectively cancel a policy, the precise terms of cancellation must be applied. Faced with a fraudulent claim, the adjuster might have to take quick action to cancel or void the policy. Only part of the premium (pro rata) is returned when canceled. The entire premium is returned when the policy is voided ab initio (from the beginning). Even though a claim has already occurred, a property may become too risky to insure. E.g., if a house is only partially damaged in an arson fire, it remains a grave potential risk to the insurer.

4) Requirements After Loss: To properly document a claim the insured may be asked to provide, by statutory declaration:

• an inventory of property showing quantities, costs, ACV and particulars of amount claimed;
• how the loss occurred;
• that the loss did not occur through any willful act or connivance of the insured;
• details of other insurance on the property;
• the names of all who have an interest in the property and any charges against property;
• details of any changes in title, use, occupation, location, possession or exposures of property;
• the location of property at the time of the loss;
• detailed inventory of undamaged goods;
• documentation to show inventory or value of goods.

Any fraud or willfully false statement in a statutory declaration in relation to any of the above particulars, vitiates the claim of the person making the declaration.

Proof of loss forms carry a qualification that a loss did not occur through "any willful act or neglect or the procurement, means or connivance of the insured." An insurer can deny coverage if the insured deliberately makes a false statement in a proof of loss. Examples:

• The insured submits a proof of loss for property alleging he owns property that belongs to someone else. A deliberate false statement is made in order to defraud.
• The insured submits a proof of loss grossly exaggerating the value & quantity of property.

In Royal Insurance Co. of Canada v. Dimario, the insured claimed that he bought several items from a store--this was proven to be untrue. Evidence showed that the insured made willfully false material statements on the proof of loss. The claim was successfully denied.

In Quebec, a claim made for property affected by a false representation can be denied. Civil Code provides that coverage will only be affected for the particular type of claim in question. E.g., lying about property stolen in a burglary would not affect the insured’s coverage and right to indemnity for a fire loss caused by burglars on the same occasion.

6) Entry, Control, Abandonment/Salvage: The insurer has a right to enter damaged premises immediately after the loss to examine property. The insurer continues to have a right to enter to appraise the damages but does not have any right to control the property. Nor may an insured abandon property to the insurer unless the insurer sanctions it. The insured must take all reasonable steps to protect the property from further damage. In Quebec, similar conditions exist called Safeguarding and examination of property.

7) Notice to Police: In Quebec, the insured is required to promptly give notice to the police of any loss caused by a criminal act. Requiring insureds to report crimes may deter insurance crime.

Investigations and General Legal Concepts: How insurance people conduct themselves can seriously affect how conditions apply. Insurance professionals need to know the legal concepts:

• Waiver and Estoppel
• Duty of Care
• Bad Faith and Good Faith
• Rights of Individuals

Waiver is the voluntary or intentional relinquishment of a known right or conduct from which someone can infer that a right is relinquished. If an insurer knows facts that would bar recover under the policy, but acts as if it were in force, later these facts cannot be used to avoid liability.

Estoppel is a principle whereby an insurer is not permitted to renege on its position when an innocent party has relied on it. E.g., if an adjuster leads an insured to believe that a claim will be paid, the principle of estoppel prevents denial at a later date. When circumstances exist that may invalidate the claim, it must be made clear that policy conditions will not be waived.

2) Duty of Care: A standard of performance is expected from insurance professionals. Obligations are set out for agents and brokers in Common Law, Civil Code and Statute Law. Case law has been considering whether a fiduciary duty is owed to insureds by insurers, brokers, agents and even adjusters. Insurance may establish a fiduciary relationship between insurer and insured. Insurers hold premiums for their insureds. Insurers must manage these funds prudently to ensure that money is available for losses. The interests of the ‘owner’ of the funds must be respected before the interests of the trustee. Canadian courts have not generally accepted this argument. It is debatable whether the premium belongs to the insurer or whether the insurer is holding it ‘in trust’ until a claim occurs. Insurers should give at least as much consideration to the insured’s interests as to their own. Fiduciary duty: a position of special trust and confidence that one who holds funds or items of value for another occupies. A fiduciary duty implies a strong duty of responsibility on behalf of the holder of funds or property.

3) Bad Faith and Good Faith: Bad faith means an absence of good faith. It has been argued that adding ‘utmost’ does not change the meaning. Insurance fraud is based on dishonesty and deceit, and breaches good faith. Most allegations of bad faith are made against insurers. When one of the parties to an insurance contract does not act in good faith (or utmost good faith) then recourse is available through the actionable tort of bad faith. Mixed results in courts have created case law to follow. The principle provides a basis for maintaining a balance of power between contracting parties. How far the duty of utmost good faith extends is not clear. The duty of good faith arises in claims handling. An insurer who knowingly does not divulge a claims entitlement to an insured is not operating in good faith. Utmost good faith affects:

• disclosure by an insured when applying for insurance;
• handling of claims.

Yet another variable was added to the good faith issue with an independent adjuster and dual claimants--a husband and wife. Wigmore v. The Canadian Surety Company: adjusters must act in perfect good faith, promptly pointing out anything in the policy that interferes with the insured collecting a claim. The insurer denied liability because the husband falsified a claim for carpeting. The husband’s fraud did not vitiate his wife’s claim. The adjuster identified himself as an independent adjuster, communicating that he was trained and experienced in handling claims, and that the insureds could look to him for advice and assistance. When the adjuster became aware that the husband intended to defraud he should have severed his relationship with the wife. 3 elements to determine whether a fiduciary duty exists:

• The fiduciary has discretion and power.
• The fiduciary can affect the legal and practical interests of the beneficiary.
• The beneficiary is particularly vulnerable to the fiduciary’s power.

• fail to properly investigate;
• intentionally offer an amount substantially lower than reasonable;
• fail to settle in a reasonable time;
• unreasonably deny the claim;
• bring unfounded allegations against an insured in a self-interested and callous manner;
• ignore plaintiff’s evidence responding to issues in dispute.

In Labelle v. Guardian: Insured received $10,000 in punitive damages. Investigating a fire the adjuster acted unreasonably in breach of a duty to treat the insured fairly by unreasonably refusing to believe him. The adjuster deliberately tried to starve the plaintiff into submission.

Punitive or exemplary damages are meant to punish the defendant. Such damages are awarded when conduct has been deemed to be high-handed, oppressive, outrageous, wanton, or evil usually with some form of malice towards the plaintiff.

In Warrington v. Great West Life Assurance Company: the court of appeal upheld an award of $10,000 for aggravated damages in an action to reinstate disability benefits, but rejected punitive damages. Disability insurance is supposed to provide peace of mind and freedom from distress. The insurer refused the claim despite overwhelming contrary reports.

Aggravated damages aim to compensate but take full account of intangible injuries, such as distress, loss of dignity, and humiliation. They are not awarded in addition to general damages, but as part of the general damages. Punitive damages and aggravated damages differ in that aggravated damages compensate plaintiffs rather than punish defendants.

Bullock v. Trafalgar: $25,000 in aggravated damages was awarded in an action for the destruction of a 1986 Corvette by fire. The insurer alleged the insured had pierced a fuel line and then driven the car. The insured and his expert presented evidence to the insurer that damage to the engine was possibly caused by firefighters. The fire expert hired by the insurer reported that the case was arson. The insured hired his own expert who suggested the fire had been accidental. When the insurer was faced with contradictory expert evidence they should have settled the case and it was a breach of good faith to continue.

