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:
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:
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.
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:
1. Those developed by insurers that are an integral part of the policy
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:
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:
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:
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 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:
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:
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:
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:
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:
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:
shall discharge...duties to clients, members of public, fellow members and insurers with integrity.
The basic functions of selling insurance include:
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:
Background red flags
Application red flags
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:
...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
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:
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:
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.
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
Appraisal report red flags
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:
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:
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
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:
6) Changes and New Exposures
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.
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.
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.
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
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.
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
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:
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
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.
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:
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:
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:
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.
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:
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
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.
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
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
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:
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
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.
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.
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
(c) an appraiser or umpire refuses to act or is incapable of acting or dies, a judge of the county or district court of the county or district in which the appraisal is to be made may appoint an appraiser or umpire, as the case may be, upon the application of the insured or of the insurer.
The finding of any two determines the matter. In other words, the dispute is settled when the two appraisers agree, or when the umpire agrees with one of the appraisers. The umpire alone is not empowered to impose a settlement. The umpire may suggest compromises which may then lead to a settlement, or suggest a figure which is then agreed by at least one of the appraisers. The agreement is confirmed in writing (usually by an appraisal award). The appraisal procedure is flexible; legislation does not prescribe rules of conduct. The appraiser and umpire may simply review documents in an office, or they may meet at the insured premises. They may also have experts in attendance to clarify reports, plans, estimates and other documents.
Theft Claims: After arson claims, theft claims (including burglary) are the most costly source of insurance fraud. While the amounts involved tend to be minor in comparison with fire, burglary and theft claims are more easily arranged, and with less risk to the perpetrator. In a fire claim contents may be badly damaged but still available for inspection. In a theft claim the object is gone. Probing for proof is necessary. Reasonable proof must be submitted that establishes the:
Analysis of Receipts
An insured submitted a claim for a $7,000 ring stolen in a break and enter. The ring was purchased from a friend. There was a friend and a ring but the friend had been arrested on a narcotics charge and the ring was in an RCMP evidence room at the time of the alleged burglary.
Another insured submitted a claim for a 21-foot boat that was kept locked in his garage. The adjuster on the scene measured the garage at the site to find that the garage was 18 feet long.
Theft claims are subject to the Statutory Condition which provides that a wilfully false statement vitiates the claim. This provision applies not only to fabricated claims, but also to claims in which values or quantities lost are significantly exaggerated. There must be a great deal of flexibility and persistence by the adjuster to document evidence a fraud has occurred.
The insured made a claim for a theft under a Homeowner’s policy. The insured did not disclose prior insurance losses on the application. This information was material but the evidence needed to deny the claim on the basis of nondisclosure did not satisfy the court. On the same claim the insured supplied fraudulent receipts. These receipts were submitted for a previous claim. The claim was forfeit because the insured made wilfully false statements in the proof of loss.
Fraud on Liability Policies: The third-party claimant on a liability claim represents an unknown factor. Before investigated, the insurer generally has no prior knowledge of the third party. The insured has a relationship with the third party--which gave rise to the claim. The claimant could be a customer, stranger, friend, or relative. Once the threat of legal action arises, the relationship is generally adversarial. An insured who is sympathetic may be tempted to enhance a third party’s claim by accepting responsibility, when no legal liability applies. Insurers are protected by policy conditions that impose a duty on insureds not to assume any obligation without the insurer’s consent. This is difficult for the insurer who must defend the insured’s legal position.
Many liability claims arise from slip-and-fall and products liability. Most claimants genuinely suffer injury. Claims primarily involve BI. Few liability claims involve outright fraud. Elaborate scams may be played out by professional claimants, opportunists who claim to be injured when not, and others who earn a living from the claim and injury business. Fraudulent PD liability claim situations arise, mostly associated with a BI claim. Property items such as expensive cameras or clothing may be used to inflate claims.
A scam is easily identified as fraud--more subtle forms may not be. A certain amount of exaggeration may occur in the negotiation of the settlement. An important skill that an adjuster may have is an ability to read situations accurately. People skills and the ability to communicate effectively are important. How adjusters communicate will influence how claimants react. Exaggeration may not necessarily constitute fraud. The claimant may not intend to cheat the insurer. Negotiation is often complex and engages all kinds of personalities and tactics. Adjusters must be alert to exaggeration and control the loss. Many different situations are presented in investigations, each with a unique solution.
