How To Defeat or Deter Insurance Fraud

Insurers Must be Proactive Against Insurance Fraud

Insurers Must Stop the Logarithmic Growth of Insurance Fraud

Fraud is taking more money every year from the insurance buying public. The Coalition Against Insurance Fraud recently revised its estimates from $80 billion a year to announce that insurance fraud takes over $308 billion a year from the insurance industry. The US Department of Justice working with various federal police agencies have taken an active role to investigate, prosecute and convict those who defraud U.S. health programs and federally funded insurance like flood insurance and crop insurance. Yet, the arrests and prosecutions that happen are only creating a small dent in the amount of money stolen from private and federally funded insurance.

Since no one really knows how much is taken from insurers and federal programs – because most succeed – the best estimates, like that made by the Coalition Against Insurance Fraud, is nothing more than an educated guess. People who are actively involved in the investigation of insurance fraud believe that the more accurate estimate is an amount equal to 10% to 30% of premium collected.

Since the property and casualty insurance industry collected $394.8 billion in the first half of 2021 compared to $362.3 billion for the same period in 2020, fraud took in six months $39.48 billion to $118.44 billion a year for that small part of the insurance industry. [https://content.naic.org/sites/default/files/inline-files/Property-Casualty-and-Title-Insurance-Industries-2021-Mid-Year-Report.pdf] If the trend continues the amount stolen from the property and casualty insurance industry – a small part of the Coalition’s number - for the year would be doubled to almost $80 billion to $220 billion.

Insurers properly complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud,

Insurers have good reason to complain. They are universally ignored by police agencies when they report the crime. When insurance criminals are caught in the act they are seldom arrested, even less often prosecuted and almost never punished.

Insurance is the Only Crime Where The Victim Is Required To Pay For Investigation & Prosecution of the Criminal Or No Investigation Will Be Done

The California Department of Insurance, like similar entities across the country, compel insurers to fund and staff a Special Investigative Unit (SIU) to investigate and report to the state potential insurance fraud and maintain a detailed anti-fraud program. The California Department of Insurance audits insurers regularly to be sure that each insurer works hard to investigate and seek prosecution of the crime of insurance fraud and punish those the Department believes are not seriously working to defeat fraud.

Simultaneously, the same Department of Insurance punishes insurers for not paying claims rapidly or for not treating insureds or claimants fairly. Courts, and juries will often assess punitive and exemplary damages against insurers who accuse their insured’s of fraud while looking with 20/20 hindsight at the SIU investigation.

Similar businesses in the financial sector, who are also regular victims of fraud and other crimes are not taxed or compelled to investigate crimes committed against them. No one demands that the Bank of America or Wells Fargo or Chase pay for prosecuting embezzlers or bank robbers. No one demands that Southland Corporation pay for prosecuting people who hold up 7-11 stores. No Regulator requires stockbrokers to investigate money laundering or fraudulent transactions. The imposition upon the insurance industry – and the attendant cost passed to the insurance consumer – is unique.

Insurers are treated differently than all other businesses in the United States.

George Orwell was right when, to paraphrase, he had a character in his novel “Animal Farm” say that “all businesses are equal, some are more equal than others.”

Clearly, insurers are less equal with regard to crimes perpetrated against them than are other businesses.

Do Insurers Get Their Money’s Worth From Fighting Fraud?

Insurance fraud prosecutions and investigations are anemic.

I have heard the following excuses from prosecutors to whom insurance fraud cases were presented:

A confession on the record with five corroborating witnesses is not enough to support a fraud prosecution.
An insurance company can’t be a victim of a crime.
You have a good case, but I don’t have time to prepare an indictment or take the case to a grand jury.
Juries don’t like insurance companies.
Are you bringing this case because you don’t want to pay a legitimate claim?
I don’t understand what the claimant did wrong.
Arson-for-profit cases take up too much time and effort unless someone dies in the fire.
What Can Insurance People Do to Change The Statistics?

