Insurance Fraud Awareness

Transcription

1 Insurance Fraud Awareness 8.0 Credit Hours 73 pages 8 Lessons 1 Online Final

2 Insurance Fraud Awareness Published by Pohs Institute Westbury, New York Pohs Institute, one of the oldest insurance schools in New York State, was founded in 1921 by Herbert Pohs. Pohs Institute is one of the largest providers of insurance education in New York State, as well as an approved provider in New Jersey, Pennsylvania, Connecticut, Massachusetts, New Hampshire, Maine and Rhode Island. More than 250,000 men and women, eager to pursue a career in the insurance industry, have enrolled in Pohs Institute schools. Pohs Institute provides insurance instruction to large insurance companies and brokerages, as well as banks and financial institutions. The instructors are professional adjunct teachers from the insurance industry with an average of 10 or more years of industry experience. This course will address the following topics: An Introduction to Insurance Fraud Preventing Insurance Fraud Identifying the Fraudsters Fraud Within the Insurance Process Patterns & Indicators of Fraudulent Claims Fraudulent Claims and the Insurance Industry The Legal Issues in Insurance Fraud Consumer Protection and Insurance Fraud This course includes: 8 Lessons 1 Online Final Exam Insurance Fraud Awareness Page 2

3 Disclaimer: The material presented within this course is for informational and educational purposes only. It should not be used to provide guidance to your customers or clients in lieu of competent, certified legal advice. All parties involved in the development of this course shall not be liable for any inappropriate use of this information beyond the purpose stated above. As a student, you should understand that it is your responsibility to adhere to the laws and regulations pertaining to any aspect of this course and the materials presented within. Insurance Fraud Awareness Page 3

4 Table of Contents I. An Introduction to Insurance Fraud 1 Understanding Insurance Fraud 1 Factors of Insurance Fraud 2 The Cost of Insurance Fraud 3 Ethics and Insurance Fraud 4 Honesty 6 Integrity 6 Respect 6 Trust 7 Responsibility 7 Results of Insurance Fraud 7 To Insurance Companies & Policyholders 7 To the Entire Country 8 II. Preventing Insurance Fraud 9 Operation Restore Trust 10 Making Insurance Fraud a Crime 11 False Advertising 11 Unfair Claims Settlement Practices 12 The Health Insurance Portability and Accountability Act (HIPAA) 12 The National Insurance Crime Bureau 13 III. Identifying the Fraudsters 15 External Insurance Fraud 15 Con Artists 16 Auto Salvage Fraud 16 Medical Mills 22 Internal Insurance Fraud 23 IV. Fraud Within the Insurance Process 24 Preventing Fraud in the Insurance Agency 24 The Marketing Department & Fraud Prevention 24 The Underwriting Department & Fraud Prevention 25 Insurance Fraud Awareness Page 4

5 Concealment, Misrepresentation or Fraud 25 Warranties 25 Contract Fraud vs. Premium Fraud 25 Insurance Fraud and the Claims Department 26 First-Party and Third-Party Claims 26 Claims and Misrepresentation 27 False Swearing 27 Fraud Prevention 28 V. Patterns & Indicators of Fraudulent Claims 29 MORAL Hazard 29 MORALE Hazard 29 Patterns of Insurance Fraud 30 Time of Loss 30 Purchase of an Insurance Policy 31 Circumstances in Claimant s Life 31 The Claim Papers 31 VI. Fraudulent Claims and the Insurance Industry 33 The Impact on Property and Casualty Lines 33 Homeowners Insurance Fraud 34 Arson Fraud 34 Water Damage Fraud 35 Burglary & Theft Fraud 35 Auto Insurance 35 Types of Schemes 36 False Auto Insurance Claim 36 Auto Arson and Auto Theft Fraud 37 Workers Compensation Insurance 38 Employer Fraud 40 Medical Provider Fraud 42 Insult Added to Injury 43 Other Bodily Injury Fraud 43 Slip-And-Fall Claims 43 Product Liability Claims 43 Understanding Risk Utility 45 Lost Earnings Claims 45 Legitimate Losses 47 Claims Involving Malingering 48 Insurance Fraud Awareness Page 5

