The possibility of a tax-free profit when coupled with the commonly held
belief that criminal prosecution will probably not occur is sometimes too difficult
for normally honest people to resist. Each year, the effect of insurance fraud
runs to billions of dollars. It is estimated that insurance fraud takes from
the insurance buying public between 3 and 30 percent of the premiums collected.
It is estimated that insurance fraud annually drains more than $100 billion
from the assets of insurers.
In the first quarter of 2007, 29 percent of consumers were upside down on
their vehicles loans. According to the Kelley Blue Book and the Coalition against
Insurance Fraud, auto insurance fraud may be the only possible escape from debt.
Many people are driving vehicles with negative equity; they owe more than the
value of the car. If they leased their vehicles, they did so with a penalty
clause that allows for additional payment at the end of the lease if more miles
are driven than allowed by the state.
Similarly, because of what has been described as a "mortgage crisis" and
the current downturn in the value of residential property, many people find
they are upside down on their home mortgage. They believe that an arson-for-profit
scheme, a fake burglary, or some other fraudulent claim will allow them to escape
from the debt they cannot pay.
Shifting Debt to the Insurer
The auto owner or homeowner attempts to transfer the debt to the insurer
when:
- The payments can't be made.
- The negative equity makes it impossible to trade in the old car for
a new one or buy a new house because credit is harder to get.
- The lease is up, and the vehicle is many miles over the limit.
The car owner with gap insurance (which pays the difference between the value
and the loan or the lease) and the homeowner with full replacement cost coverage
are faced with an often unbearable temptation—to transfer the upside-down loan
to the insurance company. The logic often goes that if the insurer is dumb enough
to insure the owner with negative equity for full replacement cost or sums in
excess of fair market value, it deserves to bear the financial burden. With
more than a quarter of car loans currently upside down and up to a third of
home mortgages in default—or about to be in default—no one should be surprised
that reports of thefts of automobiles, automobile fires, and arson fires in
dwellings are increasing.
Because many people lease vehicles to reduce the monthly payment amounts
without concern for mileage limits, most of the increase is more likely than
not because of fraudulent claims. With tighter lending rules and the high cost
of homes and automobiles, the problem for insurance claims professionals dealing
with auto theft and arson claims and home fires where arson is suspected will
get more difficult before loose credit returns and people decide it is better
to keep the car and pay for it than pass the debt on to their insurance company
and risk arrest.
The methods used by insureds who are upside down on their loans to defraud
their insurers include the following.
The Staged Theft
In this situation, the owner contracts with an intermediary to dispose of
a vehicle. The owner "gives up" the vehicle and then reports it to the insurer
as stolen.1 The person to whom the vehicle is given
up will pass it to a salvor that breaks it up into its component parts and sells
the parts (sometimes called a "chop shop").
Abandonment
The owner abandons a vehicle on a city street or in a parking lot, creating
a morale hazard. The vehicle is either stolen or not. Regardless, the insured
will report the vehicle stolen and attempt to collect before it is recovered.
Dumping
The owner disposes of a vehicle by dumping it into a lake or other body of
water.2 Some lakes have been found to have more
than 50 cars underwater. Cars have even been found buried underground.
Arson
An apocryphal story I read many years ago was that not one car fire in the
state of Arizona happened to an uninsured auto. Since there are many uninsured,
old vehicles on the road, there is a good probability that a vehicle fire is
not accidental. Similarly, accidental fires in homes are rare, and there is
almost never a fire in a successful business.
Fire is a method the perpetrator believes will establish the total loss of
a vehicle and eliminate evidence that the insured was involved. It isn't true,
but most of the public believe it is true.
Most automobile leases include penalties from $0.15 per mile to as much as
$1 per mile over a pre-set limit. Upon learning that such charges are considerable,
the insured-lessee will often take the vehicle to a remote location, set it
afire so that it is totally destroyed, and then report it stolen.
Homeowners, faced with a mortgage they cannot pay believe that a fire will
pay off their mortgage. They are not aware that the mortgageholder is required
to allow the homeowner to rebuild and apply the insurance proceeds to the full
cost of rebuilding. This does not, under any circumstances, eliminate the obligation
of the homeowner to pay the monthly mortgage amount. At best, when rebuilt,
the house will have more value than before and can be sold for the amount of
the debt. Unfortunately for amateurs, arson invariably leaves evidence that
can put the homeowner in a position of spending the next 5 to 10 years in state
prison—a risk most reasonable people would not be willing to take simply to
avoid foreclosure.
Investigating the Potential Fraudulent Claim
When an automobile is reported stolen and not recovered or recovered burned,
or when there is an intentionally set or undetermined cause of fire at a home,
the adjuster or special investigative unit (SIU) investigator should obtain,
at a minimum, the following information.
- The application for insurance.
- The wording of the comprehensive coverage.
- Photographs of the vehicle or dwelling involved.
- Detailed inspection of the recovered vehicle or burned dwelling including:
- All documents in the vehicle after recovery.
- All undamaged parts.
- Whether any easily saleable parts remain.
- The extent of contents in the dwelling.
- The source of ignition.
- Analysis of the vehicle or dwelling by a fire cause and origin investigator
if destroyed by fire.
- Copies of documents proving ownership of the involved vehicle or dwelling.
- A detailed recorded statement of the insured(s).
- Financial documents from the insured, including records of payments
on all loans, leases, or mortgages.
- The insured's sworn testimony at examination under oath.
Arson is the intentional burning of property. It no longer is limited to
specific types of property. Although perhaps the most dangerous of all methods
of insurance fraud, people continue to attempt insurance fraud by burning their
homes, vehicles, and business structures. However, by use of technical devices,
chemical analysis, and even trained dogs, it has become more difficult for the
arsonist to cause a fire that appears to a trained investigator to be accidental.
For that reason, auto arsonists often first report the vehicle stolen and then
blame the arson on the unknown thief. Home arsons almost always take place when
the named insured claims to have been out of town.
Arson is not excluded in any policy I have ever seen. There is no arson defense.
The defense is misrepresentation, concealment, or fraud. If an insured sets
fire to his car to defraud the insurer, the defense is fraud. To defend a claim
based on fraud by arson, the insurer must prove the following.
- The property was insured under a contract of insurance.
- The contract of insurance contained a provision allowing the insurer
to void insurance because of misrepresentation, concealment, false swearing,
fraud, or an exclusion for intentional acts of the insured.
- The fire was not accidental.
- The fire was caused by the acts of a person or persons.
- The fire was set by the insured or someone acting for the insured.
- The fire was set for the purpose of defrauding the insurer.
Under Michigan law, for example, to establish an arson defense, the insurer
need only show that the fire was of incendiary origin and that the insured had
both motive and opportunity to set it. Each element may be established by circumstantial
evidence.3
There is rarely direct evidence that a fire was set by an insured, but even
without an eyewitness or other direct evidence, the insurer can prove arson
circumstantially by evidence of the insured's motive and opportunity. For example,
showing an insured's financial difficulties or anger at a spouse or significant
other can establish motive. If opportunity and motive combine, and all accidental
causes are eliminated, fraud by arson or arson-for-profit can be proved.
Technical devices, chemical analysis, and trained arson detection dogs' success
at arson-for-profit has become more difficult for the arsonist. In fact, it
is almost impossible to cause a fire that appears, to a trained investigator,
to be accidental.
Red Flags of Fraud
Suspicious claims have common attributes, which insurers have collated into
lists to be used to determine whether further investigation is required. Continually
growing, these lists are known as the "red flags" or "indicators" of fraud.
There are many different categories, ranging from those associated with the
claim itself or with insureds to indicators of specific types of fraud, such
as bodily injury fraud or arson for profit. Each claimsperson should be made
familiar with the red flags of auto theft or auto theft and fire claims.
If, when assessing a claim, three or more red flags are found, further investigation
should be considered. The existence of red flags does not mean a fraud has occurred.
It is only a signal to the adjuster to investigate further so that the suspicion
may be either removed or confirmed. It is not any single indicator that alerts
the adjuster to the possibility of a fraudulent claim but a combination of three
or more. Every SIU has a list of red flags available for the review of every
employee as well as those published by the local state departments of insurance
or in my book Insurance Claims: A Comprehensive
Guide.
Conclusion
Insurance fraud or arson-for-profit can only be defeated by a thorough investigation
by competent and well-trained claimspersons and investigators working with expert
cause-and-origin investigators and competent insurance coverage counsel.
© 2009 Barry Zalma, Esq., CFE