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Claims Practices

Why Insurance Fraud Succeeds

Barry Zalma | September 1, 2003

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Insurance policy and gavel

Private property and casualty insurers lose $100 billion every year to insurance criminals. Insurance fraud is a prevalent problem that receives little attention by the police and judicial system. Often seen as a "victimless" crime, it is not. This drain on society can be plugged if insurers, insureds, and others raise their voices to point out the problem and be vigilent about seeing that justice is done.

There has been much hand wringing and wailing over the malfeasance of the corporate officers and directors of Enron, WorldCom, and others. No one, however, has gone to the root causes of the situation. It is not that some corporate executives suddenly turned to the dark side and became evil. It is, I submit, because they were trained by the Department of Justice and local prosecutors to believe that there was no penalty for their crimes. White-collar crime, especially insurance fraud, has been ignored for the last two decades as a serious crime. A crime unpunished emboldens others who might never consider a life of crime to pursue wealth the easy way.

The prosecutorial obsession with violent crime has instigated massive growth in so-called white-collar crime. Fraud is rampant and unpunished. Every year more than $100 billion is stolen from Medicare and Medicaid programs across the country while private property and casualty insurers lose a similar $100 billion every year to insurance criminals.

Prosecution of the massive crime perpetrated against insurers and government "insurance" programs like Medicare are miniscule, to the point of nonexistence. It is so easy, with so little chance of being caught, to commit insurance fraud that schools are being formed to teach gang members to commit insurance fraud so that they can move out of the dangerous field of armed robbery, where, if not killed by the convenience store operator, the robber will surely be hunted down and prosecuted. A prosecutor told me that the robbery of a convenience store, with a gun, where no one is hurt and $300 is stolen, is more important than a $2 million fraud against an insurer perpetrated by the stroke of a pen in the hands of an insurance criminal.

The Victims "Insurers" Pay for Justice

The police and prosecutors ignore the person who commits a white-collar crime. Insurers, as victims of crime, are disfavored. Some police officers, prosecutors, and judges believe that an insurance company cannot be a victim of a crime. Unlike all other crime victims, insurers are required by statute to fund local police agencies and prosecutors, conduct the entire investigation, and present the case to the prosecutor on pain of losing the right to do business. The prosecutor will then review the materials and refuse to prosecute for lack of evidence. Police agencies "except for insurer-paid-for Insurance Fraud Bureaus" ignore insurance fraud and many other white-collar crimes.

The California Department of Insurance added an extra 25 cents per auto policy tax to pay for the fight against automobile insurance fraud. Insurers are compelled by statute and Regulation to maintain Special Fraud Investigation Units and a detailed antifraud 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. Simultaneously, the same Department of Insurance punishes insurers for not paying claims rapidly or for not treating insureds or claimants fairly, many of whom are experienced insurance cheats who use the Department's consumer unit to brow-beat insurers into paying fraudulent claims. Courts and juries will assess punitive and exemplary damages against insurers who accuse their insureds of fraud looking with 20/20 hindsight at the investigation.

Similar businesses in the financial sector that 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 banking industry pay for prosecuting embezzlers or bank robbers. No one demands that convenience store operators pay for prosecuting people who hold up their stores on a daily basis. No regulator requires stockbrokers to investigate fraudulent transactions. The imposition on 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 in this regard. George Orwell was right when, to paraphrase, he had a character in Animal Farm say, "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.

Special Bureaus Fight Fraud

The Coalition Against Insurance Fraud reported that fraud convictions have doubled during the years 1995 to 2000. State Insurance Fraud Units (police agencies assigned to the crime of insurance fraud that exist in 41 of the 50 states) reported the following.

1995-2000 State Insurance Fraud Unit Statistics
  • Criminal convictions from fraud-bureau investigations doubled.
  • Cases presented for prosecution by fraud bureaus more than doubled.
  • Civil actions more than tripled.
  • Two of three states increased their fraud bureau budgets.
  • States are spending an average of 43 cents per resident to fight fraud while fraud takes an average of $300 a year from each person insured.
  • Fraud bureau investigations in the United States led to 2,123 criminal convictions in 2000. This is double the 961 reported in 1995.
  • Fraud bureaus presented 4,000 cases for prosecution in 2000. This is up from 1,562 in 1995. Florida leads the nation with 688 referrals in 2000. South Carolina's referrals rose 355 percent between 1999 and 2000.
  • Twelve new fraud bureaus were created between 1995 and 2000.
  • There are now 41 states that sponsor a total of 46 fraud bureaus.
  • Fraud bureaus with prosecutors assigned to them have more success with criminal convictions and more cases considered for prosecution.

