Recession Increases Insurance Fraud

Does a bad economy increase crime? Analysts have debated that question for years, according to Mike McKee, senior special agent for the National Insurance Crime Bureau. While it’s too soon for statistics to confirm whether recent events like the mortgage meltdown and an increase in unemployment truly lead consumers to commit more crimes, McKee said at least anecdotally the economic recession is affecting insurance fraud.

“The special agents at NICB have been seeing some effect from the current economic situation on insurance fraud,” McKee said. Additionally, he said the recession is affecting fraud enforcement efforts in several ways. “One, it’s siphoning off investigators. For example, the FBI is aligning a lot more investigators to look into actual economic fraud investigations versus insurance fraud investigations. All of the bank problems, mortgage fraud, things like that are detracting from the investigations of fraud.”

The Coalition Against Insurance Fraud is seeing an uptick in different types of fraud such as auto giveups and arson, said Howard Goldblatt, director of government affairs. “Fraud bureaus are telling us this, we’re hearing it from the state fire marshals, and we’re hearing about it anecdotally through news stories. It’s clear that as the economy has gone down, the opportunity to commit fraud, to recover monies they think they need, has increased.”

And with anywhere from $80 billion to $200 billion lost to fraud each year, affecting all lines of the insurance business — health, property, casualty, life and disability — it’s no wonder that states are concerned with combating it.

Cashing in on Cars
Typically, insurance fraud is more prevalent in large, metropolitan areas. Large states such as California, Florida, New York and Texas also see more than a normal amount of fraud, McKee said. Yet across the nation, from Louisiana to California, insurance departments report they’ve seen an increase in vehicle giveups, where the owner alleges that a vehicle theft has taken place, but in reality the owner has gotten rid of the vehicle.

“When the owner is involved, they’ll often report the car stolen but actually take it out to the desert and set it on fire, then go back home and call the police, collect the insurance money, then pay off the car and make a profit,” McKee said. “Here in California, we’ve got a lot of waterways where they drive it into the water and just sink the vehicle.”

In some cases, with vehicle sales down and dealerships closing, another trend NICB sees occurring in Nevada and California is car dealership fraud. In this case, employees of car dealerships sometimes facilitate the theft and/or burning of vehicles to help the car owner pay off their old car and, in turn, have them purchase a new one from the dealership.

“CNN reported on March 17, 2009 that in the 4th quarter of 2008, 9 percent of all auto loans were one or more payments behind,” McKee said.

In California, John Standish, bureau chief for the fraud division, southern region at the California Department of Insurance, said staged accident rings are increasing. Criminal rinks are finding it easier to recruit alleged victims for insurance scams because of people being in dire straits, needing money and not having the capability to function, he said.

Personal Assets
When people are in economic straits, they also try to unload other valuable assets, such as classic cars or jewelry. New Hampshire’s Fraud Unit Director Barbara Richardson said her state’s Insurance Division has seen tons of jewelry go lost or missing in recent months.
Cindy Schmell, fraud bureau chief for the Iowa Division of Insurance, said her department has seen an increase in arson of both vehicles and homes.

“Desperate consumers also are torching homes — seeking an insurance bailout from foreclosure or general financial distress,” McKee added. And, in California, he said the NICB has seen a “tremendous increase in alleged smoke and ash cleanup, where three to six months after the wildfires, people are coming in and saying, ‘I had to spend thousands of dollars to cleanup my house for this ash and smoke.'”

Cargo and Copper
In the commercial insurance area, the most significant area of insurance fraud is in the rise in theft of cargo from inland marine type trucking companies, McKee said. Electronics such as laptops, video games and other equipment are being stolen off of the trucks. Semi-precious metals also are being stolen from commercial buildings, where circuit breakers are torn out, copper wiring is ripped out of the walls.

The base and semi-precious metal objects targeted are often kept in easily accessible or relatively unsecured areas, such as outdoors or at construction sites overnight, he explained. Copper had a significantly higher number of theft claims in ISO ClaimSearch than the other metals analyzed. People are also stealing catalytic converters to remove and resale the valuable metals, McKee added. And when that happens, it destroys the vehicles.

Workers’ Comp and Medical Claims
In the workers’ compensation, McKee said the NICB has seen people stay out longer on claims, and multiple body parts are reported in the same claim. “Rather than just a hurt leg, now there are two legs or a leg and an arm, or a shoulder and a back,” he said. “This of course increases treatments and payouts.”

Employees also are willing to litigate more in workers’ comp cases, instead of settling. This requires more testing and lab work. “And probably the most interesting trend we’re seeing is where employees expand the claim. For example, we had one case where the employee injured his toe, and this led to him not being able to sleep, so he had to have sleep therapy, and of course, this lead him to have sexual dysfunction, so he needed to go to a sleep therapy and for sex therapy,” McKee said.

NICB has seen a “pretty significant’ trend in medical identity theft and provider fraud, according to McKee. This is when someone steals a person’s identity, and medical and insurance information, then submits fraudulent bills to the insurance company for treatment the person did not receive. The check goes back to the fraudulent company, and the person is unaware that his or her identity was stolen or is being used for fraud, he explained.

Unreliable Agents
Last but not least, COIF’s Goldblatt and Ted Clark, anti-fraud division director for the Kansas Department of Insurance, said they have seen an increase in agents committing premium theft and diversion.

“We know agents — unscrupulous agents — are committing fraud,” Goldblatt said. “We know what they tend to do is take the premium checks that are intended to go to the insurance companies and abscond with them to embezzle them, to shift them for personal use while telling the insured they are covered,” he explained. In this case, insureds believe they have coverage, but the insurance company has no information on them, “and in some cases it only comes out after the insureds file a claim only to discover they weren’t covered,” he said.

“As economic times get worse, some agents feel the pressure, and those that are having problems anyway, have access to people’s premium dollars,” Clark said, noting his department finds that the majority of agents are honest, but investigates a small percentage for premium theft.

“Actually a very small percentage of agents do this, but unfortunately those unscrupulous agents that do, give everyone who is an agent or a broker a bad name,” Goldblatt concluded.

Clark, Goldblatt, McKee, Richardson and Schmell were participants at the National Association of Insurance Commissioners Insurance Fraud Training Seminar held in March 2009.