OUNCE OF PREVENTION | FRAUD
How Detection and Prevention Can Avoid the High Cost of Insurance Fraud
By Robert Horst, Dan W. Webb and David Rioux
According to the Insurance Information Institute, approximately 10 percent of the property/casu- alty insurance industry’s incurred losses and loss adjustment expenses may be attributed to fraud. Not surprisingly, insurance fraud claims have
increased as the American economy has declined. In 2009, the
National Insurance Claims Bureau reported a 14 percent increase
in the number of claims referred to the NICB for investigation of
potential fraud. In the same year, 68 percent of states surveyed by
the Coalition Against Insurance Fraud reported an increase in
automobile “give-ups,” in which policyholders (often behind on
vehicle payments) falsely report vehicles as stolen or destroyed.
Insurance fraud has significant implications not only for the insurance industry, but also for policyholders. Researchers have
estimated that American households pay an average of $200 to
$300 per year in increased premiums due to fraudulent claims.
The rise in fraudulent insurance claims highlights the need for
insurance professionals to redouble their efforts to identify these
claims. Twenty states have mandated that insurers develop and
follow detailed anti-fraud plans. Anti-fraud plans frequently in-
clude the following features:
• Extensive training programs for claims and underwriting per-
• Periodic audits of claim files by anti-fraud teams
• Procedures in which files containing certain “red flag” indica-
tors of potential fraud are identified and referred to anti-fraud
personnel for further investigation
In addition, many insurers take advantage of claims databases to
assist in obtaining prior loss histories and recognizing claims pat-
terns, both of which may be crucial to the identification of fraud-
ulent claims. A growing number of insurers also utilize sophisti-
cated data mining programs to help make accurate predictions as
to the likelihood that a particular claim is fraudulent.
Fraud technology can significantly expand the ability to identify
and investigate potential fraud over manual methods, yet technology is not a solution by and of itself. A quality fraud investigator
is essential to ensure that technology and knowledge/experience
are used in conjunction for maximum advantage.
Aggressively combating insurance fraud makes good business sense
because it affects the bottom line, competitive position in the marketplace and the policyholders. A strong anti-fraud program can
serve as a deterrent against those looking to commit fraud. Even
small changes in the fraud identification and investigation process
can have a large impact to the fraud mitigation rate.
Today, an effective fraud solution requires a holistic approach to the
problem, including support at all levels of the organization, as well as
a skillful blend and integration of technology, people and the right
business processes. Using the right types and mix of technologies in
concert with human talent like claims adjusters, investigators, ana-
lysts and legal counsel is critical to a successful fraud program.
The identification of suspected fraudulent claims is only half the
battle. Insurers’ use of experienced professionals within special
investigation units to investigate such claims has become vital.
Moreover, attorneys retained by insurers often play an important
role in the investigative process.
The Council on Litigation Management offers a seminar
entitled “Fraudulent Claims: Identification, Investigation
and Litigation.” This course will be offered at multiple
sites during 2011 and will provide information that will
facilitate the recognition of fraud, the investigation
necessitated by that recognition, the decision to deny or
litigate proactively, and the issues faced by the company
and each member of the team at the various stages in
the process. For more information on the seminar dates
or to learn how you can host a presentation of the
seminar at your company, visit litmgmt.org/training.
As insurers have increased their efforts in identifying and investigating potentially fraudulent insurance claims, litigation regarding such claims has inevitably ensued. Whether participating in
the investigative process or representing an insurer in subsequent
litigation, attorneys must investigate the potential existence of insurance fraud with the same diligence as their clients. Such investigation should include careful review of the claims file to analyze
whether the insurer’s determination of fraud has a reasonable
basis; follow-up interviews with claims personnel and investigators to confirm the basis for the insurer’s conclusion and assess
the strength of the case; and a detailed review of agent files and
underwriting files/material, including reviews of information related to the claims, the issuance of policies, and other information
that may be related to defense of the claim denial.
Proactive prevention of insurance fraud may prove as valuable as
the identification and investigation of fraudulent claims. Careful
attention must be paid in the underwriting process to ascertain
whether an applicant has a history of submitting fraudulent
claims and to identify other factors increasing the likelihood that
an applicant will commit fraud.
Robert T. Horst is with the law firm of Nelson Levine de Luca and Horst LLC.
Dan W. Webb is with the law firm Webb Sanders & Williams PLLC. David J.
Rioux is Vice President of the Corporate Security Department for Erie Insurance
and President of the International Association of Special Investigation Units.