Injury can lead to large monetary gains for claimants and others involved. Various types of professionals have been drawn into fraudulent claims--sometimes as drivers or as unwitting participants. Firms providing health services might establish that a client has a disability in order to reap lucrative benefits. Claimants may have a financial connection to the medical service provider. When extensive rehabilitation programs are initiated consider whether the claimant has any financial connection.
Planned ‘Accidents’: Fraudulent claims can be staged anywhere but are likely to occur in a public place, such as a mall, restaurant, store, or supermarket. They are likely to resemble legitimate liability claims. If a pothole can be found in a parking lot or driveway, or a patch of ice in winter, an opportunist may allege a slip. Staged incidents may take place any time, day or night. There may be a witness; proof of a claim would be more difficult to provide without one. Fraudulent claimants usually allege injuries of a subjective nature (e.g., major depressive disorder, post-traumatic stress disorder)—these are easier to feign. A planned incident may evolve because an injury, already sustained, did not merit compensation. Such a claimant undoes any medical treatment already received, i.e., removes a cast. Then a story is fabricated to claim under a liability policy. Provincial health care systems provide some control against this as people carry health cards. Treatments can be tracked.
Occupier’s Liability Claims: Slip-and-fall’s are the most common occupier’s liability claim. A claimant threatens litigation from a bogus injury from allegedly dangerous conditions on insured’s property. Occupier liability laws meant to protect the public are used against businesses and insurers. Fraudulent claimants go to great lengths to orchestrate a phony fall, including:
Damages caused by claimant
A newspaper headline stunned the public when the lead claimant in a multi-million dollar class action suit withdrew his claim. The would-be claimant was ordered to pay the defendant’s costs. An investigation showed that the claimant was not even at the scene of the accident! The claimant’s story about evacuation from the disaster site did not make sense. The claim was based on subjective type of injuries suffered because of the horror of the disaster.
Accident Investigation: When fraud is suspected, the intensity of the investigation must be accelerated. The basic steps of investigation also apply to liability claims. The special focus of liability accidents may involve:
Questions for the claimant:
Injury Claim Red Flags:
Wage Verification and the Employer Red Flags:
Lawyers and Red Flags:
Evidence from Experts: Experts or forensic specialists may be hired to develop, record, or preserve evidence in 5 areas:
Adjusters sometimes hire surveillance experts to confirm the activities of the claimant. Surveillance tapes can be useful in court. A plaintiff may swear that a certain task cannot be performed and then a videotape may show plaintiff performing that activity. Surveillance can establish how active the claimant is and provide evidence of full range of movement. Kinesiologists provide professional assessments of movements.
Kinesiology is the study of human movement. It involves four areas of study: anatomy, biomechanics, physiology and psychomotor behaviour. Kinesiology includes forensic biomechanic--the study of the mechanisms of injury. Specialists such as engineers, orthopedic surgeons, physical therapists, biologists, physical education professionals, mathematicians and computer experts may be involved to measure, model, categorize and explain the movement of internal and external body parts.
Medical Professionals and Fraud: Complaints can be lodged against doctors who behave unprofessionally. Provincial legislation protects the public and guides medical professionals. There is a complaints process to deal with misconduct and incompetence. Legislation demands that all complaints be investigated and strict confidentiality maintained. Medical professionals are mostly self-regulated. Lawyers are often in association with older, semi-retired physicians in solo practices. Physicians operating solo are unusual, most prefer a group practice.
Medical Report Red Flags:
Malingering is intentional feigning of mental or physical illness to gain insurance money or to avoid returning to work. The person is consciously aware there is nothing wrong with them. It is considered to be fraud and is the most common type of abuse.
When vague psychological causes are linked to diagnoses of physical illness, it raises ambiguity. An illness not supported with an organic-based physical issue is tough to rationalize. Liability policies should respond to negligently caused injuries. Establish whether the injury exists and was caused by the accident. Doctors are only human and medicine is not an exact science. Adjusters are often faced with contradictory medical analyses. The profile of patients plays a role in some diagnoses--especially when litigation is involved. Controversial types of diagnoses:
Somatoform pain disorder (myofascial pain syndrome, fibromyositis): preoccupation with pain without adequate physical findings to account for the pain or its intensity. The symptom is either inconsistent with anatomical structure or cannot be accounted for by organic pathology. Psychological factors may be linked to the cause of pain. The pain may permit the person to avoid an activity. May be related organic pathology, but complaint of pain or impairment is grossly in excess of expected physical findings. For somatoform pain disorder the patient must:
Factitious illness: self-induced injury thought of as employing more psychopathology than malingering, as the secondary gain is less obvious or absent. New diagnoses are emerging--one is an environment that encourages dependency, illness behaviour, and inappropriate disability.