6 VII. The Legal Issues in Insurance Fraud 50 Investigating Claims 53 Preventing Fraudulent Acts 54 Auto Insurance Fraud 54 Automobile Loss Exposures 55 Fraudulent Claims 55 Home Insurance Fraud 56 Regulations in P & C Insurance 57 The Law of the Agency 57 The Law of Sales 57 Commercial P&C Insurance Fraud 58 Commercial Policies 58 Business Insurance 59 VIII. Consumer Protection and Insurance Fraud 63 Regulations of the Insurance Companies 64 Categories of Consumer Protection 65 Post-Claim Representation 65 Pre-Claim Representation 65 Consumer Protection Legislation 67 Theories of Recovery 67 Types of Remedies 68 Unfair Practice and Acts 70 The Federal Trade Commissions Act 70 Uniform Deceptive Trade Practices Act 70 Misstatements and Misrepresentations 72 False Information and Advertising 73 Glossary 78 Insurance Fraud Awareness Page 6

7 I Introduction to Insurance Fraud Understanding Insurance Fraud The insurance industry in the United States consists of more than 5,000 companies with over $1.8 trillion in assets. It is broken down into two segments of equal importance: property/casualty and life/health. The insurance industry is one of the largest and most interdependent of the United States industries. It is therefore, by definition, a critical industry in the United States and, as such, falls within the definition of Tier One in the FBI's Strategic Plan. Insurance fraud has become one of the most prevalent and costly white-collar crimes. Public concern about the price of insurance and the solvency of the insurance industry has prompted the insurance industry to conduct both internal and external reviews of the various insurance cost elements. According to a published study by the Coalition Against Insurance Fraud (CAIF), fraud is among the most prominent cost components escalating the costs of insurance. The CAIF has estimated the annual loss figures relative to insurance fraud (non health insurance) to be approximately $26 billion. Outside of the CAIF figure, the life/disability insurance segment of the industry estimates that approximately $1.5 billion is lost each year through fraudulent schemes. Identifying, targeting, and dismantling those individuals, organized groups, and con artists committing fraud against the insurance industry will accomplish reducing the amount of economic loss to the insurance industry due to fraud. They will be targeted through national initiatives in specific insurance industry segments that will bring the crime problem to the national consciousness. As we have said, insurance fraud is one of the most costly white-collar crimes in America, ranking second to tax evasion. In the broadest sense, insurance fraud can encompass any fraudulent or illegal act that involves the business of insurance. Insurance fraud is: any deliberate deception perpetrated against or by an insurance company, agent or consumer for the purpose of unwarranted financial gain. It occurs during the process of buying, using, selling and underwriting insurance. Insurance Fraud Awareness Page 7

8 Insurance fraud occurs when someone tries to make money from insurance transactions by deceiving others. Insurance fraud - including selling insurance without a license, filing fake or padded claims and making or possessing counterfeit proof-of-insurance cards - is a criminal offense in most states. Criminal fraud is defined and may be committed by an individual or several people in a sophisticated conspiracy. Fraud generally involves elements of theft and dishonesty. It includes fake accidents & disability, false applications & claims, theft of insurance premium, false medical billing, arson, and unauthorized insurance companies. Fraud can be divided into two investigative areas. Claimant and Provider Fraud is fraud committed against the insurance industry. Insurer Fraud is fraud committed within and by the insurance industry. Fraudulent activity committed by applicants for insurance, policyholders, third-party claimants, or professionals who provide insurance services to claimants is known as external fraud. Fraud within the insurance industry itself is known as internal fraud. This activity includes bribery of company officials, misrepresentation of facts by insurance company officers, directors, employees, agents and brokers for their personal enrichment or to prevent regulators from taking certain actions, etc. Factors in Insurance Fraud Factors of insurance fraud include: deliberate lies intent for someone else to rely on that lie someone relying on the lie damages being suffered by the person who relied on that lie Examples of insurance fraud include: Agent fraud occurs when a consumer gives money to an insurance agent and receives nothing in return or receives a product that was not desired. Unauthorized insurance is the sale of insurance by unlicensed companies. Fraudulent insurance claims are when a hospital bills a patient's insurance company for procedures not performed, or a homeowner inflates a claim to cheat the insurance company. Counterfeit proof-of-insurance cards are sold to people who do not have automotive liability insurance required by law. Insurance Fraud Awareness Page 8

