In what she described as a highly intimidating encounter, they questioned
her about her possible involvement in an insurance fraud scheme. Her error?
She had retained a public adjuster who was in disfavor with her insurer and
who, among other things, helped demonstrate the presence of smoke damage
when the insurer's adjusters (and experts) contended the contrary. According
to her story and the testimony of other homeowners with similar experiences,
the state officials cast suspicion on the public adjuster.
In my review of the investigators' conduct, I discovered their lack of a
basic understanding of the claims process and of criminal laws under which
they were acting. Perhaps more importantly, though, the case raised
questions as to whether state regulators properly scrutinize fraud referrals
made by insurance company Special Investigative Units (SIUs) before swinging
into action.
Fraud Investigators' Unfamiliarity with the Claims Process
To review points made in an earlier
fraud commentary, personal lines policies include appraisal provisions for resolving disputes
over the value of a claim. Upon determination that a loss has occurred, some
states even allow arbitration provisions in insurance policies for resolving
inevitable differences of opinion over disputed amounts. Moreover, since
much of the industry's claims literature treats adjusting as a
communications bargaining process, characterizing almost any genuine dispute
over value as a crime of fraud may be indefensible—indefensible because
proof of fraud must satisfy beyond a reasonable doubt all of the elements of
fraud. Based on personal experience, I know that satisfying each prong of
criminal fraud is difficult.
To explain, fraud generally consists of the
following elements.
- Misrepresentation by concealment, false representation, or
nondisclosure of material fact(s).
- Scienter
(knowledge) that the misrepresentation is false.
- Intent to
defraud, meaning that the person must intend that the other party (insurer,
for example) rely on the misrepresentation.
- Reliance indicating
that the insurer believed the misrepresentation and acted on the belief in
its being true.
Consider the element of intent, for example. Since claims
negotiations involve give and take about value, arguably, any representation
by either party is intended to alter the other party's position; hence,
holding either the insured or the adjuster strictly liable under fraud
statutes for asserting a specific position would bring negotiating to a halt
and render meaningless all of that adjuster training about "getting to yes."
Moreover, from the insured's perspective, imposing a form of strict
liability for one's assertions in negotiations could open the door to
characterizing as fraudulent any disagreement with the insurer. Intent is
certainly present in back-and-forth bargaining, but the purpose underlying
intent is to achieve an acceptable solution, not necessarily to steal from
the other party.
Reliance also presents a problem. To explain, adjusters
are experienced, trained experts at claims negotiations, while most
policyholders are novices. It is highly unlikely that an adjuster will rely
on any representation that deviates substantially from what she perceives as
the true value of a claim. If the adjuster knows the representation is off
the mark, there is no reliance. In fact, given the imbalance of experience
and resources, the insured is more likely to rely on an adjuster's
misrepresentations than an adjuster is to rely on the claimant.
Thus,
industry practice is (1) to acknowledge that insurer-insured disputes are
not, ipso facto evidence of fraud and (2) to make use of standard policy
provisions for resolving differences. One might reasonably expect a fraud
investigator to have a basic knowledge of these industry practices. Yet,
here is the actual deposition testimony of one of the fraud investigators
mentioned above:
| Question: | Do you have an understanding as to the type of
policy issued to (Mrs. Laven)? |
| Investigator: | I'm not sure. |
| Question: | Have you heard of something called the appraisal
clause of the insurance policy? |
| Investigator: | No. |
| Question: | Have you heard of the New York Standard Fire Policy
or the (State's) Standard Fire Policy? |
| Investigator: | No. |
A fraud investigator without a working knowledge of
insurance fundamentals, may readily perceive allegations of claims fraud as
a question of strict liability, sort of like issuing a parking or speeding
ticket. In a way, that is what happened initially with Mrs. Laven's claim.
Investigators Need To Know Insurance because Criminal Investigations Are
Different
Unlike traditional insurance regulatory work of approving
forms and rates, handling consumer complaints, and preserving the solvency
of insurers, insurance fraud is a crime. A crime is an offense against the
state; punishment for one convicted of a crime results in possible loss of
life, liberty, and property; and the standards of proof for crime are more
demanding than for those imposed for civil wrongs or regulatory infractions.1 Among the
more complex types of crimes to control are those known as economic or
white-collar crimes. Insurance fraud is of this genre of criminal activity.