Symptom magnification syndrome: self-destructive behaviour consisting
of self reports and displays of inappropriate disability. Produced consciously
or unconsciously to control one’s life; reinforced by family, cultural,
vocational and financial facilitators.
Methods and Motive for Vehicle Theft Fraud: A vehicle that needs expensive maintenance may become a burden to the owner. A reasonable solution may entail selling or trading the vehicle, but if repair costs exceed ACV, the vehicle has no net value. Rather than scrap the vehicle or sell it for parts, there may be a temptation to make it disappear--hide it in a remote area or roll it into a lake. Then it can be reported stolen and a claim advanced. If the vehicle is not found, the insurer might be expected to pay the value of a vehicle of the same make, model and year. The lucrative black market trade for luxury cars has motivated fraud. Leased vehicles are sometimes "stolen" and shipped overseas and sold for up to 3 times the retail price.
Phantom or paper cars are the source of another common fraud. The ownership document for an unrepairable salvage vehicle is purchased. The nonexistent vehicle is re-registered. The new owner then reports the phantom vehicle stolen and submits a claim.
Sensationalism may divert attention from an attempt to defraud. It may evoke sympathy from the public. In an actual hoax, an insured claimed his 1993 Mustang was stolen at gunpoint while he drove through a parking lot. The claim for $19,000 was rejected and he was ordered to pay defence costs. Others admitted they conspired to set up the car-jacking in order to get rid of the car, which was giving the insured problems. In a similar vein, a taxi driver alleged he was kidnapped with his cab. The interest generated from the kidnapping was meant to deflect attention from several claims he was advancing.
SIU personnel typically investigate vehicle thefts. Claims are also reported to the Canadian Automobile Theft Bureau, a division of the ICPB. Certain types of information are identified:
Recoveries: Recovering amounts spent on a claim should always be explored even when fraud is involved. Each case must be reviewed to determine the options available and the likelihood of recovery. Victims of fraud can seek recovery through the courts. Mareva Injunction—rare civil procedure used to freeze known assets when strong evidence suggests proceeds of a crime have been converted. Legal proceedings must have already been commenced against the perpetrator. It is usually the insured who starts an action against the insurer, thus a Mareva Injunction would not be feasible. Fraudulent claims for vehicle thefts might justify such an injunction if the insured purchased a replacement vehicle.
Branding Stolen and Salvaged Vehicles: Ministry of Transport Ontario implements standard terminology with precise definitions for stolen and recovered vehicles. It is called branding vehicles. Definitions are consistent in Quebec and the Atlantic provinces.
Irreparable vehicles are banned from public roads. They may be
sold only for scrap.
Salvage vehicles: banned from public roads--damaged beyond cost of making them roadworthy.
Rebuilt vehicles are those that have previously been declared to be salvage. They have been repaired, inspected and approved for registration and operation on public roads.
Stolen vehicles have been declared stolen by police. They have not been recovered (temporary flag). The stolen status may be assigned or removed only by police.
Vehicle Arson: An alternative to making an unwanted vehicle disappear is to have it burned. A severe fire may destroy evidence of poor maintenance or mechanical problem--a motive for arson. An insurer might be expected to pay full value for the vehicle. There is no need to hide the vehicle or roll it into a lake, and the fire can be arranged at a convenient time and place. Gasoline is the most common accelerant used in motor vehicle arson. Gasoline is used as fuel in vehicles and traces of it are not necessarily considered unusual or suspicious. Gasoline may be poured in the interior, or the fuel line may be disconnected and leaking fuel and vapours ignited. Traces of gasoline may be detected near the vehicle. Trace evidence may be the result of spillage before the fire, or a trailer used by the arsonist as a safety mechanism.