9 The Cost of Insurance Fraud There is no doubt that fraud is costing companies, businesses, and individuals, who pay higher insurance premiums. Insurance provides many benefits to our society. However, these benefits are not cost free. Premiums for the insured are charged in order to collect the necessary money to pay the losses of the insured. Although no precise dollar amount can be determined, some authorities contend that insurance fraud constitutes a $100-billion-a-year problem. The United States General Accounting Office has estimated that $1 out of every $7 spent on Medicare is lost to fraud and abuse in one year, and that Medicare has lost nearly $12 billion to fraudulent or unnecessary claims in a year s time. On Property and Casualty Insurance An insurance policy is a contract between an individual and the insurance company. The individual agrees to pay the premium, which is the annual price for the policy, and the insurance company agrees to pay for the insured s losses resulting from the events that are covered in the policy -- a fire, burglary, or a car collision. There is a limit to the amount of money any insurance policy will cover for a loss, and that is just what it is called -- the policy limit on each covered risk. According to the National Insurance Crime Bureau (NICB), a non-profit association that helps insurance companies and law enforcement agencies combat fraud, it is estimated that fraud costs the property-casualty insurance industry $20 to $30 billion each year in fraudulent claims. Consumers pay the tab for these scams, estimated at $200 to $300 each year in additional insurance premiums. On Health Insurance Even the medical industry has been infiltrated with fraud. Fraudulent health insurance claims have contributed greatly to the increased costs of health care and lower quality health care in many cases. Today some doctors, hospitals, ambulance services and other medical providers, as well as lawyers and insurance executives, have allowed greed to win over duty. For example, some doctors take kickbacks for referring patients to other health care providers; unscrupulous insurance executives collect insurance premiums and then skip town; and individuals stage car accidents and collect from insurance companies for medical expenses and hospital stays. Insurance Fraud Awareness Page 9

10 At the top of the list of obstacles to effective fraud fighting is a widespread failure on the part of insurers, employers, politicians and law enforcement agencies to understand the complex nature of health care fraud. This is equally true in both the public (Medicare) sector and the privatesector health insurance industry. Ethics and Insurance Fraud While most people would never approve of an act of arson, or of a criminal earning a living from insurance fraud, many experience little guilt about taking advantage of an insurance company through fraud. Reformers who have issued prescriptions for more ethical behavior have relied upon business schools and religious institutions to imprint increased moral behavior patterns upon individuals. The executive, in the view of the majority, is supposed to embody the highest standards of American society and accept responsibility for his actions. He is a professional and his responsibilities include moral rectitude. The modern business organizations chief executives have functional advisors in areas such as marketing, production, finance, and public relations. But they have no ready wellspring of advice on ethical issues. Ethical ramifications crop up in all major business decisions. And they may very well be just as complex as the issues in other areas. Much of business behavior operates in a gray area in which individuals are unsure whether if they are behaving unethically or not. Governing ethics coupled with a set of guiding principles form the basis for organizational integrity. This strategy holds the organization to a higher standard and creates a shared sense of accountability among employees. The ambiguous situations could spring from cultural differences, inexperience, the absence of guidelines and laws, or lack of awareness by employers. Students are not prepared to apply ethical principles in the business world unless they have been exposed to discussions on how they would respond to morally questionable situations. Truth exhorts each individual to perform a most difficult task that of being honest. Indeed, truth telling is not always easy or advisable. It is often difficult to be honest with someone if there is some thought that honesty would hurt that person s feelings, or give that person information with which he or she may be unable to deal. If managers and leaders consider business ethics irrelevant, they must take into consideration the fact that their responsibility is two fold: Leaders and decision makers must exemplify ethical behavior and be held accountable to a higher authority and to the public. Insurance Fraud Awareness Page 10