The investigators in this case, as is true of many fraud investigators and
insurance company Special Investigative Unit staff, are retired police
officers. Typically, Bunko Artists and pigeon drops are the essence of a
city police officer's white-collar crime experience. Thus, the following
exchange between Mrs. Laven's lawyer and the fraud investigator should not
be surprising:
| Question: | What are the elements of insurance fraud? |
| Investigator: | There's a misstatement, omission, or lie. |
| Question: | What are the other elements? |
| Investigator: | Well, there's a whole bunch of them. |
Believe me, that response is about as good as it got. The state
fraud unit did not show evidence of establishing evidence supportive of the
four key elements of fraud even though departmental records indicate that
these are the standards for proving a fraud allegation.
How the Department
of Insurance Fraud Unit Got Involved
As eventually determined, the
insurer's SIU staff got involved early in Mrs. Laven's claim because of the
public adjuster's presence. Evidence revealed that the adjuster had enjoyed
considerable success in exercising policyholder contractual rights to
appraisal of disputed claims and, by doing so, secured better settlements
for his clients than the insurer's SIU personnel deemed acceptable. Building
a fraud case against the public adjuster was a way to reverse his impact on
claim settlements. Despite the fact that the company adjuster handling the
claim never suspected the Lavens of fraud, the SIU staff filed a fraud
report with the Department of Insurance Fraud Unit under the mandatory
reporting requirement of the state's fraud statute.2
As it turned out, that is all the fraud investigators needed to leap into
action. The following exchange occurred in the investigator's deposition:
| Question: | You would expect that they're (the insurer) not going to slant
their fraud referrals to state that they don't think there's damage
when, in fact, they recognize there's damage, correct? |
| Investigator: | I don't believe they would do that. |
Although the investigator acted on blind
faith in the SIU referral, the local prosecutor refused to prosecute,
suggesting difficulty in determining which party to indict: the company
personnel for low-balling the claim or the claimant's representative for
estimating on the high side. In a subsequent trial, the insurer lost its
"good faith" immunity.3
Implications and Lessons
My experiences in the case summarized above and similar cases in
different states suggest first, that insurance fraud is equated primarily
with policyholder claims fraud or fraudulent acts committed by third parties
that provide services under insurance contracts. Fraud by insurers and other
regulated entities rarely gets attention from state fraud units. Insurers,
anti-fraud organizations, such as the National Insurance Crime Bureau, and
insurance regulators seem to act in concert to reinforce this notion.
Indeed, the National Association of Insurance Commissioners (NAIC) daily
Newswire is replete with Insurance Department announcements of arrests for
claimant fraud. The two exceptions are insurance agents and unauthorized
insurers, the former suggesting that insurers maintain poor supervision of
agents, the latter implying that insurers are not satisfying certain market
demands, especially in health insurance and certain liability products.
Regular reports and news releases from regulators reveal a similar theme.
Insurance regulators routinely report how much they "saved" or "got back"
for policyholders in claims that were paid because of Insurance Department
intervention; however, news releases are silent about how many claims
adjusters are prosecuted for unlawfully withholding or underpaying claims.
For example, Ohio's February 27, 2009, NAIC Newswire story boasted of
"recovering" $9.7 million in "claim reversals" with no mention of
enforcement actions against insurance adjusters. The same news release
stated that the fraud unit investigated "suspected fraud" by consumers and
healthcare providers and referred 125 cases for prosecution.
Second, the
developing record suggests that the relationship between insurance company
SIU staff and government fraud units may work to the detriment of individual
policyholders by compromising objective, neutral enforcement of fraud
statutes. A form of "group think" appears to be widespread among public and
private fraud fighters. A future commentary will address this issue.
*Note: This commentary reflects
actual case experiences. Since certain issues in the case are ongoing, I
omit reference to the state, the individual regulators involved and the
actual names of the policyholders.