It is the obligation of all of us whose work is to protect insurers against insurance fraud to do something to change the lack of sufficient arrest and prosecution of insurance fraud perpetrators. Methods that are available and that should be exercised by every person who wants to reduce the effect of insurance fraud include:

Lobby to change the system so that:

All the money must go to all kinds of insurance fraud at the discretion of the Commissioner of Insurance.
Prosecutors must be assigned to the Fraud Bureau and their only job must be to prosecute insurance fraud.
When the local D.A. does not file a criminal complaint, the fraud investigator or lawyer for the insurer, must complain, loudly.

Work within the system we have:

Report every suspected fraudulent claim to the Fraud Division or Fraud Bureau in you state with an effective report including admissible evidence.
Follow-up with the Fraud Division after you get the letter saying they won’t investigate.

Supplement the Suspected Fraudulent Claim (“SFC”) report with investigation results and transcripts of examinations under oath.
Develop a personal relationship with investigators at the Fraud Division.
Develop a personal relationship with supervising investigators at the Fraud Division.

When The Fraud Division refers a case to a prosecutor determine the identity of the prosecutor.

Make it clear to the prosecutor that you represent an interested and proactive victim.
Make it clear to the prosecutor that your insurance company is upset that it is the victim of a crime.
Make it clear to the prosecutor that you will make available to him or her anything required.
Make it clear to the prosecutor that you, and other employees of the insurance company, will be available to testify.
If you are in California and sixty days go by after the case is referred to the D.A. demand compliance with the requirements of the California Insurance Code. California Insurance Code § 1872.4 provides, in relevant part, as follows:

“If prosecution by the district attorney concerned is not begun within 60 days of the receipt of the commissioner's report, the district attorney shall inform the commissioner and the insurer as to the reasons for the lack of prosecution regarding the reported violations.”

If you are not in California look for similar statutes in the state you are in or simply complain to the D.A. or State’s Attorney who are public servants.
The letter demanding an explanation for why there is no prosecution should go to the elected District Attorney. He or she will refer your letter for response to a head deputy. Often, they will be ashamed to tell you that the only reason for the failure is that other cases always have priority over insurance fraud. The District Attorney of every county must be made aware that he or she is obligated to inform the insurance company victims why the crime is not being prosecuted.

Enough letters, enough complaints, and insurance fraud will finally be recognized by prosecutors to be a serious crime.

It is also the obligation of everyone involved in the effort to hinder insurance fraud to:

Write articles for your local newspapers.

Telephone local reporters and complain that they don’t cover the crime.
Call talk-radio and explain the expense of insurance fraud.
Volunteer for your company’s speaker’s bureau and give talks on insurance fraud to every Rotary, Lions, BPOE or other service organization meeting.
Appear at the trial of every insurance fraud case.
Demand restitution when an insurance fraud is convicted.
Refuse to pay fraudulent claims.
When sued by people who are believed to have presented fraudulent claims insist that the case be tried to a jury before any payment is made.
Remember Pogo who was reported to have said: “We Have Met The Enemy and They Is Us!”

To defeat or deter insurance fraud, it must be prosecuted. To get it prosecuted the insurer must do the work because local police agencies or prosecutors will not, unless there is a serious violent crime included, deal with the fraud.

The Orphan Child of the Criminal Justice System

Insurance fraud is the orphan child of the criminal justice system and will never be defeated until the public and prosecutors recognize that insurance fraud is a serious problem that effects their own financial condition.

It is time that insurers stop complaining and do the work necessary to defeat this metastasizing crime before its growth eats away any chance insurers – and their shareholders – have of making a profit.

Everyone involved in the business of insurance and everyone who buys insurance must make it clear that they are angry at what is happening to their insurance premium dollar. When I, and everyone who has ever purchased a policy of insurance, hears that $300 out of every $1,000 we pay in premium goes to a criminal we should all want to scream out the window, as did the character in “Network”: “I’m mad as Hell, and I’m not going to take this anymore!”

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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