Whiten v. Pilot Insurance: Whitens sued for indemnity under a fire policy. The adjuster recommended the claim be paid. The insurer denied the claim relying on suspicious circumstances that were later clarified. The insurer pressed on with a defence alleging arson, which the jury rejected. Punitive damages were awarded based on an unreasonable denial.

Suchy v. Zurich Insurance Company: Insurer refused to pay a business interruption loss because the claim was inflated. The claimant finally agreed to settle for a lesser amount but the insurer did not respond. The claimant could not continue to operate the business because of the financial pressures. 11 months later the insurer offered to settle; the claim settled for about 50% of the original offer. The insurer felt it was not obliged to make any offers until the plaintiff submitted a proof of loss. The plaintiff launched a claim alleging bad faith. Although the insured did not submit a proof of loss form, the insurer was not permitted to use this as a defence.

Preventive strategies effective against charges of bad faith:

• Treat insureds fairly and with dignity.
• Conduct a thorough investigation before taking action.
• Consider any alternative measures to handle the claim.
• Investigate in a professional manner until the case closed.
• Reassess positions as new evidence becomes available.

Standard of Proof: Evidence heard should make it clear that the offence was committed by the accused. Assessments are made based on evidence raised and not on what is suspected. The court decides whether the proof meets the standard. The law has evolved a further standard --to cover evidence in a civil trial that relates to criminal fraud. Proof must be more persuasive when fraud has been alleged. The more serious the allegation the more stringent the standard of proof. The judicial system ensures that serious and potentially damaging allegations are not made lightly. The burden of proof is more than the standard balance of probabilities test--but it is less than beyond any reasonable doubt required in a criminal case. Standard of Proof:

• Civil matter: Balance of Probabilities.
• Criminal matter: Beyond a Reasonable Doubt.

Evidence is anything presented at trial which attempts to prove the case. There are strict rules to follow when gathering it during an investigation. There are two main categories of evidence:

1) Direct evidence proves the fact in issue without the need to infer or make presumptions. E.g., a witness saw an arsonist set fire to his equipment.
2) Circumstantial evidence: inferences from connected facts. E.g., the insured was in serious financial trouble and he stood to collect a large sum for heavily insured equipment. He had the only key to the torched building. There was little or no opportunity for anyone else to have started the fire. He had contradicted himself several times in statements made.

Complex rules govern whether evidence will be admissible. There are many types of evidence:

• Sworn statements from witnesses or the insured are the most common form of evidence. There are some instances when unsigned (unsworn) statements will be accepted by courts.
• Expert evidence given on scientific, technical or professional matters given by qualified persons who can speak authoritatively on a particular subject. Experts may also qualify to give opinion evidence based on the special knowledge or skill they possess.
• Testimony given under oath (viva voce) by witnesses at trial.
• Documents such as written contracts, deeds, share certificates, and other similar items.
• Experiments are sometimes conducted in court by experts. The judge decides whether or not to allow such an event in the courtroom.
• Real evidence: physical object brought before the court, including photographs, videotapes, audiotapes, or other. Electronic records have generally been accepted. To introduce electronic evidence, the integrity document must be shown. Record-keeping must be reliable.

• whether the party who did not have access to the evidence would be prejudiced by its loss;
• whether the evidence is relevant;
• whether it was destroyed intentionally to suppress the truth.

• Communication between solicitor and client is privileged whether action anticipated or not.
• Settlement negotiations are privileged. Often correspondence sent to claimant will be marked ‘without prejudice’. Courts use the dominant purpose test to determine if communication involved settlement negotiations.
• Evidence collected in anticipation of litigation is privileged.
• Reports produced by Insurance Crime Prevention Bureau (ICPB) have been consistently held to qualify as privileged. They must be produced for obtaining legal advice and for anticipated litigation. ICPB acts as an agent for the defending insurer.

Brokers and Agents: Agents act on behalf of the insurance company they work for or represent; while brokers represent several insurers. Both owe dual obligations--to insurers & insureds. Generally, brokers and agents:

• make inquiries into the nature of risks to be insured;
• communicate the information assembled to insurer;
• liaise between insurer and insured; respect terms of any contract made with insurer.

• lead to unacceptably high loss ratios;
• cause loss of premium income;
• tarnish the image and reputation of the producer.

shall discharge...duties to clients, members of public, fellow members and insurers with integrity.

The basic functions of selling insurance include:

• Get to know client.
• Determine insurance needs.
• Give advice on insurance protection.
• Obtain instructions from client.
• Provide quotes on policies to client.

• Negotiating coverage with insurers.
• Should a claim occur, facilitate the claim process as the situation demands.
• Choosing the right insurer to tailor price or coverage to a customer’s needs.

• Information provided by applicants must be accurate. The consequences of misstatement or concealment are serious--coverage may be forfeited--potential clients must understand this.
• When consumers buy insurance they must be made aware that an investigation will be carried out to check credit history, references, claims history, and prior carriers.

• pass the applicable examinations;
• be otherwise qualified under the Act;
• have received a certificate to this effect.

New Customers: represent growth and stability to businesses. They also represent the greatest degree of risk. Front-line insurance personnel can prevent and control insurance fraud. 3 general areas can be considered: business practices, professional standards and interpersonal skills, and being aware of how frauds occur. The following strategies can be applied:

• Adopt business practices to develop effective work processes and develop and maintain technical competencies. Underwrite insurance policies to discourage fraudulent activity.
• Develop and maintain professional standards of conduct. Improve interpersonal skills.
• Use red flags to identify questionable risks.

Background red flags

The applicant:

• has no prior carrier;
• is new to the broker;
• is new to the area;
• is "walk-in" business;
• is not known to anyone at the brokerage, agency or insurer;
• asks too many questions claims;
• is very knowledgeable about insurance terms or procedures.

The applicant:

• is never available to meet--only deals by phone;
• comes in at noon, end of day, or Friday when staff may be rushed;
• is in a hurry to complete the application and interview;
• has never been insured before.

• discuss an applicant’s requirements in detail;
• gain knowledge of the applicant’s background;
• explain why certain information is required;
• explain that misinformation or omission may jeopardize coverage;
• evaluate physical hazards;
• build rapport effectively.

• Quotes on new business.
• Expanding an insurance portfolio.
• Client referrals.

Application red flags

The applicant:

• does not live or work nearby;
• has an address not consistent with employment or income;
• records a post office box number as an address;
• lived at the stated address for less than six months;
• only has a cellular phone number;
• does not have a driver’s license or other identification;
• requires high limits of coverage not consistent with income or lifestyle.

• Where does the applicant live?
• Why does the applicant only have a post office box address?
• What is the applicant’s previous address?
• Have there been many address changes over the past few years? Why?
• Why does the applicant not have a phone?
• Is the applicant unable to get a telephone?
• Why is the applicant unable to produce a driver’s license?
• Who is the principal driver if car insurance is involved?
• Are underage drivers likely to be principal operators?

Occupation: If an applicant is unemployed or employed in seasonal or transient type of occupation, it is worthwhile to investigate more closely. Certain lines of insurance limit the types of questions that insurers can ask. In Ontario, the automobile application form no longer contains a question concerning occupation--companies are prohibited from asking. Insurers are entitled to know whether the vehicle is used for business.

Applications are important documents to be treated seriously and diligently. Applicants are required to read applications and sign them. They must be told that they are signing what they know to be true and what the effects will be if untruthful. An application not signed in full view should be scrutinized to ensure the signature is legitimate.

Placing the Risk: Having met with the applicant, determined the type and amount of insurance required, and obtained as much relevant information about the applicant and risk as possible, the risk must be placed with the appropriate insurer. An underwriter must be found who is willing to accept the risk at a rate the client will accept. This may entail approaching several insurers, obtaining competitive quotations, and for larger risks, arranging coverage with more than one insurer, based on proportional shares or primary and excess layers. This is not required for direct write--although in direct-writing operations underwriters do review the risk.

Choosing the right insurer is also a deterrent to fraud. Some markets are better suited than others to handle certain high risk customers. Well-defined specialty markets can effectively curb any potential fraud. Specialized niche market players:

• properly underwrite certain high risk insureds or insureds with special needs;
• make the best recommendations;
• impose the right conditions; provide the right type of policy contract.

...shall hold in strict confidence all information acquire--concerning the business and affairs of the member’s client, and the member shall not divulge any such information unless authorized by the client to do so, required by law to do so or required to do so in conducting negotiations with underwriters or insurers on behalf of the client.

Underwriters: confirm information provided is correct. A limited time is available to do this before the insurance policy must be in place. The pressure of time is an element that a fraudster uses. Threats to move coverage elsewhere should be viewed critically. Underwriters may need to ask questions beyond information supplied with the submission.

Moral Hazard: It is part of the underwriter’s job to evaluate whether a potential insured is likely to cause a loss intentionally or otherwise defraud. This is a test of whether a moral hazard exists. Information about the insured’s character, business, and financial condition should be reviewed.

Morale hazard: Careless attitudes towards security and loss prevention pose morale hazards. Insureds who demonstrate little motivation to prevent or minimize losses tend to be poor risks. E.g., insureds who don’t bother to lock the car or have many small accidents demonstrating a careless attitude. It can also encourage some insureds to commit fraud.

Each type of risk brings its own susceptibilities. E.g., large public companies are usually less of a risk for arson than the small business in which the owner is also the chief employee.

Loss history should be verified. Database files are available to check background history electronically. A phone call to a previous insurer can verify information. An applicant’s financial condition can be checked through an independent source, such as credit reporting company. Several commercial agencies sell financial and related information. Financial problems provide strong motives to commit fraud. A newly formed company without a loss record might look attractive until it is known that the operators have a problematic loss record. The identity and history of principals must be checked. The ICPB and IAO maintain databases to uncover claims history. Documents and information to review may include:

Business credit information

• financial statements
• payment records
• receiverships or fines
• public filings: law suits, liens, judgements, and similar events
• historical information: on owners, current management, and the company

• Applicant is deeply in debt.
• Trend of decreasing sales is significant.
• Trend of decreasing profits established.
• Prior bankruptcy.

Binders: Producers generally will not issue a binder with only a phone request from a new customer--especially on an urgent basis. Brokers may have authority to "bind" coverage for an insurer. Binding authority is subject to dollar and time limits. During the period coverage is bound, usually a month, the broker will arrange permanent coverage. This exposes an insurer to a potential claim from a risk which the insurer has not had the opportunity to examine closely, and it is important that brokers be diligent in assessing risks.

Property Inspections: Often producers are the first to inspect risks. Marketing or engineering department reps also do inspections. Inspectors document the condition and nature of a risk and recommend ways to improve it. Inspections are carried out selectively, and underwriters are dependent on information provided. Underwriting business in declining neighbourhoods is tough--areas may become unattractive to retailers. Inspections provide a method to verify the information in an application. This can prevent fraud both directly and indirectly:

• It proves that property exists and it will shed light on its value.
• Good security measures and fire suppression/detection equipment will deter insureds who are tempted to fabricate a claim. If a burglary will cast suspicion that insiders are responsible it will be less a attractive action. Extinguishing and detection devices reduce fire damage.

• housekeeping and cleanliness
• storage and disposal of waste
• storage of combustible material
• obstructions on staircases and corridors
• security systems
• business operating from a home

The area:

• newer & better retail space available;
• isolated;
• not located close to a fire station;
• served by volunteer or part-time fire dept.

The business:

• is less than fully active;
• has seasonal operations;
• has areas open to traffic but should be closed to public;
• has high rate of turnover in staff;
• is involved in employee disputes over working conditions.

Appraisals

Scheduling Property: When insurance is placed on a specific piece of property often an appraisal accompanies the request. Property that tends to be scheduled includes cameras, survey instruments, contractors’ equipment, fine art, jewellery, and other items that cannot be insured adequately under blanket coverage. Items are usually scheduled because they are:

• expensive to replace;
• subject to low limits of insurance on standard insurance forms;
• insured only for certain limited perils;
• completely excluded on standard property forms.

• The item exists.
• An accurate fair value has been established.
• The item belongs to the insured.

The insured buys an expensive diamond ring. She obtains an appraisal from a well-known reputable gemologist. The invoice and appraisal are presented when she applies for insurance. But, she is intent on committing fraud. She returns the jewellery and gets her money back. She now claims that she has lost her ring.

Example

Synthetically manufactured faux diamonds, such as cubic zirconia--are sometimes so realistic they even have minor blemishes in them to look authentic. The look fooled the insured. She thought she bought a diamond ring. The ring insured for $5,000 was only worth $250. If she claims $5,000 from her insurer for "losing" her ring--it’s fraud.

To select an appraisal facility consideration should be given to experience and trust earned over time. The appraiser’s professional standing and qualifications are important factors. If the appraiser physically examined the item then at least it establishes that the item exists.

Appraiser red flags

• Is the appraisal signed by the appraiser?
• Is the letterhead what you expected?
• Are the appraiser’s qualifications mentioned?
• Has the appraiser made a statement with respect to whether any conflict of interest exists?

• described in detail;
• described as to its general condition;
• identified with a photograph. (Not standard practice to include for moderately priced items.)

Appraisal report red flags

• Fee was calculated based on the valuation amount.
• Limiting conditions and basic assumptions are not stated.
• The appraiser did not physically view or inspect the piece.
• Valuation procedure is not described.
• Valuation method is not stated, i.e., replacement cost, actual cash value, or fair market value.
• An effective date is not stated.
• The purpose of the statement is not stated.

Diamonds: Discounting, especially for diamonds, is common; to pay full retail price is rare. For diamonds over .75 carats it is common to mention any inclusions or blemishes. Inclusions refer to imperfections on the interior and blemishes are exterior imperfections. Valuations of a particular stone can vary widely because there is subjectivity involved. Retail jewellers who have sold a diamond ring tend to maximize its value. An appraisal from a gemologist who has no retail activity is theoretically more credible. Diamonds should be described in detail including:

• type of cut;
• carat or weight;
• colour;
• clarity.

All of the information obtained about a risk influences the design of the policy and the premium charged. By incorporating exclusions or clauses limiting coverage, introducing limits of liability or special periods for terminating, the insurer attempts to control the moral hazards. Large deductibles encourage the insured to maintain care for the property. Tempting policyholders to commit fraud for large profits from inappropriately written policies must be removed.

Brokers are in a vulnerable state when it comes to selling the right coverage. Consumers may be unrealistic in their expectations of coverage. Insureds who believe they have not received adequate compensation on a claim often look to sue their broker.

Named Perils and All Risks: An insurer may only offer named perils against fire, lightning, explosion, etc., for high risks. Limiting coverage for high risks may discourage fraud.

Replacement Cost and Actual Cash Value: Technologically outdated, worn out, or no longer used equipment should not be insured for replacement cost. Although most personal lines policies include replacement cost usually any such equipment must be functional to qualify.

A building may be valued in different ways:

• The cost of replacement of a new building of like kind and quality;
• A building insured for actual cash value can be determined by giving consideration to

• replacement cost less depreciation;
• market value--current selling prices of comparable properties in the same area;
• income approach-income produced as a rental property.

Conditions of replacement cost coverage normally oblige an insured to rebuild on the same site, replacing the destroyed building with a similar structure, to be occupied for the same purposes. Otherwise a claim will be assessed based on depreciated value to reflect the loss.

If the property to be insured includes manufacturing equipment, contractors’ equipment, computers or computerized equipment, such equipment not only wears out—it is also subject to a rapid rate of obsolescence.

Underwriters may decline to offer Replacement Cost coverage. When coverage is limited to Actual Cash Value, an insured can expect to be put back in the same cash position. This removes the temptation to profit from a claim by receiving "new for old".

Wreckage Value: Buildings that have very little monetary value may still be commercially viable. An endorsement can be issued to cover the cost of repairs or replacement as long as the work is completed within 12 months on same or adjacent site with materials of like kind and quality for same occupancy. If repairs are not carried out, the claim is limited to market value.

Valued Basis and Floater Policies: Underwriters may on occasion cover jewellery on a valued basis; the sum insured is paid in event of loss. Special attention to the quality of appraisal, and character of insured. is essential.

Floater policies entitle the insurer to replace articles, or settle for the amount it would take to replace. This provision may be unpopular with many insureds, especially if the item is replaced far below appraised value. This practice ensures that insureds are returned to the same position as before the loss. There is no point in over-insuring. There is a motive for fraud if the insured can "make" money by over-insuring.

Automobile Insurance: In large urban centres the largest exposures for insurers are private passenger vehicles. Insurance providers tend not to know their auto clients well. Fraudulent claims can flourish more readily where anonymity prevails. Often people just cannot remember the date of claim, accident or vehicular conviction. It is important to verify information.

Automobile red flags

• Applicant’s income is not compatible with value of vehicle.
• Applicant has not owned a vehicle for any significant period of time.
• Age of applicant suggests prior ownership of vehicle or property.
• No previous insurance carrier or proof of prior coverage.
• Full coverage is requested for an older vehicle.
• No lien on an expensive vehicle.
• An older vehicle is reported to have no existing damage.

• phantom vehicles; Phantom vehicles are ones that do not exist or are already wrecked.
• non-existent equipment and accessories;
• preexisting damage;
• salvage schemes; import-export frauds.

• vehicle description;
• unrepaired damage;
• V.I.N. verification;
• special equipment;
• photographs.

• Cash payment made for insurance but only for minimum amount required.
• Applicant wants to buy insurance and cost is not important.
• Premium payment is late.

Reviewing Accounts: A renewal policy is a new contract, presenting a good time to reassess a risk. An underwriter may offer modified terms, adjust premium, or decline the risk. At renewal, consider whether accounts are susceptible to fraud. Several areas may be analyzed, including:

1) Economy
2) Environment
3) Communication
4) Personal
5) Financial
6) Changes and New Exposures
7) Claims
8) Coverage Requirements

Timing for the renewal process is significant. It should not be done too early because events important to the review may not have occurred. It should not be started too late, as enough time should be available to conduct a review to uncover any potential fraud. Usually 2-3 months before renewal is opportune. Clients have sued producers because a claim was not covered. The stress of an event may make people imagine they asked for the coverage in the first place. To protect the producer or insurer--document all conversations, especially requests for coverage deletions & additions. Whether a telephone call or visit, take proper notes to show the parties involved, date, time, reason for the call, and how it was resolved. When losses are not covered, lack of documentation is used against a broker or insurer—and a loss not covered may have to be paid. Documentation can save a broker from an errors and omissions suit.

Example
An egg farmer bought coverage for consequential losses from power outages. Relevant policy exclusions (e.g., losses caused by fuses blowing) were discussed. The broker made detailed notes of the conversations. Later a power interruption caused a fuse to blow and the farm operation was shut down. The farmer lost income. The farmer sued the broker for not advising of the exclusion. Based on the broker’s testimony, supported with documentation, the judge believed that the farmer’s memory was not accurate. The farmer may have forgotten that he had been informed. Fraud was not committed, but if the client had consciously lied, it would be fraud.

Automated renewal notices sent to a client may negate the voiding of a policy. The insurer may have rescinded or voided a policy. Beware of automatic processes that might counteract action taken on a policy. Even a cancellation notice assumes that the policy existed in the first place.

1) Economy: When policyholders are thriving economically the risk of fraud is low. Overall economic conditions are significant and should be considered. When an economic downturn occurs it takes some time before increases in fraud are reported but there is a correlation between the two. Even when conditions begin to improve the threat of fraudulent activity is still high. Changes in local economic conditions, like a particular neighbourhood or area, must also be assessed. The insured’s specific industry might be undergoing upheaval. The business may need updated equipment and require a source of ready capital.
2) Environment: The regulatory and market environments in which insurance operates changes at times. Each province has unique legislation. Some of it affects the ability to collect and disseminate information. Other conditions limit the nature of questions to prospective clients. There is an onus on producers to acquaint insureds with appropriate options for coverage. Producers are expected to advise on coverages available, and meet certain standards. Producers have a delicate balance to maintain. A very competitive environment may adversely affect writing insurance. It may encourage greater emphasis on writing business rather than assessing insurability. When generous coverage benefits are sold, this may become a target for fraud. The physical environment also affects how susceptible clients are to fraud. Newer businesses and construction in the area may have a positive or negative impact on a client.
3) Communication: Many brokers and insurers send out newsletters to inform policyholders about important insurance issues. Clients can be reminded about (1) the connection of fraud and increased rates, (2) the principle of indemnity, (3) typical policy exclusions, (4) additional coverages to counteract the exclusions. Stories can be shared about how claims handling. Sponsorship of community events may help to raise awareness about issues that help to control fraud. The nature of your involvement at the community level can positively demonstrate your position. Let your policyholders know about what you have done during the year.
4) Personal: Brokers and agents must prepare clients for changes to insurance portfolios when a marital breakdown (or some other personal event) occurs. Such a time is also a susceptible time for insurance fraud. Moral hazards may materialize because of changed circumstances.
5) Financial: Some people experience financial difficulties their entire lives. This does not mean that they will commit fraud. Changes in the finances of a policyholder must be reviewed. The attitude of the policyholder may indicate whether the risk is still tolerable. Even those with a high standard of living are not immune. A wealthy, high-profile person is just as much at risk of committing fraud. Both commercial and personal insurance portfolios must be assessed together.

Example
Your client owns a manufacturing company and also many other ventures. Two of the ventures cause a serious drain on the company’s cash resources. To add to the distress, the manufacturing company experiences labour problems, employees at two plants go on strike, and one of the product lines loses a significant share of the market. In desperation, the client looks for a quick fix through insurance. Some jewellery pieces are insured against mysterious disappearance for $1M. Your client hides the jewellery but reports the pieces have mysteriously disappeared.

6) Changes and New Exposures: New exposures must be made known to insurers. Changes might affect how the insurer views the risk or affect the premium. When a client deliberately withholds important information it may be fraud. Most policies have conditions dealing with change--that the insured must report anything material. Know whether something insured is used for business or pleasure; in automobile insurance, the actual principal driver should be listed.

Example
A couple spends January, February, and March in Mexico. When they left, they did not arrange for a competent person to enter their house daily and ensure that heat was maintained. Nor did they shut off the water and drain the pipes. A major cold spell descended in January—causing pipes to freeze. As the temperature warmed up, water flooded the house. This couple is now vulnerable to commit fraud. They have experienced a severe financial loss but their insurance coverage will not respond. It is not always possible to maintain contact with policyholders throughout the year; for most producers it is not realistic. Renewal time is one opportunity to review changes and new exposures so they can be dealt with appropriately.

7) Claims: A policyholder with a legitimate claim one year may run into financial difficulty the next year and submit a bogus claim. All claims made should go through some review process. All policies for a client should be reviewed together. Some criminals earn a living through fraudulent claims. When the claims rate on a policy is higher than average, or when a pattern of claiming on multiple policies exists, it should be closely reviewed.
8) Coverage Requirements: Maintaining coverage is the responsibility of the policyholder, but brokers and underwriters may suggest increases in coverage when warranted. When an insured requests large increases in coverage, it must be fully explained. Increases in insurance are cause for concern unless the amounts requested reflect a proper value. When coverages are added or deductibles lowered, care should be taken. When an insured requests increases in amounts without any apparent reason, it needs to be questioned. A loss may already have occurred or being planned. A failing business, three or more mortgages on a home, and the persistent submission of claims are reasons to give greater attention to a renewal.

Example
The client was insured with ABC Insurance Company. Four claims were made in a three-year period on a Homeowner’s policy. The policy had been canceled twice for non-payment of premium. New replacement policies were written. There were three mortgages on the property for at least 110% of the value of the home. One day the client called the agent in order to increase building and contents coverage. The client explained that a major renovation to the property was being planned. Architectural plans were presented. The amount of insurance was increased even before work began. A serious and suspicious fire occurred destroying the house.

Indicators on Renewal

• Economic downturn in the neighbourhood or the insured’s class of business.
• Major personal changes such as a divorce or job loss.
• Policy has been canceled several times for non-payment of premium.
• Number of claims on the account is higher than average.
• An increase in insurance limits is requested.
• Insurance is taken out on items that, in the past, did not warrant insurance.

Functions of Adjuster: investigate, determine policy coverage, negotiate, adjust, and settle claims. The investigation process determines facts and establishes coverage and liability. The investigation is key to developing evidence of fraud. Evidence must be pursued and preserved.

Definition of Adjuster: Provincial Insurance Acts define adjuster as

a person who, 1) on behalf of an insurer or an insured, for compensation, directly or indirectly solicits the right to negotiate the settlement of or investigate a loss or claim under a contract or a fidelity surety or guaranty bond issued by an insurer; or investigates, adjusts or settles any such loss or claim...

Independent adjusters must be licensed. A probationary license is issued after completing a number of IIC courses; a full license is issued after other courses and an oral exam are completed. Other criteria may be used to qualify. Staff adjusters are not required to be licensed or certified. Whether licensed or not, adjusters need ongoing education and professional development. Improving personal skills and keeping current on the changing business environment are important and so is awareness about fraud.

Reporting of Claims: Claims are usually reported to a producer or insurer directly. Coverage and claim details will be confirmed. Questionable claims are immediately referred to the most appropriate person. The insurer’s representative decides whether a claim requires an independent adjuster, investigative or other expertise, and which individuals are best suited. This decision may be influenced by internal guidelines or consultation, but it is the product of experience and awareness. Assessing a claim from the initial telephone contact may be crucial to the outcome of the claim. Special Investigation Units handle or consult on questionable claims.

Red Flags Common to All Types of Claims: Questionable claims must be identified at the outset, so that they can be more thoroughly investigated. The ICPB and other organizations have developed a list of red flag indicators to warn that further investigation is warranted. Those who accept new claim reports should be sensitized to red flags. The insured or claimant:

• presses too strongly for a quick settlement;
• seems too familiar with insurance terminology and the claims process;
• is experiencing financial problems in business or personally;
• is willing to accept a low settlement figure to avoid providing full documentation;
• called the broker just before the loss to confirm coverage;
• was separated or divorced shortly before the loss;
• submits a claim for very expensive items that do not correspond to the
• insured’s lifestyle or cash flow.

• just after policy inception;
• after an increase in coverage;
• just before the policy expires.

Locale: Established adjusters, especially in small communities, are well known to professionals locally and this improves their chances of obtaining information and documentation. In a professional capacity, they interact with authorities, service providers, and medical professionals.

Attitude: An important element to consider when choosing an adjuster. Adjusters must be objective. There are many different types of individuals. Some are better suited to deal with certain types of claimants. For a questionable claim adjusters must proceed cautiously. The claim must be investigated to establish the facts and amount of loss. The investigation must be conducted in good faith. The insurer may imply that a loss is covered, and waive its right to reverse its position later. The Insurance Acts protect the insurer by permitting an investigation without prejudice to its rights. When the possibility of a policy violation or exclusion arises, a non-waiver agreement permits the adjuster to maintain contact with the insured throughout the investigation without fear of creating estoppel. The insured is required to sign the agreement. Non-waiver agreement, identifies the parties, date of loss, location, and type of claim, and states:

It is understood and agreed that ...(the insurer) may

• investigate the circumstances surrounding the said claim,
• carry on negotiations,
• make a settlement or settlements
• defend any action or actions which might be brought against either or both parties to this agreement, without prejudice to the rights of any of the parties under a policy of... insurance issued by... (the insurer), and the parties agree, for themselves, their heirs, executors, administrators, successors and assigns, that they or each of them will not plead or contend that...(the insurer),
• by conducting the said investigations or defences or
• by making the said settlement or settlements or
• by payment of the said judgment or judgments, created any estoppel or waived any of its legal rights to refuse payment or indemnity under the said policy of insurance or any of its legal rights to recover the settlements made or judgments paid.

A blank proof of loss form must be provided. Providing a proof of loss is not an admission that a policy is in force. Nor does it acknowledge that the loss falls within the coverage. Delivery of the proof of loss by the insured does not extend the prescription date.

The insurer may need financial information, employment records or medical records and need the insured’s permission to authorize their release. All permission documents should be signed as soon as possible. The laws related to privacy issues must be strictly obeyed.

Photographs: Adjusters may photograph accident sites or damages. Sometimes, an adjuster may consider hiring a professional photographer. Photographs or videotapes may remind people of what the area looked like and tend to add weight to physical evidence. Photographs can provide a record that no physical damage existed. They also demonstrate the general type and quality of contents. Photographs provide an inexpensive way to combat fraud. It is difficult for an insured to claim the loss of expensive items unlike the caliber of goods that remain. The insured may offer photographs to validate the existence of property stolen or destroyed--adjusters should review photographs carefully. Photographs, as evidence, may be used against an insurer.

Example
The insured claimed that an expensive piece of boat equipment had been stolen. A picture of the boat showed the installed equipment. The adjuster, wary of the claim because of the number of red flags, carefully analyzed the picture. It became apparent that the insured had cut out some advertising material and pasted it on the boat. The insured was convicted of fraud.

Interviewing Techniques: Interviews may be conducted in person or by telephone. They may be formal or informal. Some information will qualify as evidence. Any information could be useful. Information could be used to effect a settlement or deny a claim. The "in person" interview is usually most effective. Adjusters conduct investigative interviews--they do not interrogate. An interrogation is where known facts are matched to a suspect to obtain a confession. Interrogations are the mandate of other agencies. Most claims result from traumatic events for insureds or claimants. Adjusters sometimes revive those memories to get at the facts. Every claimant has different motivations and reactions. Time must be spent to assess personality traits. What works for one person may not work for another. Everyone must be treated fairly, whether suspected of fraud or not. In most instances it is not wise to make a public allegation of fraud. Identify the specific behaviour that is suspect. Interview steps:

• Plan. Prepare for any interview. Learn as much as possible before meeting. Examine all the documents you have. Prepare a checklist to cover all areas to cover.
• Listen. Learn about what happened from the person being interviewed, even if the person goes off topic or rambles. A lull in the interview is not something that needs to be "fixed". Do not jump in when the person stops talking. Allow the person to answer. Allow the person to vent, if necessary. Do not interrupt--listening is a skill. It is often the latter part of an interview that holds the most information, as the person develops a comfort level.
• Do not use threatening language or gestures.
• Maintain composure. It is almost never appropriate to get upset--even if the person is lying. Sometimes a lie can be more useful than the truth when credibility is brought into question.
• Ask one question at a time. Always wait until the question is answered. If it was worth asking, it’s worth getting an answer.
• Evaluate body language. A person in distress shows it. The person may be uncomfortable in the surroundings or there may be another reason for the discomfort.
• Ask for an explanation if the answer is not clear. Do not be concerned with looking foolish.
• Make notes, even if the interview is being taped. Show the person your notes after the interview. Permit the person to make changes as long as they are initialed. This will make it difficult for them to change the story later.

Example
A passerby was injured at a railway crossing. The guard assigned to the crossing was asked: Were you on duty on the night in question? Were you there when the accident occurred? Did you have your lantern? Did you wave your lantern as a warning that a train was approaching? The guard answered affirmatively to all of these questions in a formal interview. It appeared that adequate warning of the danger was given. Later the guard shared a concern with a fellow employee, "I was terrified they were going to ask whether the lantern was lit."

Statements: Most claims of any consequence require a formal statement in writing from the insured. Statements can provide a map to direct an investigation. They are a valuable and permanent record of an individual’s recollection when the incident is still fresh in their mind. The longer the statement is delayed, the more likely the recollection will fade or be revised. It may be necessary to take more than one statement. An "alibi" statement may confirm exactly what an insured was doing at a certain time. Sometimes a second interview is required to clarify inconsistencies. Statements are used as reference to refresh the memory of the statement-giver later, or other persons interviewed. Statements can be used to damage the credibility of the statement-giver should inconsistencies arise in testimony.

At the scene of a suspected arson, it may be impracticable or inconvenient to take a statement from an insured. A statement can be drafted later, based on detailed discussions that take place. It can later be sent to the individual for review, corrections, expansion, and signature.

A person may refuse to sign a statement. If not signed, it will still be useful and credible. Allow the statement-giver to read the statement and record any objections. There are policy conditions that oblige an insured to co-operate and provide relevant information. Although an insured may refuse to sign a statement, facts about the incident and documentation must be provided.

Even when a statement is negative it may be a useful tool in investigation of fraud when taken by a trained investigator. A negative statement is one that denies knowledge about the accident. There is concern that an interviewer may "contaminate" the statement, by doing something that influences the person giving the statement. The interviewer should not seek to control, but should only collect information. The interviewer is expected to ensure all aspects are covered, but take care not to distort the account. Statements can be recorded through a court reporter, who uses shorthand or transcribing machine to record the adjuster’s and claimant’s answers. The transcript is the most accurate statement. A written statement taken by the adjuster is generally tailored to include only points the adjuster perceives as important. If a claim is fraudulent, a statement might reveal the motive or policy violations. Statements should be analyzed carefully. If the insured makes a false statement, this could lead to denial.

Examination under oath: Many policies provide insurers with the right to conduct an examination of the insured under oath. Usually this is recorded by a court reporter. A sworn statement is used to emphasize the gravity of the occasion and also creates documentation. Once the claim is denied, it is too late to invoke this right.

Polygraph Testing: Polygraph testing is controversial, not widely used and its acceptance is limited. Courts have not accepted results as evidence. In Quebec, there have been instances where polygraph testing has been admitted. The truth is elusive when one considers the complex issues about memory. Some psychologists maintain there is no specific "lie response". There is no agreement in scientific or legal circles as to the reliability of the polygraph. Even researchers who believe the polygraph can reveal deception agree there can be a "false positive" finding. Some claimants may insist on taking a polygraph test. Submitting to a polygraph is entirely voluntary. In a polygraph test an instrument collects physiological data from the subject. There are several stages:

• pre-test interview
• collection of data
• analysis of the data

Experts: Using experts on questionable claims may improve fraud detection. It also develops evidence. It is usually the insurer’s claims person who retains managing the file. When an independent adjuster is hired, usually the insurer’s examiner will control the file. Take care to choose:

• properly qualified persons;
• reputable firms or individuals;
• stable operations/individuals;
• those who conduct operations to avoid liability or criticism brought upon the insurer;
• firms who value training & development in their field.

• origin and cause specialists
• appraisers
• electrical, mechanical, or chemical engineers
• accident reconstruction specialists
• investigative specialists
• surveillance specialists
• photographers
• doctors
• accountants
• lawyer

• Was proper testing carried out?
• How soon after the loss was the scene inspected? Was continuous custody maintained?
• What effort was made to determine whether there were any changes since the loss?
• Was evidence properly handled?

Restitution: If a claim is paid and later discovered fraudulent, insurers can apply to have claimants reimburse money paid. If fraud was perpetrated by service providers, such as garage shops, action would be taken against them. Restitution can be awarded--the insurer must make a formal request. Such orders are uncommon for insurance fraud. Civil actions can be instituted --for repayment of funds, cost of investigations, general and punitive damages.

Example
Two men were ordered to pay $275,000 for conspiring to commit fraud by staging two vehicle accidents. The two individuals were not even in the automobile at the time of the collision.

Court Testimony: Not many cases make it to trial but adjusters must be prepared to give evidence. Testifying is an important event. Appearances influence judges & juries. Conservative and dignified dress is appropriate. The adjuster testifying should consider:

• Detailed notes make a well-prepared witness. Notes can jog memories--and are not necessarily read into court. Review notes with others who investigated.
• Spend time looking through your notes and preparing them for easy reference.
• Focus on the points you want to make.
• Before entering the witness box take a number of deep breaths.
• Make a conscious effort to speak slower than normal. You are likely to be nervous. An increased rate of speech makes it difficult for anyone to follow you.
• Listen carefully to each question. Resist any urge to ‘jump in’ and answer the question quickly. Take time and formulate a response.
• If you are unsure of what is asked, then say so; do not use this to slow things down.
• Answer the question. Be concise. Keep answers short. Do not volunteer extra information.

While any claim may be fraudulent, fraudulent property claims are usually fire or theft losses. Theft claims may be fabricated or exaggerated; fires may be set by or for an insured. Company guidelines, and the experience of assigned adjusters and examiners, direct claims handling. The first step is to recognize signs of potential fraud. When such items are identified, they should be explained. Indicators are not necessarily evidence of fraud, but may lead to a finding of fraud.

Fire Scene Investigation: Before approaching a fire scene adjusters should know the coverage in force, underwriting history (recent increases in coverage or additions), and background information about the insured and business as possible.

Insurance Coverage-Related Indicators

• Coverage was arranged shortly before the loss (e.g., one or two months).
• Coverage was increased or added shortly before the loss.
• Property is heavily over-insured.
• The loss occurred shortly before expiry or cancellation.
• Property owned for longtime before coverage arranged, and soon after a loss occurred.
• Many documents and records destroyed in fire but insurance policy was left intact.
• Duplicate or multiple policies were arranged through different agents or brokers.
• Facts were misrepresented in the application.
• Information provided to underwriters was misleading.
• The insured has an extensive claims record.
• The insured called the broker, shortly before the loss, to check coverage.

• Insured was recently separated or divorced and disputes have arisen over property.
• Insured has onerous alimony or child support obligations.
• Insured has recently encountered an employment problem: strike, layoff, or business closing.
• Insured has a gambling problem.
• Bank has threatened to foreclose on the property.
• Insured has an oppressive debt load.
• Clues to suggest the insured is involved in some other criminal activities, e.g., extortion or drugs. Connection established between insured and criminal activity may foreshadow fraud.

In Regina v. Ouida (1996) it was decided that the fire marshal needed a search warrant to enter the scene because it was believed that the owner was engaged in arson. A search warrant was not obtained; certain incriminating items discovered in the debris were not admitted into evidence. The law is evolving concerning the need for search warrants during an arson investigation.

Although cooperation among crime fighting agencies and other support groups is considered to be key to fighting fraud, care is taken to gather and exchange information legally. Budget cuts have affected government services. This has affected how arson is investigated. Insurers have been encouraged to contribute financially to permit sifting through debris at fires where arson suspected. Courts have questioned this method of financing a public function. Insurers want a quick but thorough investigation designed to eliminate or confirm the insured’s involvement.

Arson Indicators: Fires need time to burn. Delaying discovery of the fire permits it to burn longer, providing more complete destruction of property.

Timing

Fire occurs:

• late at night;
• in early morning hours (at commercial premises);
• when business is closed;
• weekends or holidays;
• when insured is out of town or inexplicably miles away;
• shortly after insured has left the premises.
• special articles or pets removed just before fire. When the only property not damaged either has sentimental value, is irreplaceable, or involves the life of a pet, it is cause for concern.

Premises are

• vacant or unoccupied;
• under renovation;
• in a deteriorating neighbourhood;
• in an improving neighbourhood;
• in need of expensive repairs;
• in need of sizable maintenance & new equipment;
• listed for sale without activity for long period.

• Reports and witness accounts are inconsistent.
• Insured has a carefully-planned alibi.
• Values claimed are inconsistent with the insured’s reported income.
• Insured’s lifestyle does not correspond to the types of items claimed.
• Insured carries multiple mortgages on the property.
• Insured discovers the fire and also notifies the authorities.
• Insured hires a public adjuster.

At the scene, a walk through the grounds and the surrounding area may reveal evidence of accelerants--e.g., an empty gasoline container. The point of origin, likely to be the most heavily damaged area, is identified. If the point of origin is in a closet, or if more than one point of origin exists, suspicion of arson is justified.

A burn pattern (the shape of the charred areas) forming an inverted vee on a wall next to the point of origin may suggest that chemicals were used to accelerate or propagate the fire. Ordinary burn patterns take the shape of an upright vee.

Vee burn pattern usually indicates a normal burn without accelerants.
Inverted vee pattern suggests that chemicals were used to accelerate or propagate fire.

Irregular burn patterns suggest that chemical accelerants were used. A flammable liquid splashed over an uneven surface causes mottled or spotted effects. Accelerants cause fire to get hotter faster, not hotter overall. Chipping, splintering, or splitting of concrete or brickwork (spalling) occurs when cold water comes into contact with a very hot surface. Whether a condition was caused by arson should be decided by accredited professionals in the field of arson investigation.

When arson is suspected by the fire department, the Fire Marshal’s Office (FMO) will investigate. Many people may be involved in the investigation: the FMO, the police, the ICPB, the SIU, engineer, adjuster, examiner, and lawyer. Each has a specific role, but also it is important that they work as a team, partly to share information, partly to ensure that all avenues of inquiry are covered, and partly to expose discrepancies in evidence or conclusions reached.

Fire Scene Indicators

• Multiple points of origin exist.
• Some evidence of flammable liquids is present (e.g., odour in debris, empty fuel containers).
• Trailers suggest the presence of flammable liquids. (A trailer is a visible pattern caused by gasoline or other similar accelerant).
• An explosion or series of explosions occurred.
• Timing devices were connected to electrical appliances near the point of origin.
• Contents were removed from the building before the fire occurred.
• Contents are of uncharacteristically inferior quality.
• Signs of tampering with gas, electricity or sprinkler systems exist.
• Artificial draft conditions exist: open windows, holes in walls, or other combustion boosters.
• The fire spread was unusually rapid.
• Flames of an unusual colour were observed.
• No obvious potential source of ignition exists in area of fire (e.g., fire starts in a closet).
• Things are out of place--E.g., a propane tank is in the kitchen.

Arson and the Criminal Code: Arson is a crime against society. Criminal Code:

Arson--disregard for human life: Section 433
Every person who intentionally or recklessly causes damage by fire or explosion to property whether or not that person owns the property, is guilty of an indictable offence and liable to imprisonment for life where
a) the person knows that or is reckless with respect to whether the property is inhabited or occupied; or
b) the fire or explosion causes bodily harm.

Arson--damage to property: Section 434
Every person who intentionally or recklessly causes damage by fire or explosion to property that is not wholly owned by that person is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years.

Arson--own property: Section 434.1
Every person who intentionally or recklessly causes damage by fire or explosion to property that is owned, in whole or in part, by that person is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years, where the fire or explosion seriously threatens the health, safety or property of another person.

Arson for fraudulent purposes: Section 435.(1)
Every person who, with intent to defraud any other person, causes damage by fire or explosion to property, whether or not that person owns in whole or in part, the property, is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years.

Holder or beneficiary of fire insurance policy: Section 435.(2)
Where a person is charged with an offence under subsection (1), the fact that the person was the holder of or was named as a beneficiary under a policy of fire insurance relating to the property in respect of which the offence is alleged to have been committed is a fact from which intent to defraud may be inferred by the court.

Arson by negligence: Section 436.(1)
Every person who owns, in whole or in part, or controls property is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years where, as a result of a marked departure from the standard of care that a reasonably prudent person would use to prevent or control the spread of fires or to prevent explosions, that person is a cause of a fire or explosion in that property that causes bodily harm to another person or damage to property.

Non-compliance with prevention laws: Section 436. (2)
Where a person is charged with an offence under subsection (1), the fact that the person has failed to comply with any law respecting the prevention or control of fires or explosions in the property is a fact from which a marked departure from the standard of care referred to in that subsection may be inferred by the court.

Possession of incendiary material
Section 436.1
Every person who possesses any incendiary material incendiary device or explosive substance for the purpose of committing an offence under any of the sections 433 to 436 is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years.

Following a conviction for arson, a judge may order the accused to make restitution (Criminal Code Section 725) if the insurers’ lawyer makes the necessary representation before sentencing.

Defending Against Arson: Since arson usually takes place without any witnesses, the evidence developed is circumstantial. A court does not necessarily require an eyewitness account to find an insured guilty of arson. The quality of proof submitted must correspond to the gravity of the misconduct. Since arson is a serious charge, commanding evidence must be presented not merely suspicious circumstances. In civil court the standard of "on a balance of probabilities," has been confirmed by Supreme Court of Canada in, among other cases Monteleone v. R.

in an action...in which arson is raised as defense, once the insured establishes that loss by fire occurred, onus is then upon the insurer to establish by a balance of probabilities, commensurate with the occasion, that fire was caused by deliberate act of insured or at his behest.

The key elements of arson defense must show evidence that the:

• fire was set;
• insured had a motive to set the fire;
• insured had opportunity to set the fire.

Motive: Motive in an arson case is often financial problems. Often the insured is in debt, behind in mortgage payments, operating an unsuccessful business, or otherwise in need of money. Evidence of motive, financial or otherwise, strengthens the insurer’s case. It is not conclusive proof that arson has occurred. But it is one of the building blocks in making a case. If the insured is seen leaving the building moments before the fire, and the evidence clearly shows that the fire was deliberately set, the evidence against the insured may be conclusive and evidence of motive may not be necessary. Usually there are no witnesses, and evidence of motive is important to add to the other circumstantial evidence connecting the insured to the fire. Financial motives may be disguised. Financial information must be reviewed keeping in mind that much might be withheld. Information supplied by the insured should be carefully examined and confirmed.

Checklist for Deceptive Financial Practices

• Financial statements cannot be produced.
• Invoices submitted by related companies could be fictitious.
• Sales after fiscal year-end were included in statements to show stronger financial position.
• The year-end cut off is being manipulated.
• Expenses are understated.
• Many creditors have not been paid.
• Purchase invoices have been suppressed.

Sales Indicators

• Although sales are falling, the insured claims they are increasing.
• Fictitious sales are being recorded.
• Sales recorded are out of proportion to prior periods’ results. Alterations made to invoices.

Inventory-related Indicators

• Inventory is obsolete. Perhaps the insured could not sell during the designated selling period.
• The inventory is overvalued. Product may depreciate very rapidly (e.g., computer equipment, fashion items). Insured manipulating financial statements to make them look better.
• Large purchases of stock were made for cash just before the claim. Stock did not exist but was "manufactured" to accommodate an anticipated claim.
• New and better products are readily available at comparable cost.
• The acceptable rate of turnover for the inventory should be determined.
• Large quantities of stock were purchased draining the company’s cash standing.

Business-related Indicators

• The area is subject to an economic recession.
• A new highway has significantly reduced traffic to the insured’s retail operation.
• Competition in the insured’s line of business is ruthless.
• The insured’s product is no longer viable or competitive.
• The insured wants to get out of business quickly because of:
• disputes with partners/shareholders;
• labour problems;
• health problems;
• a decision to emigrate.
• The insured cannot fulfil contracts because of:
• inadequate equipment;
• qualified help cannot be hired;
• materials are unavailable.
• Seasonal business has been adversely affected by:
• location;
• poor weather;
• zoning (loss occurs at the end of unsuccessful selling season--ski equipment destroyed in Spring).

Credible Witnesses: In any hearing, a court listens to and watches the witnesses closely in order to judge their sincerity and truthfulness. Inconsistencies, hesitations, and other examples of suspect behaviour can tip the scales of justice, especially when the decision is guided by the balance of probabilities. Many arson cases have been won or lost by this deciding factor.

While not constituting direct evidence of arson, any apparent misrepresentation or non-disclosure on the insured’s part prior to the loss is normally cited in pleadings on behalf of the insurer. Claims may be declined if the policy is found to be void under statutory conditions covering misrepresentation and fraudulent omission; even if insufficient to void the policy, they may expose the insured as unreliable or lacking in credibility.

Example
In D’Amico v. General Accident Assurance Co. of Canada (Ont.) (1997) the insured increased coverage shortly before a fire. The insurer denied the claim alleging the insured had wilfully caused the fire. The insurer brought evidence of the insured’s dire financial straits to support the motive. The insured, when called as a witness, was not credible. Sufficient evidence was presented to show motive and opportunity and for the judge to reasonably find the insured responsible. Some money had been paid out on the claim initially and the insured repaid it.

Damage Claims: Physical damage to property (not necessarily fire damage) may motivate an insured to commit fraud. A policyholder may unrealistically expect that any damage experienced in a home should be covered by insurance. An event not within the policy terms should not be paid. It has the same effect as paying a fraudulent claim. It increases premiums inappropriately.

Estimates of Damage: It would be difficult to identify a fraud without having an expert view the damage. An experienced general contractor or an engineer with suitable experience can confirm (or will know who can confirm) the extent of the damage and its cause. Adjusters must be able to discern when an engineer be called upon. Determining the actual cash value of the claim may be useful even when for a replacement cost settlement. Estimating repair cost is somewhat of an art. Differences of opinion are inevitable. Each case is unique and this will affect how repairs will be done. To reduce the margin of discrepancy it is important to clearly set out the scope of repairs and the quality of materials. Those items that represent old damage should be carefully noted. Old cracks in drywall or plaster can be discerned by the trained eye. Some may represent critical issues in the claim and others may not. Estimates must be well organized and detailed. Detailed estimates are needed to control the repair. If other insurance is a factor, apportionment of costs is appropriate. A careful review of the repair estimate is needed to reconcile the damage claimed.

Estimates

• Scope the damage that relates to the claim.
• Establish the actual cash value of the claim, even when it is a total loss or when a replacement cost settlement is anticipated.
• Complete a detailed itemization of the claim.
• Lump sum estimates from contractors should not be accepted, especially for large losses.
• Determine who must authorize repairs.
• Ask about other insurance, if applicable calculate the apportionment.

• Material to be used must be equivalent in value to the original. It is not usually reasonable to substitute aluminum for vinyl siding. Aluminum is more expensive. Although an error can occur in any estimate, a discrepancy may be an attempt to defraud an insurer.
• Although prices fluctuate for materials, a reasonable range must be determined based on quality of the item and appropriate labour.
• Collusion between an insured and a service provider is possible.

Damage to contents should also be assessed. An inventory, or list of items damaged or lost must be prepared. It may be advisable to have damaged stock removed to a storage facility to prevent further damage and to allow a proper inspection. Clothing stock which has escaped damage by smoke, can be tested by a textile expert to confirm its condition. If the clothing is allowed to remain on the premises, an unscrupulous person may be tempted to "arrange" smoke damage after the fact, especially to stock that is out of season or has not sold well.

Formal Appraisal Process: Prescribed by the Statutory Conditions when the damage, or the value of the property, is in dispute. When litigation has been commenced, or is anticipated, it may be appropriate to invoke this process in order to save the time and expense incurred in litigation. Quantum can then be established, leaving only the issue of coverage to be decided. The t provision in the Insurance Act of Ontario is similar to most other common-law provinces:

In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, these questions shall be determined by appraisal as provided under the Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and independently of all other questions. There shall be no right to an appraisal until a specific demand therefor is made in writing and until after proof of loss has been delivered.

Claims for damage to buildings, contents, loss of earnings or profits or any loss can be quantified by appraisal, and can be demanded by either the insured or the insurer. The procedure outlined in the Insurance Acts provides:

The insured and the insurer shall each appoint an appraiser, and the two appraisers so appointed shall appoint an umpire. The appraisers shall determine the matters in disagreement and, if they fail to agree, they shall submit their differences to the umpire, and the finding in writing of any two determines the matters. Each party to the appraisal shall pay the appraiser appointed by him and shall bear equally the expense of the appraisal and the umpire, where,

(a) a party fails to appoint an appraiser within seven clear days after being served with written notice to do so;
(b) the appraisers fail to agree upon an umpire within 15 days after their appointment; or