Investigation of Vehicle Arson: The first focus is cause. There must be evidence that the fire was set deliberately before classified as arson, before motive and opportunity become relevant. Vehicle arson tends to occur at isolated locations with no witnesses. Such locations also preserve footprints and tire tracks. If footprints belong to the insured, then the insured was at the scene. If the tire tracks match those of another vehicle connected to the insured, perhaps the other vehicle was used to drive the insured or accomplice from the scene. This is significant if the insured claimed that the vehicle had been stolen. Other clues may be visible in the vehicle. An engineer may determine that fuel line, cap or plug was loosened or detached deliberately. A physical inspection may reveal a key was left in the ignition--the particular vehicle may have needed a key to start it. It may be evident that components of value were removed before the fire. Electrical fires in vehicles rarely spread beyond the firewall or engulf the entire vehicle. All other potential causes must be addressed and eliminated. An engineer should examine the electrical system as a potential cause of the fire. Determine the pre-loss condition of the vehicle, where the vehicle was serviced and whether any maintenance records exist.
Motive and Opportunity in Vehicle Arson: Once arson is established it must be determined if the insured had motive and opportunity to set the fire. The motive for vehicle arson is usually financial. Maintenance and operating costs may have risen. Major repairs, worth more than the vehicle, may have been needed. The insured may have been in arrears on payments, or that the his income had dropped recently, or that he had recent additional commitments, such as mortgage payments on a new home, or perhaps interest rates rose. An insured may have had his driver’s license suspended. The condition of the engine, transmission, and differential before the fire can often be determined even in cases of severe fire damage. A lab may analyze a sample of oil to analyze the pre-loss condition. It may be alleged that the vehicle was left unlocked in an accessible place, from which it was stolen. It may then have been driven to a quiet, but still accessible, spot, and set on fire. Since both locations were accessible to others, it can be argued that others had opportunity to set the fire.
Operation of Fraud Rings: Two vehicles can produce many claimants, each eligible for accident benefits. The individuals may also be involved in more than one accident in different vehicles (E.g. rental vehicles). If the claimants have no vehicles of their own, benefits are claimed from insurers of the accident vehicles, and if these vehicles are insured by different insurers, fraudulent claimants might claim benefits simultaneously from several insurers. Claimants might also use different names, perhaps interchanging first and last names, or maiden names, to avoid detection. Since lucrative weekly benefits and medical benefits may continue indefinitely, fraud is popular and elaborate schemes have been exposed.
A recruiter may gather a number of prospective claimants. Each claimant pays a fee for a seat, in return for a set sum. Others buy a seat for a lesser sum not to be in the vehicle, but to be shown as passengers on the accident report. The recruiter plans the accident. The participants are briefed. Personal information is exchanged: full names, addresses, dates of birth, and drivers’ licence numbers. This information is sold to an intermediary who relays it to lawyers. Accidents are staged at night, behind buildings or in other areas where there are no witnesses. The vehicle (often a rental) may be driven into a wall at low speed, causing little damage. Police may not attend minor accidents involving PD only; vehicles are driven to collision reporting centers where an accident report is completed, and the insurer is notified. Claimants are referred to designated lawyers. The claimants are referred to clinics for treatment. Accident benefits forms are submitted to the insurers after 3-4 weeks of treatment. Insurers frequent agree to a cash settlement; normally providing the claimant with the return on their investment promised by the recruiter. An organized rear-end collision, between two vehicles occupied by fraudulent claimants provides extra income for the recruiter, the legal representatives and the treatment facilities. Organized accidents may also involve innocent third parties. A typical plan involves signaling a right turn at an intersection until an unsuspecting oncoming vehicle makes a left turn. The perpetrators suddenly accelerate causing a collision. Collisions with unconnected parties are more common as more insurers investigate suspicious claims. These accidents appear genuine because the parties are not in collusion, and there appears to be risk of serious injury. Individuals involved in accident benefits fraud are often also involved in:
Rehabilitation and Medical Service Providers: Billing practices of rehabilitation and medical services must be examined. Instances of over billing, paper billing, and collusion with patients to increase insurance payments are ways insurers have been defrauded in the past.
Service Provider Billing Indicators
ICBC boasts fraud "first": The Insurance Corporation of British Columbia is suing a physiotherapist who allegedly defrauded the corporation of $300,000. ICBC is asking for repayment of funds, the cost of investigation, and general and punitive damages. This is the first time a medical service provider has been the target of a civil action relating to fraud. After receiving a tip 3 years ago, the ICBC’s Bodily Injury SIU began investigating. It revealed criminal action and RCMP joined the investigation. The RCMP’s commercial crime unit laid 18 criminal charges. Provincial legislation increased penalties for those found guilty of defrauding the corporation. First time offenders face fines up to $25,000 or 2 years in jail. Last year, ICBC anti-fraud activities saved the corporation and its policyholders $31 million dollars.