What Do the Results Really Show?

Insurance fraud prosecutions and investigations are anemic. They have averaged 46 convictions per fraud bureau in the year 2000. They have averaged only 86 referrals for prosecution per fraud bureau. Florida led the states with 688 referrals in 2000. There was an investment in the year 2000 of $47,103 for every conviction.

What the reports do not tell is that most of those convicted pleaded guilty and were sentenced to probation. Few made full restitution. Those who served time were few and far between.

Read the reports: The criminals are laughing at the insurance industry, the police agencies, and the prosecutors. If they are one of the 2,123 criminally convicted, they face an average sentence of only 5 years' probation and 60 days in jail. Jail time is usually served on weekends.

Fraud bureaus are not as effective as they want to be or want insurers to believe. Only 47 percent of the cases referred for prosecution resulted in a conviction. Those convicted were a minimal percentage of the cases referred by insurers to the fraud bureaus.

In California, and many other states, the law requires insurers to report suspected fraudulent claims to the fraud bureau. California insurers report approximately 2,000-3,000 suspected fraudulent claims each month. Few are investigated, fewer are reported to prosecutors for prosecution, and only 47 percent reported to prosecutors for prosecution result in a conviction.

Contrary to the belief of many prosecutors, even though people are seldom physically injured by insurance fraud, it is a major crime with a statutory maximum punishment in most of those states where it is a crime of 5 years in state prison.

Specialists who understand insurance and insurance fraud investigate it. It is, at least in California and those states that have a criminal insurance fraud statute, a rather simple crime to prove. It should be the type of case a prosecutor would want to file and take to trial. Instead, as an ex-prosecutor said, "Insurance fraud is a crime prosecutors run away from because the cases are usually heavy with documentary evidence and are complex."

Consider the public outcry if gangs of bank robbers took $100 billion every year from banks in the United States. Would the public stand for groups of criminal stockbrokers looting their 401k and other pension plans? What would happen if a motorcycle gang went across the country and stole $100 billion every year from convenience stores across the country? When the public is told that a group of criminals steals $100 billion every year from the insurance industry, the response is either a cheer or a yawn.

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

  • A confession on the record with five corroborating witnesses is not enough evidence 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.

A Proposal

If the country wants to stop insurance fraud, it must recognize that a major crime exists. Police, prosecutors, and judges must recognize that a gang that is bleeding the country, its taxpayers, and insurance premium payers blind is harming the entire country. Certain steps need to be taken, as shown below.

Steps To Fight Insurance Fraud
  • All the money allocated to fight fraud must go to all kinds of insurance fraud.
  • Prosecutors must be assigned to the fraud bureau with their only job to prosecute insurance fraud.
  • When the local district attorney does not file a criminal complaint on suspected insurance fraud, the fraud investigator or lawyer for the insurer must complain, loudly.
  • Insurers must report every suspected fraudulent claim to the fraud division.
  • Insurers must follow-up with the fraud division after it refuses to investigate.
  • When the fraud division refers a case to a prosecutor, the insurer must determine the identity of the prosecutor and:
    • Make it clear to the prosecutor that the insurer is an interested and proactive victim.
    • Make it clear to the prosecutor that the insurer is upset that it is the victim of a crime.
    • Make it clear to the prosecutor that the insurer will make available to him or her anything required.
    • Make it clear to the prosecutor that all employees and representatives of the insurance company, will be available to testify.
  • If you are in California and 60 days go by after the case is referred to the district attorney by the fraud division, 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 your state or simply complain to the district attorney 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. To defeat insurance fraud it must be prosecuted. To get it prosecuted, the insurer must do the work. Insurance fraud and all white-collar crimes is the orphan child of the criminal justice system. Fraud will never be defeated until the public and prosecutors recognize that insurance fraud is a serious problem that affects their own financial condition.

Everyone involved in the business of insurance and everyone who buys insurance must make it clear that they are angry with 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 it any more!"

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