11 Leaders of higher education should revise or develop policies for ethical standards that reflect a rapidly changing technological society. The profit motive and the quest for power are strong drives that are often coupled with the prevalent notion that business executives and politicians are expected to cheat, at least from time to time. That notion is only strengthened by the many reports in the media and by our own observations of those around us. In the business world there are always at least three people involved. If an individual is to decide the people to whom he or she is ethically responsible, he or she could list the people or entities that a decision will affect. The list could include employees, customers, shareholders in the company, a supervisor or manager, and suppliers. Honesty Honest means truthful, trustworthy, got by fair means; straight-forward. Who decides if a sale is made or a service is rendered by fair means? If the individual s code of ethics is corrupt, there may not be any perimeters around by fair means for him or her. Integrity Integrity is honesty, incorruptibility, wholeness, entirety, and soundness. So can a professional person be dishonest yet maintain integrity with his clients? It is doubtful. Honesty is one part of integrity. So maybe, yes. Maybe one can maintain a tainted form of integrity. But the vital signs of trust and confidence with the client will be missing. Respect This is a two-fold responsibility in the professional circle. To say that one responsibility is more important than another would be impossible, so let us just look at one at a time. There is a triangle of respect in which an individual has the opportunity to treat with dignity and fairness persons in the professional circle. There is the agent, the co-workers, and the clients. The dictionary says that respect means, admiration felt toward a person or thing that has good qualities or achievements, politeness arising from this; attention, consideration. To treat everyone in the same way without being influenced by their importance. If an individual s ethical value system includes a high priority for respect, he or she will realize that respect starts at the moment of an initial encounter. The interest of the client must be in giving clear information, complete facts, and repeating whatever information the client does not understand. Insurance Fraud Awareness Page 11

12 Just because one client needs a small health insurance policy to meet his or her needs does not mean that the agent can have less respect for that individual than for the client who wants to buy a large life insurance policy that will give an outstanding commission to the agent who sells it. Both of these incidents have some items in common. In each the individual is responsible to build the same type of long-term relationship, because each one needs maintenance. This is the manner to establish a track record, not only with one s company but also with one s clients, and to eliminate some of the potential for occasions of fraud. Trust Trust is one more important ingredient of integrity. Is trust asked for, or is it earned? This may be the greatest question of the century, but after an agent has been working out on the sales front for a few weeks, or maybe months, he or she will be able to answer this question with all intelligence. When an agent is trying to convince a client to trust him or her, the company, or the product or service that is being offered, it may be the first step to losing a sale or securing a sale. Trust is earned by meeting the client at his or her point of need. Their point of need may be different than what the agent thinks their point of need is. The client can be guided to possibly a better choice as long as he or she does not stray from their point of reference. The trust factor will still be intact. Responsibility The ethics of responsibility include reporting concerns in the workplace, including violations of laws or acts of fraud that one sees or knows about. It also includes seeking clarification and guidance whenever there is doubt as to the course of action that an agent should take. According to the dictionary to be responsible is to be legally or morally obliged to take care of something or to carry out a duty; liable to be blamed for loss or failure. It means to have to account for one s actions; to be capable of rational conduct; trustworthy, being responsible. Results of Insurance Fraud Insurance is affected by fraudulent claims in much the same way as any other business that is the target of criminals. While some of the claims are humorous, there are cases where the witnesses are killed. An investigator with one of the country's biggest insurers says that some cases of fraud are never prosecuted because several justice officials are on the payrolls of the syndicates. Desperate consumers who need the insurance payout are easy prey for crime syndicates. A client who confessed to the direct insurer recently that he had made a fraudulent claim proves this point. When an investigative team confronted the client, he said he had tried but failed to sell his car for the amount he still owed to the bank so that he could buy two cheaper cars, one for himself and one for his wife. Insurance Fraud Awareness Page 12

13 He said he had mentioned at work that he would be better off if his car was stolen. Soon afterwards, someone who offered to take care of the vehicle contacted him. A drop-off was arranged and before he knew it his car was gone. He was told to give the "thieves" a chance to reach the next town before reporting his car stolen. Similar cases are reported to insurance companies regularly. In about three months, one insurance company repudiated 35% of all investigated claims, with an average value of $55,000 per claim, because of suspected fraud. But while syndicate-driven insurance fraud is on the increase, tough economic conditions still trigger the majority of fraudulent claims. One insurance manager of a nationally known company says after fifteen years there is little he has not seen. Insurance fraud has been committed irrespective of social status, color, creed, or educational degree. There may be people who normally would not steal an apple off the pavement who are inflating claims. They do so when money is tight, and it may be as simple as adding a computer and CD collection to their list of stolen goods. Arson is just as common. The fire divisions of all insurance companies have suffered huge claims over the past several years. Opportunists sometimes submit inflated claims shortly before Christmas when they need money for gifts or they need to take a holiday. Everyone pays the costs of insurance fraud and corruption by having to pay extra amounts for insurance, goods, services, and taxes. Insurance fraud threatens the affordability of insurance and the concept of risk sharing upon which insurance is founded. Insurance fraud such as staged auto accidents and arson fires kill or injure many people throughout our nation every year. Insurance Fraud Awareness Page 13

14 II Preventing Insurance Fraud The insurance industry always has experienced fraudulent claims, but insurance fraud across North America has grown steadily in recent years. Front-line claims examiners, frustrated on a daily basis by this phenomenon, are often without the resources or expertise to deal with it. Many industry members have taken significant corrective steps, but in some states considerable work remains. A happy insured or claimant satisfied with the results of his or her claim will never sue the insurer. Incompetent or inadequate claims personnel force insureds and claimants to lawyers. Every study performed on claims establishes that claims with an insured or claimant represented by counsel cost more than those where counsel is not involved. Prompt, effective and professional claims handling saves money and fulfills the promises made when the insurer sold the policy. First-party bad faith suits are still available in most states of the United States. In those states and countries where the tort of bad faith (TBF) is not the law, one needs only to convince the courts to create a TBF. Insurers should remove their heads from the sand, look around, and protect themselves against multiple lawsuits. A cost-effective defense to bad faith claims is a claim staff filled with insurance claims professionals dedicated to excellence in claims handling. Insurers have found that insurance claims professionals resolve more claims for less money without the involvement of counsel for the insured. Profits, thin as they are, will continue to move rapidly into negative territory. Punitive damages will deplete reserves. Insurers will quickly question why they are writing insurance. Some will escape the jurisdictions that have a TBF. Those who remain will either adopt a program requiring excellence in claims handling from every member of their claims staff, or fail. Insurance is a business. It must change if it is to survive. It must rethink the firing of experienced claims staff and reductions in training to save "expense." Insurance Fraud Awareness Page 14

15 Insurance claims professionals are: People who can read and understand the insurance policies issued by the insurer. People who understand the promises made by the policy and their obligation, as an insurer's claims staff, to fulfill the promises made. They are all competent investigators. They have empathy and recognize the difference between empathy and sympathy. They understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals. An insurer whose claims staff is made up of people who are less than Insurance Claims Professionals will be destroyed by the new tort of third party bad faith. Operation Restore Trust In May 1995, President Clinton launched Operation Restore Trust (ORT) to develop several innovations in fighting fraud and abuse in Medicare. During a two-year demonstration, ORT identified: $23 in overpayments for every $1 spent looking at home health care, skilled nursing facilities, and suppliers of durable medical equipment 2,700 fraudulent home care providers and entities who were then excluded from doing business with Medicare and other federal and State health care programs Medicare has incorporated many of the methods first piloted in ORT to put illegitimate providers and suppliers out of work. For example, efforts to fight durable medical equipment fraud and abuse in 1997 have produced the following results: convicted fifty-nine suppliers on fraud and abuse charges denying $509.7 million in improper payments before they were made Medicare and its contractors actively work to prevent attempts to defraud Medicare and to support investigations and prosecutions of such defrauders. The contractors to the HHS Inspector General began many of the successful law enforcement actions through Medicare contractors and regional office staff identification of problems and issues, and through referrals. Making Insurance Fraud a Crime Model legislation has been developed to combat the problem. Various states can enact provisions that would make insurance fraud a specific crime with appropriate penalties, including restitution Insurance Fraud Awareness Page 15

16 for victims, or require insurers to commit to specific plans on how they propose to prevent and detect fraud. These states can even require claims forms and insurance applications to carry a warning that insurance fraud is illegal and a serious crime; require administrative action against licensed individuals or businesses - medical providers, lawyers, insurance agents, adjusters, contractors and body shops - upon conviction of insurance fraud, and provide immunity to insurers when sharing fraud information with other insurers, fraud investigators, and law enforcement. It is also important for various states to enact provisions to establish fully functioning fraud bureaus in states with moderate or severe problems of insurance fraud. The bureaus should have subpoena power and fining authority and should work with law enforcement and industry to investigate fraud. False Advertising Insurers who are not authorized to transact business in a specific state are prohibited from sending advertisements, which are designed to induce that state s residents to purchase insurance. These acts were enacted to protect insurance consumers from insurers not authorized to transact business in their state. These unauthorized insurers may be any insurance company organized under the laws of another state, as well as any territory of the United States or any foreign country. Since anyone who is not so authorized in the first place cannot conduct the business of insurance within a particular state anyway, the purpose of these acts is to protect insurance consumers from misrepresentation. No unauthorized insurer may issue any advertisement, estimate, or illustration, which misrepresents its financial condition, the terms of its policy contracts, benefits, advantages, dividends, etc. This includes newspaper and magazine ads, radio, television, and all circulars, pamphlets, letters, flyers, etc. If the insurance commissioner of one state has reason to believe that an insurer is engaging in this unlawful advertising, in some states he must notify the insurance supervisory official in the state of that insurer. Unfair Claims Settlement Practices There has been a great amount of legislation created to protect insurance consumers with respect to unfair claims settlement practices. No insurer in any state may engage in unfair claims settlement practices. Some acts that are prohibited are: the failure to acknowledge, with reasonable promptness, appropriate communications concerning claims knowingly misrepresenting to a claimant pertinent facts or policy provisions which relate to his coverage Insurance Fraud Awareness Page 16

17 the failure to adopt and implement effective and efficient standards for the prompt investigation of claims not attempting, in good faith, to make a prompt, fair, and equitable settlement of a claim submitted in which liability is reasonably clear compelling policy holders to initiate lawsuits in order to recover amounts due under policy coverage by offering to settle for an amount substantially less than is ultimately recovered by the claimant the failure to maintain a complete record of all of the complaints received during recent years or since the date of the last examination by the insurance commissioner, whichever is shorter. This record must indicate the total number of complaints, their classification by line of insurance, the nature of each complaint, their disposition, and the time to process each complaint committing any other actions which the state defines as an unfair claim settlement practice The Health Insurance Portability and Accountability Act This law creates minimum federal standards for health care insurance. The main goal of the legislation is to provide employees with continuous, portable health insurance, and to prevent insurance companies from denying coverage for individuals with preexisting conditions. The law mandates test marketing of medical savings accounts, increases health insurance deductions by the year 2006, and makes long-term care expenses and insurance deductible. Significant fraud and abuse provisions were included in the Health Insurance Portability and Accountability Act. This law creates several new criminal offenses with regard to health care fraud. It also extends the coverage of these laws to all health care programs--not just Medicare and Medicaid. The medical community succeeded in convincing the Congress to adopt the "knowing and willful" standard in the final version of the bill signed into law by President Clinton. The term "willful" is essential to ensure that inadvertent and accidental conduct are not considered criminal. The newly created criminal offenses subject to the "knowing and willful" standard include healthcare fraud, theft or embezzlement, false statements relating to health care matters, obstruction of criminal investigations of health care offenses and laundering of monetary instruments. In addition, the fraud and abuse provisions provide some clarification on the civil monetary penalties imposed. The law increases the existing $2,000 penalty to $10,000 for each day the prohibited relationship occurs and also imposes a $10,000 penalty for each item or transaction (that is, each incident of incorrect coding). Insurance Fraud Awareness Page 17

18 This law also clarifies existing law and specifically spells out that incorrect coding can be subjected to civil penalties. It states that a civil penalty can be assessed for a claim that the Secretary of the Department of Health and Human Services determines is for a medical or other item or service that the person knows or should know was not provided as claimed. The National Insurance Crime Bureau (NICB) Armed with new technology and analytical and forecasting skills, the National Insurance Crime Bureau (NICB) will help insurers go beyond managing potentially fraudulent claims to predicting when and where fraud will occur before it happens. It is information that can be used to anticipate fraud before it becomes a loss. And these benefits lead to a not only better bottom line for any particular organization, but also less insurance crime on the streets of America. A NICB department will be responsible for delivering strategic information on existing patterns and emerging trends of criminal activity that will help companies plan strategies and allocate resources. At the same time, the department's tactical information products will deliver information regarding a specific criminal event that can assist a company's investigations. Multi-claim, multi-carrier investigations of major criminal activity, in cooperation with insurers and law enforcement, are the top priority of the NICB's criminal investigation support services. Through a realignment of field operations, companies can work more closely with a more focused agent task force specializing in multi-claim, multi-carrier cases. NICB also will be devoting more investigative resources to a port and border interdiction program designed to stop stolen vehicles from leaving the country rather than allotting those resources to recovery efforts from foreign soil. Training programs for insurers, law enforcement, regulators and NICB staff are another core function. If we do not continue to stay on the leading edge of training, we will slip behind the criminal enterprises as they devise new ways to defraud insurance companies and the American public. Insurance Fraud Awareness Page 18

19 III Identifying the Fraudsters External fraud includes any fraudulent activity committed by applicants for insurance, policyholders, third-party claimants, or professionals who provide insurance services to claimants. These fraudulent activities include inflating or "padding" actual claims and fraudulent inducements to issue fraudulent policies and/or establish a lower premium rate. Internal fraud refers to fraud within the insurance industry itself. This activity includes bribery of company officials, misrepresentation of facts by insurance company officers, directors, employees, agents and brokers for their personal enrichment or to prevent regulators from taking certain actions, etc. External Insurance Fraud Individuals and/or organized groups who defraud the insurance industry through a myriad of sophisticated fraudulent schemes commit the most blatant type of external fraud. The most egregious of these schemes involve staged automobile accident rings and the filing of multiple fraudulent accident claims involving bogus or non-existent property damage. These schemes may also include the corruption of an insurance company employee; typically an insurance claims adjustor, to ensure the payment of the bogus claims. Upon payment, the parties involved split the resultant proceeds. Losses from fraud caused by managers and executives are sixteen times greater than those caused by non-managerial employees. Losses caused by men were four times those caused by women. Losses caused by perpetrators sixty and older were twenty-eight times those caused by perpetrators twenty years of age or younger. Losses caused by perpetrators with post-graduate degrees were more than five times greater than those caused by high school graduates. Characteristics of occupational fraud perpetrators could be as follows, if analyzing the perpetrators by position in the organization, gender, age, marital status, and education. The data indicates that non-managerial employees committed about 58% of the reported fraud and abuse cases, while managers committed 30% and owners and executives committed 12%. However, the median losses caused by non-managerial employees were significantly lower than those caused by managers and executives. Con Artists Insurance Fraud Awareness Page 19

20 Often the perpetrators are white-collar professionals operating from medical centers, law offices, auto repair shops, or even the house next door. With the cooperation of the insurance industry, through the receipt of criminal referrals from industry intelligence, the FBI will target individuals and/or organizations committing internal/external insurance fraud. The FBI will then be able to initiate and conduct traditional investigations as well as utilize sophisticated investigative techniques to apprehend the perpetrators. As a future goal, the FBI will pursue the implementation of a mandatory criminal referral system of suspected fraudulent activity. The FBI will ensure the successful prosecution of these individuals to the fullest extent of the law, often forcing their removal from the insurance industry and thus eliminating them from the crime problem. The FBI, in concert with the National Association of Insurance Commissioners (NAIC), is attempting to identify the top echelon con artists who are defrauding the insurance industry. Once identified, these con artists will be targeted in proactive investigations utilizing sophisticated investigative techniques in an effort to neutralize their efforts prior to their criminal activities becoming a larger, more egregious problem within the industry. Auto Salvage Fraud As a result of their efforts to salvage more cash from a crash, insurers have given risen to a littleknown industry that sells poorly repaired cars to unsuspecting consumers. When a car or truck has been so badly damaged in an accident that an insurance company declares it a total loss, it usually means the labor and parts required for proper repair would cost too much, given the vehicle's worth. The public might think that would put severely damaged vehicles on a one-way trip to the junkyard for parts or scrap. Instead, hundreds of thousands of these wrecks get right back on the road. Insurance companies, which own the piles of twisted metal after they pay off a total-loss claim, have discovered they can get more money for the bang-ups if they sell the wrecks at salvage auctions. The practice has fostered a thriving industry that rebuilds severely damaged vehicles--craftily enough to hide their traumatic pasts yet cheaply enough to turn a sizable profit. This shadow auto industry now annually beats, bends, and bangs out as many as 400,000 rebuilt wrecks that are five or fewer model-years old, according to surveys, and no authority keeps track of the total. That represents 3% of the 13 million used vehicles sold in that model-year group in But the number looms large, because rebuilt wrecks, like all used vehicles, are not subject to federal safety standards. Insurance Fraud Awareness Page 20