Bodily Injury and Accident Benefit Indicators
Canadian Coalition Against Insurance Fraud: Public polls have shown that Canadians hold insurers responsible for solving insurance fraud--not police or government. The Canadian Coalition Against Insurance Fraud was formed in 1994 as a direct response to consumers. More than 80% of the industry signed the Coalition’s Anti-fraud Protocol. Coalition members represent all stakeholders concerned--including private insurers, police and fire services, consumer advocacy groups, and public auto insurers. Insurance regulators participate as observers of the coalition’s activities. The Coalition has its base in Ontario with chapters in Alberta, British Columbia and Quebec. Three guiding principles of the Coalitions’ efforts: (1) keep the needs of honest policyholders foremost (2) keep all activities cost effective, and (3) meet the needs of all stakeholders. They have concentrated efforts to:
Insurance Crime Prevention Bureau: More than 90% of Property/Casualty insurers fund the ICPB; part of the Insurance Council of Canada, ICPB provides insurance crime investigation and information services to detect and prevent insurance crime. When appropriate it assists public law enforcement authorities. The ICPB maintains a data bank that helps insurers to anticipate and detect crime. The Automated System for the Prevention of Insurance Crime (ASPIC) is the Bureau’s loss information database--used to identify fraud before settlements are paid, and it also provides valuable loss information to evaluate risks. There is direct web-based claims and vehicle data. Most types of claim activities are maintained in ASPIC including vehicle salvage, vehicle thefts, accident benefits, bodily injuries and other liability claims, and property losses.
The Canadian Automobile Theft Bureau (CATB), a division of ICPB, was organized to detect vehicle fraud. Members can consult it about suspicious vehicle losses. Insurers check the data banks for loss information and the VIN validation service. When adjusters submit theft reports, the CATB generates an automatic subject verification check, and produces a letter acknowledging the incident, advising of previous losses. If the same vehicle has been reported stolen or salvaged before, this is noted. It also develops measures to improve vehicle security.
The ICPB operates independently. Since it serves most of the industry, it maintains a much more comprehensive database than any 1 insurer. Member companies are required to report all losses within certain specific guidelines—using standard reporting forms. New claim reports are checked against the existing database. Selected cases are assigned to agents to investigate. ICPB has adopted the Canadian Standards Association Privacy Model, the IBC Privacy Model, and is bound by provisions of the Quebec personal privacy legislation. All ICPB members are bound by confidentiality agreements. Information collected is personal, privileged and strictly confidential.
Insurance Bureau of Canada: IBC is the national trade association of the private property and casualty insurance industry. Its main focus is to strengthen the insurance business environment. It identifies and monitors policy issues and develops policies and plans. It monitors proposed legislation and informs of proposed changes in federal and provincial law. Judicial interpretations of contracts and legislation are monitored. IBC is involved in loss-prevention.
The Insurance Institute of Canada: The IIC and its provincial associations help to control of insurance fraud through training and education. Formal education is important to improve fraud awareness among brokers, adjusters, investigators, lawyers, risk managers and other personnel.
The Association of Certified Fraud Examiners: an international organization with 10,000 members in 25 countries. Chapters operate throughout Canada. The association confers the CFE diploma to individuals who have completed an examination or have accredited experience in auditing and accounting, criminology, fraud investigation, or related areas of legal practice. CFEs typically include forensic accountants, fraud investigation specialists, law enforcement personnel, professors of accountancy, management or sociology, and lawyers specializing in fraud and white-collar crime. The association holds courses and conferences, and offers businesses training in internal fraud prevention and detection.
Canadian Association of Fire Investigators: CAFI is a national organization with chapters in most provinces. Its membership includes police, fire, and insurance personnel. Membership in CAFI is available to representatives of Provincial, Federal or Territorial Fire Marshal’s or Fire Commissioner’s Office, representatives of ICPB, or fire or police service. Individuals must be actively engaged in fire investigation. Any independent adjuster or full-time employee of a Canadian licensed insurer engaged in the investigation, adjustment or settlement of fire claims is eligible. Other associations with similar objectives include the Association of Fire Marshals, Fire Chiefs and Chiefs of Police. Objectives:
Vehicle Information Centre of Canada: VICC, a division of the Insurance Information Centre of Canada, provides auto insurance rating info, and is involved with theft deterrent standards.
Special Investigation Units: Many insurers have formed SIUs, within their own claim departments, to deal with claims where fraud is suspected or other factors are identified. Some independent adjusting companies and third party administrators provide investigation services of this type as well. These units are staffed with investigators who have specialized training in statement-taking and preserving evidence for litigation. These special investigators work in partnership with insurance claim handling professionals. There are advantages to establishing an in-house SIU. An in-house SIU:
The SIU’s main roles are as follows:
SIU personnel will liaison with the ICPB, and various police force and fire departments. Investigations into fraudulent claims will at times cooperate between all networking agencies (ICPB, police departments, origin and cause investigators, fire marshals’ office). The effectiveness of the SIU and ICPB are both enhanced by working together and are not in competition. A properly staffed SIU may assist in preparing a case for prosecution. SIU personnel will need to take on the responsibility of self-education, and joining networking organizations such as the International Association of Special Investigative Units, the International Association of Arson Investigators, the Canadian Association of Fire Investigators and the International Association of Auto Theft Investigators. Public fraud awareness programs through service organizations such as Kinsmen, Lions and Rotary clubs, will assist in the education of the public. SIUs should educate agents, brokers and underwriters, to recognize fraud indicators and spot fraud schemes being perpetrated in the auto, property and casualty fields.
SIU Staffing Issues: determine whether the unit should be made up of ex-police officers; fire investigators, private investigators, or senior adjusters. Fraud investigation requires a certain expertise and aptitude, sometimes not available in a normal claims department because of the orientation of adjusters towards customer service and settlement. Some companies actively recruit law enforcement officers or fire department personnel. Determine the type of individual who will be recruited or trained from within. It is important that the SIU members are compatible, as teamwork is key. The investigators must be skilled in diplomacy, tact and leadership. If a company has sufficient volume to justify an SIU of 4 or more individuals, an ideal situation is one from each of the 4 categories.
Police Services: Municipal and provincial police forces are typically involved when a fraud is investigated. Many larger urban forces have a dedicated "fraud squad". The RCMP is renown for its expertise in criminal intelligence and forensics. It also investigates organized crime and international crime--areas that have involved insurance fraud. The RCMP and FBI are developing a link between the Canadian Police Information Center (CPIC) and the FBI’s National Crime Information Center.
Crime Stoppers: an international non-profit program that assists
police in solving crimes through tips reported by ordinary citizens. They
Cheat, You Pay! was a catchphrase used in efforts against insurance
fraud in the program, produced by the Canadian Coalition Against Insurance
Fraud. All callers maintain anonymity. The insurance fraud hotline
is 1-8OO-222-TIPS. Crime Stoppers allows tipsters to collect rewards without
revealing their identity. The program began in Ontario in 1995; since then
1469 insurance fraud tips have been received. The investigation of these
tips have led to 43 arrests and 46 denied claims, preventing the payment
of $1,199,412 in fraudulent claims.
Ethics Standards: The costs of fraud are driven by policyholders who fail to observe good-faith. Insurers also have a common-law duty to act with utmost good faith towards policyholders and the public. Insurance has two essential functions. First, insurers indemnify policyholders. Second, insurers help to maintain economic stability and confidence. These are the private and the public dimensions of insurance. If the cost of rebuilding houses and businesses, running businesses or driving on the highways had to be borne without insurance, the economy would suffer serious consequences. Not only individual policyholders, but the community as a whole depends on the widespread existence of insurance. Insurers must provide reliable and ethical service. In its public and private dimensions, insurers have ethical, as well as contractual, responsibilities. While a breach of utmost good faith by the policyholder or applicant may occur prior to acceptance of the risk, or during the policy, a breach of utmost good faith by the insurer is likely to occur in the context of a claim.
Company Adjusters: A Claims Agreement document is produced by the IBC. Member insurers agree to maintain instructions to govern the conduct and procedures of staff adjusters, and often telephone adjusters. IIC and other programs are encouraged. The instructions also deal with:
(a) with respect to policyholders and claimants:
(a) promotes uniform standards of conduct in the adjustment of insurance
(b) promotes insurance education among its members and encourages greater industry and public understanding of the workings of the adjustment business;
(c) distributes publications and programs for the professional development of its membership;
(d) communicates with and explains to deferral and provincial governing bodies, the insurance industry and the public, the ramifications of matters of direct interest to its members in their conduct of the adjustment business; and
(e) promotes and encourages understanding, cooperation and good relations amongst its members, the insurance industry and the public.
Fire Investigator: The Canadian Association of Fire Investigators requires members: