Insurance fraud: detection, prevention, and legal implications

Insurance Fraud

After tax evasion, insurance fraud is considered the highest-ranked among white-collar crimes. The original concept of insurance, as a for-profit endeavor, was to collect funds from a large number of people to pay for damages and accidents that involved a small percentage of the population that paid premiums. Insurance fraud is an ever-growing problem. Solving or eliminating this problem requires the resources and knowledge of individuals or associations with expertise ranging from not only insurance, but also law enforcement, legal issues and the social sciences. The concept of insurance fraud, both, by an individual and a corporation, has become so pervasive in today's society that the general population has learned to tolerate and condone these crimes.

Various organizations, funded by state and federal governments, and supported by the insurance company, are trying to increase the awareness of this problem among the general population. Annually, an average American family spends approximately, an additional $1,000 in premiums for home, health and auto insurance because of fraudulent claims.

In addition to the individual, governments, employers and local businesses also pay the price in higher premiums for goods and services provided. Many small companies often are faced with insolvency due to this high business cost.

Introduction:

Insurance is not an investment where one cannot expect to get one's money back at the end of the term or period; nor is it a gamble with resources. Insurance offers protection against risks that already exist. Risks are events or incidents that can cause extensive loss and damage to both life and property. It is essentially a risk-sharing scheme. Insurance has existed in various forms for thousands of years. In ancient times, the Babylonian laws as part of Hammurabi's Code were a form of insurance-practice observed among the citizens of the land.

Fraud in the insurance industry has existed ever since insurance (as we know it today) as a concept was first introduced in the seventeenth century. Insurance fraud occurs when people deceive an insurance company or agent to collect money to which they are not entitled, as per terms of the insurer-insured agreement. Strictly defined, insurance fraud is: "the intentional misrepresentation of material facts and circumstances to an insurance company to obtain payment that would not otherwise be made."

The purpose of this thesis is to identify the different types of insurance fraud perpetrated today, and to evaluate their effect on the insurance industry and society at large. Evaluation of the preventive measures that can be taken to help prevent and reduce the number of fraudulent claims will also be discussed. The effect of fraud on both individuals as well as businesses in quantifiable and unquantifiable ways has a tremendous backlash on the individual, and consequently, on society.

History of Insurance:

One of the most famous insurance providers in the world today, Lloyd's of London came into existence in 1688. Edward Lloyd owned a coffeehouse in London where merchants and bankers evaluated the risk of the maritime operations of seafaring vessels used for trading among the various British colonies and those used for prospecting new lands. Financiers for the expensive endeavors and trips to far off lands invested huge amounts of money in the hope that the voyages would be successful. Ship captains required money for supplies and goods, and would offer to embark on these dangerous trips with the help of these financiers -- a potentially, mutually beneficial endeavor. The financiers would sign contracts with the captains of these marine vessels for specific sea-going risks that an ocean-worthy vessel would encounter. The financiers would specify the amount of monetary compensation that would be provided to the captain or his trustees for the ship and its cargo (if any) should the ship fail to return to port in good condition or if the ship was lost at sea.

In return for this 'security' that the financiers provided, the captains would pay an amount (now known as premium) to the financiers for this "insurance" service. Based on the stipulation of the document, both parties would agree on a specific amount prior to the trip. Voyages were not always successful and sometimes the financiers had to compensate the shipping company, captain or the company's trustees when the ship was lost or damaged. Later, financiers were called underwriters. In 1769, a group of financiers at Lloyd's coffeehouse formalized their association and became the first insurance company. This company operated in a manner similar to modern insurance companies. Lloyd's later diversified and widened their base of operations to include a wider variety of risks and ventures that were not all connected to the marine industry. (WatchTower, 2002)

The nature and type of rules governing the insurance industry vary from country to country depending on the purpose of insurance desired and the extent of its coverage. The basic operating principles for all insurance companies no matter what services they provide are the same: "collect from many so a few can get paid for calamities with which they are involved." While at a superficial level, all insurance companies advertise themselves as a kindler-gentler operation, trying to instill a sense that the company is really a charitable operation, it must be remembered that like any industry, the sole aim is making money. Thus, "from-many-to-few" is the only way by which insurance companies can stay in business and provide the services that they do. The term "insurer" includes anyone authorized to be in the business of selling insurance (insurance companies) as well as those authorized to do business (insurance agents) in a specific state.

Insurance coverage is generally classified into the following categories based on the risks they cover: property insurance, liability insurance, health insurance, disability insurance and personal life insurance. Property insurance covers the loss and damage to property, which may be either business or personal. Often a business property or a house is a person's biggest asset. In the absence of insurance, any loss or destruction to this property can cause serious financial problems. Liability insurance covers against injuries during an accident to either the insured or a third person. Health insurance offers coverage for health and illness that can occur to an individual or a family. Employers often offer health insurance as a major benefit to their employees and, in some cases, even the employee's family. Disability insurance is offered when individuals sustain serious harm that cannot preclude them from going about their daily routine. Disability insurance offers protection against a situation where the breadwinner of the family gets disabled and cannot work. Such insurance offers a fallback to the family and the individual till other options are available. Life insurance offers protection against the death of the policyholder and is generally paid to the deceased's next of kin or a person or association the deceased has named as the primary benefactor.

Insurance Fraud:

Insurance Fraud' is rated America's second highest white-collar crime after tax evasion. Fraud has become a major concern to the insurance industry in this century -- especially in the last forty years. Insurance fraud is a crime that is a perfect illustration of the snowball effect: it starts by affecting an individual or an organization, affects a community, society and even the country. Insurance fraud is not only committed by claimants: Broadly defined, there are three major categories of fraud in the insurance industry based on what side the perpetrator of the fraud is: claims fraud, applications fraud, and fraud committed by employees in the insurance industry. The last includes agents, adjusters, brokers or persons claiming to be in the business of insurance. Applications fraud is generally committed by the insured or customer and includes application for any insurance policy providing false information about the risk involved, the age of the insured, the geographical location or any other material evidence that can serious affect the insurance policy-rating. Fraud committed by the insurance industry includes solicitation of a fabricated and non-existent type of policy or service; requiring that the insured give the insurance company or agent a certificate of authority for personal and business insurance; and, misrepresenting the financial status of any insurer. The Coalition Against Insurance Fraud estimates: "Insurance fraud costs Americans at least $80 billion a year, or nearly $950 for each family." (CAIF, Insurance Fraud: The Crime You Pay For, 2002) fraudulent act is: an act based on a conscious intent to defraud someone of money, property or identity, and the act can be committed either against an individual, an insurance company or a consumer. The Unlawful Insurance Act requires a lower burden of proof (of fraud) and is designed to attack scams such as medical billing agencies and fraud rings in which the leaders and the brains behind the scam are often able to escape without prosecution due to the loopholes in the laws as they exist today. (AAA, 2002) year 2000 study by the Hartford, Connecticut-based Conning & Co., claimed that insurance fraud costs the American public $96 billion dollars annually in increased premiums. Honest consumers, business and governments pay the price for this crime. The Coalition Against Insurance Fraud estimates that healthcare fraud itself cost Americans about $54 billion dollars annually. More than one third of the people hurt in auto accidents exaggerate their claims so as to obtain additional and higher compensations from the insurance company.

Research into insurance fraud shows that certain types of insurance are more vulnerable to fraud than others: Health care, workers-compensation and auto insurance are sectors considered the most vulnerable. Fraud is also more prevalent during an economic recession than when the economy is doing well and the financial markets are on an upswing.

National Insurance Crime Bureau (NICB) noted that, historically, there have been increases in the number of fraudulent claims reported after a major disaster -- natural or man-made. For example, after the 9/11 terrorist attacks, several fraudulent claims were filed with New York's insurance companies. Insurers do not like asking too many questions during sensitive times, especially when human emotions and sentiments are running high. Criminals know this and use it to their advantage. Similar patterns of fraud were also observed after Hurricane Andrew hit south Florida in 1992. During such times, investigators and criminals become acutely aware of the fine line between investigating suspicious claims and harassing legitimate claimants. (FloridaDOI, 2001)

Many states also have a maximum time requirements by which the insurers must pay a claim. This requirement is imposed on the insurers by the Fair Claims Practice Regulations that each state sets up. This time-restriction makes it difficult for the insurance company to adequately investigate suspicious claims. Fraud is also more prevalent in some geographical areas than others. Cities and densely populated areas have more fraudulent claims reported, and a high percentage of these claims go uninvestigated or unpunished. It is more difficult to file a fraudulent claim in a small town where the communities tend to be closer-knit and interactions between members of the populace are higher. A study by the Insurance Research Council (IRC) showed the variation in the amount and type of fraud committed in different regions of the country and in urban vs. rural or suburban areas within the same state. For instance, the incidence of fraud was more than twice as high in California than in Michigan and Missouri. In the city of Los Angeles alone, 67% of claims contained element of fraud, versus 45% of claims for rest of the state of California. (Insurance Information Institute Inc., 2002)

There are many agencies currently established in the United States to identify criminals who are involved in Insurance fraud and bring them to justice. The Insurance Research Council (IRC); Coalition Against Insurance Fraud (CAIF); American Risk and Insurance (ARIA); National Association of Independent Insurers (NAII); The Insurance Fraud Bureau of Massachusetts (IFB) and International Association of Special Investigation Units (IASIU) are some of the agencies currently involved in helping solve the Insurance fraud problem.

The International Association of Insurance Fraud Agencies, Inc. (IAIFA) was set up in North America (the United States and Canada) when it was discovered that insurance fraud obeys no boundaries and there are no special governing factors that make it different than in countries around the world. Sharing knowledge, intelligence and know-how is important if the perpetrators must be caught and brought to justice in the shortest possible time. Globalization followed by the entrance of many foreign and multi-national insurance companies in different domains make it difficult to evolve a global, coherent policy to impede the incidence of fraud.

The organizations involved in fighting insurance fraud have to work closely with each other to help identify and trace repeat offenders and individuals trying to pad insurance claims. The National White Collar Crime Center (NW3C) is one such organization that provides services and logistical support to state and local agencies in preventing, investigating, fighting and prosecuting crimes that are involved in the high-tech and financial arenas.

The success of the battle against insurance fraud depends on two important factors: the resources devoted by the insurance industry itself to detecting fraud and the level of priority assigned by legislators, regulators, law enforcement agencies and society as a whole to eradicating fraud. There have been suggestions that a comprehensive industry database of all claims be created. When this database is combined with the sophisticated claim-analysis technology available today, this system can be a powerful weapon in the war against insurance fraud. Information technology can play a crucial role in helping the industry soften the blows of future natural catastrophes that affect the insurance industry and control the costs of fraud. Modeling various scenarios can help the insurance companies evaluate the condition of the industry and formulate a suitable plan to attack the problem.

On September 13, 1994, then-President Clinton signed the Insurance Fraud Protection Act (the "Fraud Act") into law. This act was a part of the anti-crime bill titled the "Violent Crime Control and Law Enforcement Act of 1994." Insurance fraud was, in the past and always is even today, thought of as a 'victimless' crime -- no one really sees the long-term and indirect consequences of such a crime on society. Simply put, fraud helps increase insurance costs for everyone. (Childers and Chism, 2002)

The purpose of the Fraud Act was to help protect consumers and insurance companies from the white-collar crimes. While laws can help bring the criminals to justice, the general population has to be made aware of what constitutes an insurance fraud crime. Large-scale Insurance frauds can drive many insurance companies into insolvency.

The fraud act includes a provision which prohibits any person who has been convicted of a criminal felony involving dishonesty or breach of trust from engaging or participating in the business of insurance unless that person has the written consent of an insurance regulatory official authorized to regulate the insurer. However the letter of the law does not give clear guidelines as to when the provisions should be utilized and the necessary procedures for complying with this provision.

How Insurance Frauds affects society:

Fraudulent Insurance dealers swindle a number of innocent people out of their life- savings by taking money and often an entire retirement savings for investment in fraudulent insurance investment schemes. Naive, elderly and uneducated people can be especially vulnerable to an expert con artist who can make sales pitches for the schemes with fabricated data. Insurance fraudsters use very elaborate accounting gimmicks to create impressive-looking documents by combining features from mediocre companies to produce a mission statement for a fabulous company.

The Health care industry is also very vulnerable to insurance crimes. The sale of non-existing health policies or the sale of policies involving the services of quacks and illegal medical personnel can seriously endanger the lives of the victims and can at extremes cases result in the death of the victim or a family member. Fictitious and fabricated companies that provide medical services also swindle the insurance companies for claim amounts with regards to services never provided.

Due to fraudulent claims and payments made by the insurance companies towards these claims, the premiums for auto and homeowner insurance are constantly increasing. The Insurance companies are for-profit businesses and they pass on the cost of running the business to the policyholders. Higher the cost of running the insurance business, the higher the premium people pay for routine insurance policies.

The cost of goods and commodities at the department or grocery stores are also constantly increasing. Businesses have to pass on the cost of higher business insurance and liability insurance to the customer.

Small businesses often have to undertake the burden of higher health insurance coverage for their employees and higher business insurance. Often small business may have an ideal product or service to market but the high insurance cost can reduce the profit margin thereby not allowing for greater expansion and improvement.

Damage to life and property can occur when individuals hoping to get retributions for the damage stage accidents and arsons. Children and the elderly are especially vulnerable when they are held as pawns and/or murdered to obtain life insurance money.

The overall economy of a state or region can be seriously affected when too many fraudulent claims are filed in a short period of time. The fund reserve that has to be available for an insurance company to operate may eventually end up being too low to sustain the business. Insurance is a very labor-intensive business; when the funds run low, the company has to file for bankruptcy and lay off all the employees thereby increasing the unemployment rates.

Individuals who are involved in fraud-schemes often move from company to company, wreaking destruction in their wake. Often this behavior-pattern reflects on the company for which they work. It is very difficult often to pin the fraud on individuals who may actually have committed the crime and often a scapegoat is generally held responsible.

Classification of Fraud by the Insurance Companies:

Insurers classify fraud as either 'hard' fraud or 'soft' fraud. When an accident, injury, theft, arson or any other loss is deliberately staged either individually or as a group to collect money from insurance companies the crime is classified as a hard fraud. It has been increasingly observed in recent times that organized crime groups and regional gangs are getting involved with more large-scale and intricate methods of swindling the insurance company using hard fraud methods. Innocent bystanders or individuals who are desperate for money may get involved with these staged accidents that may endanger their life and property.

In the case of soft frauds however, honest people who do not really want to swindle or cheat the insurance company commit the crimes. They tend to 'pad' or inflate genuine claims so that they recover some incidental expenses such as the deducible amount that generally accompanies any insurance policies or to recover the expenses of clean-ups and other incidentals that may have accrued as a result of the accident. This type of fraud is difficult to identify, as the perpetrator is not a repeat offender (or a criminal), rather he or she may just use the circumstances to their advantage.

The amount by which the claim is inflated by may be very small and almost inconsequential for one person, but the cumulative effects when added over every aggrieved section of society this amount ends up costing the insurance company millions of dollars.

Fraud committed by individuals, whether it falls into the category of soft fraud or hard fraud, such as staged accidents, or "non-professional" fraud, does not seem to be limited geographically, is not salient to any specific race or gender. The problem appears to be more universal. 'Soft fraud" is far more frequent than "hard fraud."

Insurance fraud -- soft or hard -- is a very difficult crime to catch. The claim may be a genuine accident; insurers are cautious about further hurting the sensibilities and the sentiments of those involved in the crime. The offenders understand this fine line that the insurers have to draw between being aggressive in catching criminals involved with insurance frauds and actually harassing a genuine accident victim. Many Americans think it is all right to inflate their insurance claims to make up for all the insurance premiums they have paid in previous years when they have had no claims, or to pad a claim to make up for the deductible they would have to pay.

Insurance fraud status as a crime:

Insurance crimes are viewed as low-risk high-reward crimes. On an average, most insurance crimes are white-collared and do not involve high risks for the fraudster, especially when the criminal is not after large profits as in the case of robbery. The insurance fraud laws are also still in their formulation stages and six states still do not have insurance fraud laws. This makes it difficult for law enforcement personnel to enforce laws and bring criminals to trail. The sentences given to insurance fraud offenders are generally light, as these crimes are not considered to be heinous and dangerous to life and property in general. In short these crimes are classified as minor or small crimes. Juries and prosecutors generally reserve longer and stiffer sentences for the more dangerous and violent crimes committed by criminals. Also to bring the crime to light requires the co-operation of peers in the field and it is very difficult to get a peer to report a crime unless the crime is of a very serious nature. (CAIF, Insurance Fraud: The Crime You Pay For, 2002)

Insurance fraud is a constantly growing crime. All indications show that it has still a whole lot more potential for growth. Insurers often take very firm action against culprits who commit large-scale fraud and hard fraud. In some cases, analysis is carried out for specific claims to determine if the claims should be paid or not. Often the insurers arrive at the conclusion that it is cheaper to settle a claim than having to invest and deal with very long and expensive legal battles to prove the point. Often the insurers have the feeling or partial proof that the claim has been padded or the evidence tampered to indicate more damages than actually true.

There is also the fear that if proven wrong in the case where the offence is very minor, the company may be held liable to a defamation lawsuit that may cause the company millions of dollars. The insurance industry is a very competitive business, with companies constantly wanting to get a larger market share in the insurance areas of operation. Introducing and enforcing very strict rules and regulations for settling claims reduces the clientele that would normally be attracted to the company. Insurance companies seeking growth therefore have to perform a balancing act between self-preservation and pursuit of potential fraud.

The health care industry in the United States is a multi-million dollar business. In a recent survey the average person rate the need for health insurance as very important and essential. Health insurance coverage was also rated as one of the highly valued perks provided by employers today. The average lifespan of an individual has also increased in the last few decades thereby increasing the stress on the health care system. The number of treatment options available has also increased and hospital. With it comes the increased liability with lawsuits.

The complexity involved in the diagnosis of illnesses and the extent of specialization that is currently followed in the health industry make the tracing of medical information long and tedious. The billing system currently used is also very complex and offers numerous loopholes for con artists. The healthcare industry is currently trying to reduce overhead costs and "trim the fat" in the healthcare system. Doctors, nurses and assistants are overworked and constantly stressed in trying to balance profitability and care. This encourages many doctors and hospitals to inflate their bills and costs to recuperate losses that they may have incurred from non-paying instances like emergency visits. These factors increase the vulnerability of health care to fraud.

Practitioners are generally defined as individuals who help the insured file and report claims. The insurance companies compensate these specialists, wholly or partially. As a law, all practitioners have to be licensed in the state where they operate. Often, unscrupulous health care officials -- individual doctors, hospitals and primary care providers help and assist individual for their own personal gain. Fraudulent claims are made more foolproof by the criminals who also utilize the services of lawyers so make sure that all the loopholes that can arise in any situation is perceived as standing on firm legal ground.

Large groups of the immigrant population (legal and illegal) in the United States are also easy targets for health insurance fraud criminals. This demographic, especially from third world countries where the health care system is not very organized and streamlined have no knowledge of how the health insurance industry operates in the United States. This same problem is also applicable towards other insurance arenas such as automotive and home insurance. Lack of the English language skills, and little or limited knowledge of how the legal system makes these immigrants more vulnerable to schemes by con artist. In the case of illegal immigrants, the fear of deportation makes them easy targets for the fraudsters. They are also less likely to report a crime against them, and more likely to be involved at the lower end of most scam deals. (CAIF, Insurance Fraud: The Crime You Pay For, 2002)

Insurance agents, building contactors, adjusters and automotive body shop and repair dealers have to also work in close proximity to help ensure that the fraudulent claim passes through the various stages without too many hurdles and queries.

With the advent of the Internet, fraudulent schemes operated over the Internet obey no regional or geographical barriers. This makes the problem of insurance fraud all the more difficult for insurance companies to identify and tackle in different areas. The IAIFA is trying actively to reduce regional jurisdictional barriers that may arise when a crime is committed long distance or from different countries, especially in the case of identity theft using credit card information that may have been obtained either legally or illegally.

Insurance crimes, especially those dealing with financial fraud, are very complicated and require the expertise of professionals to help identify the nature of the crime and how it was committed. When the crime involves fabrication of accidents, arson and staged accidents it becomes very critical to be able to simulate and prove that the accident was indeed staged and occurred as a result of careful planning.

Forensic scientists constantly attempt to perfect the science to identify and restrict fraud. The technical nature of this work requires that insurance companies retain experts, the cost of which can be very expensive for the long-term, as insurance crimes can have variability in modus operandi.

In addition to all the above problems, which help insurance fraud increase and multiply in America, an important feature is the attitude that the average American has towards the insurance crime -- they tend to tolerate and live with the problem. Such a level of tolerance has helped ensure the next generation of the insurance fraudster. Although the annual insurance cost per family is about $1,000 per family, Americans see no way out of this problem and have learnt to accept the problem.

The Internet also currently acts as a good medium for carrying out faceless crimes. Computer-savvy criminals can easily put a number of new insurance swindle schemes together within a short period of time. Often the criminal may not even live in the United States but may target the American public with these schemes. With the ever-increasing global marketplace, huge money laundering insurance schemes are easier to set up and operate. Law enforcement official will have problems keeping track of these criminals and bringing them to justice.

Many organized fraud rings are increasing their operations within the United States. Immigrants are good targets for the fraudulent crimes. However, it is being increasingly observed that immigrants themselves collude with organized crime groups, often in the hopes of earning a living. When the immigrants are illegal, it is easier for the mafia to control them by implicating them in illegal activities.

Types of insurance Frauds:

Staged Auto Accidents:

This occurs when an accident is caused intentionally in order to collect insurance payments for injuries that are either nonexistent or greatly exaggerated. Often these types of staged accidents can cause serious harm to innocent victims who happen to be at the wrong place at the wrong time. On a California freeway near Long Beach, Isidorio Medina Gomez and Esteban Galves Solano stopped suddenly in front of a tractor-trailer. Juan Lopez, his wife and two-year-old daughter traveling behind this tractor-trailer were run into by another tractor trailer that could not stop in time. All three Lopezs were burnt alive.

These staged accidents are generally done by a group of two of more people. The criminals traveling in front of a victim suddenly stop very quickly or for no apparent reason. The driver traveling behind this vehicle has little or no time to stop and inadvertently hits the rear of the vehicle in front. The criminals normally fill personal injuries claims in order to collect from the insurance company: whiplash, fabricated neck and back injuries are commonly reported in these cases. In addition, these criminals will also collect for damage to the automobile. Another type of staged accident is when an innocent party is trying to merge into traffic the criminal may signal that it is safe to merger and then hit the vehicle while it is in the process of merging. Later when the criminal makes a statement they claim that they had never indicated that it was safe or okay to merger in front of them. Hit-and-run staged accidents are also common, this generally occurs when an insured uses a damaged vehicle and claims to be the victim of a hit and run. It is very difficult for the police to verify and prove the damages.

Staged accidents are generally the handiwork of organized criminal groups that also have the active help and participation of an attorney and a medical care provider. Due to the number of staged accident, innocent victims who were involved in an accident that have the similarities of a staged accident may have to prove to the insurance company that the accident they were involved in was genuine. In these cases, the insured accuse the insurance companies of harassment. The companies then lose public trust with ramifications to the overall health of the insurance company.

In an attempt to combat fraud, insurance companies sponsor a number of television and radio commercials to instill good road habits -- safe distances and not tailgating, yielding etc. In cases where an accident does occur and a victim feels that they were innocent they should insist on calling the police to the scene and make a statement. The companies suggest taking photographs of the accident and recording the number of people in the car. In some cases, the owner of a vehicle will fabricate an accident report to cover existing damage that their personal vehicle may have sustained in the normal course of operation and collect insurance money for non-existent damage.

Arson-for-profit:

When an owner of a business deliberately sets fire, or hires someone else set fire to a business, home or vehicle for the purpose of collecting on an insurance policy, it is classified as arson-for-profit. Helen Tidwell received a 30-year prison sentence in 1999 for arson. Three years earlier, she recruited two local teenagers to burn down her Tampa Bay, Fla. restaurant, Gram's Country Kitchen. She was sure that she would be able to collect insurance money. In the process of setting the fire however, the gasoline used by the boys accidentally ignited causing an explosion in the restaurant. This explosion killed one of the boys and seriously injured the other. In another instance, Emile Moreau, a landlord was charged in a December 2000 for trying setting fire to his (heavily mortgaged) building. He also resided in the building and recruited an accomplice, Vincent Allen to abet his mischief. He believed that the insurance compensation would help tide his financial problems. (DAQueens, 2002)

Arson is a particularly egregious fraud. It puts emergency personnel like firefighters and police at risk, besides the threat to neighbors and their property. Knowledge of the science and methodology of the dynamic behavior of fire is also needed to solve an arson crime. Arsonists destroyed $1.5 billion in insured property in 2000, including factories, residential buildings, churches and motor vehicles. The National Board of Fire Underwriters was formed in 1866 to combat the growing problem of arson in that period. Since then they have tried to stay one step ahead of the law using state of the art laboratories and research center to combat the problem.

It is never easy to know why people actually get involved in arson: the financial motives may be very strong; in some cases, a business that is not doing very well, accumulation of too much inventory that is not selling as estimated, an attempt to prevent insolvency of the company, the fear of having to liquidate the business to a competition, problems among the partners of the business or just the need to get money from a claim filed. Insurance companies try to verify financial statements such as the balance sheets -- generally considered to be a "snapshot" of the financial condition of the business at a given point in time, income statements, accumulated retained earnings statements, statement of source and application of funds, and analysis of changes in working capital to help identify if there were any visible trends and indication that the business owners may be trying to collect money. In depth analysis of these statements can help determine if the cash flow was sufficient to tide the company in the near future. Some business ventures are just riskier that others. For example, it is very difficult to determine if a hardware store carrying gasoline and inflammable products involved in an explosion was really the result of arson, as opposed to a genuine accident. (Insurance Information Institute, Arson, 2002)

Accounting experts are generally required to evaluate the material from a business or individual to determine if there is a justifiable reason for fraud by arson. Fraud perpetrators, ensuring that all papers filed appear to be genuine and foolproof, often also use expertise from the financial and accounting field. The burden of proof of arson generally rests on the insurer. The technical aspect of this type of crime makes it very difficult for law enforcement officers to identify key players and operators.

Red flags in financial statement analysis are critical in assessing the financial condition of a business in arson for profit investigations. Emile Moreau was over $50,000 in arrears on a mortgage for the premises that he tried to burn down. He also owed $200,000 to Owen Federal Bank for the property. If the insured claims that important records have been destroyed or "lost" in the fire, investigators have to be able to reconstruct these financial statements to help determine the condition of the business. Suppliers, accountants, bookkeepers, current and former employees of the business will have to help either prove or disprove that a crime occurred. This type of investigation gets more difficult and challenging for the insurance companies.

In addition, investigators also have to possess knowledge in fire dynamics, fire chemistry, electrical fire causation, burn-pattern analysis and fire scene documentation. To combat arson, insurers are increasingly using computer-modeling programs that show how different burning materials react with specific structures, enabling investigators to determine how the fires were started and spread. In cases where prosecution of arson cases are built primarily on circumstantial evidence, it is imperative that no stone is left unturned in trying to obtain all necessary information. Evaluation of the arson site for any chemical that may have been used and the necessary conditions by which these chemicals prove to be hazardous is also required. The knowledge of chemistry of fuels and explosive mixtures can also help provide evidence of a crime. In addition, an investigation must also be conducted to determine if any attempts were made to contain the fire.

Health Insurance Fraud by both individuals and corporations:

Both, corporations and individuals commit health insurance frauds. The Health Insurance Portability and Accountability Act of 1996 prohibits providers from disclosing most types of patient-information without patient consent. Many individuals use this law as a safe haven while committing health insurance fraud. Private fraud and abuse investigators are responsible for providing the best service to their patients as well as to detecting wrongdoing within the health care industry. (CAIF, Phony Health Coverage -- People Left Dangerously Uncovered Throughout U.S., 2002)

Fraud and abuse in the health care insurance sector takes place at many points in the health-care provision-process. Columbia/HCA Healthcare had over-billed taxpayer-funded Medicare for years by approximately about $754 million. Many organizations bill the insurance companies millions of dollars for test and procedures for patients that were not performed. The detection and prosecution of health care abuse received a boost from a provision included in the Health Insurance Portability and Accountability Act of 1996 (see Federal Legislation), which was responsible for recovering more than one billion dollars for the Medicare Trust Fund. This money was used to help upgrade the fraud detection system laboratories and research centers.

Unethical medical providers often operate with healthy patients to create fictitious illnesses for the sole purpose of collecting insurance money. These providers recruit middlemen who in turn recruit patients for these schemes. Everyone down this chain of fraud gets a share of the pie with the largest portions going to the person at the helm. The providers often bill insurers for multiple office visits and tests that never take place.

Recently, grand theft charges were filed against 12 people. Eleven were current or former employees of Jackson Memorial Hospital, Florida. These individuals participated in fraudulent claims for unnecessary and nonexistent medical supplies and collected thousands of dollars from a self-insurance plan for Miami-Dade County. In another case, a group of individuals set up a fraudulent heart monitoring service and billing company. They swindled the insurance companies of nearly $1 million for services they never provided. This company lured more than 300 patients into a million-dollar billing scheme. The network was formed of five heart monitoring service companies, three medical companies, a medical billing company, a management company and an unlicensed physician based in Miami. The hospital workers took a very active part in helping these criminals set up shop. Referrals and recommendations were given to accident victims to encourage them to visit a "doctor" to check for soft tissue injury problems and fictitious bills were sent to the insurers.

Such situations can cause serious long-term damage to patients in serious need of medical care. Clients should be more knowledgeable about the type of insurance policies that they possess, and the applicable services and deductions. They should scrutinize bills to ensure that they are getting accurate service. There are situations where the hospital may require tests and the treatment may not correspond problem diagnosed. Individuals should be wary of these practices as they may unintentionally get embroiled in a scheme with these fraudulent medical practitioners. Medical practitioners often refer their patients to attorneys who may try to get the patient to file fraudulent claims.

Doctors may prescribe wrong and harmful procedures. Harold Goodman, an orthopedic surgeon routinely gave patients potentially harmful X-rays and steroid injections they didn't need so he could falsely bill Medicaid. Goodman did not spend a lot of time with his patients and was not very knowledgeable about their medical history prior to him writing up prescription. Currently, the Federal and State governments are setting up fraud investigating agencies that are specializing in identifying and checking the frauds plaguing the Medicare and Medicaid agencies. Tougher penalties are also being given to criminals involved in health insurance frauds. Stricter and more stringent rules have helped reduce the cost of healthcare coverage for all policyholders.

Aging baby boomers and a rising average age of the population will place huge stress on the medical infrastructure. Such a chaotic situation no doubt, will encourage fraudsters to come up with more elaborate and brazen scams to defraud the insurance industry. The healthcare industry is also very susceptible to electronic data interchange (EDI) fraud or direct filing fraud.

Workers Compensation Fraud:

When America went through the industrial revolution, the only way a worker injured on the job could obtain compensation was by suing their employers for negligence at the workplace. This process of proving negligence was very costly to the worker and also very time consuming. The most damaging factor was that the court often ruled in favor of the employers. Employers had the advantage of deeper pockets and better legal counsel.

Wisconsin was the first state to enact a permanent workers compensation law in 1911. By 1920, almost all states had workers compensation laws. Essentially, these laws state that compensation would be provided to workers hurt on the job, regardless of who was at fault. The employer was responsible for paying the costs of the medical treatment and wage loss benefits. As a part of this law, the employee surrendered the right to sue the employer for injuries caused by the employer's negligence. Compensation levels are not uniform. They vary depending on the state and the type of injury. (Insurance Information Institute, Workers Compensation, 2002)

Workers compensation insurance helps provides for the cost of medical care and rehabilitation of employees injured while on the job. It helps provide lost wages and death benefits for the dependents of persons killed in work-related accidents. The compensation awarded to workers for different types of accidents vary from state to state. The American workforce is protected by compulsory workers compensation insurance. The program covers about 90% of legal workforce. Texas is the only state in America where employers are not required by law to compulsorily purchase workers compensation insurance. Florida workers compensation costs are among the highest in the nation due to their eligibility standards for permanent total disability (PTD) benefits.

The use of robots and automated processes has reduced workers' exposure to hazardous activities in the workplace. Employers are also becoming increasingly aware of these technological changes in reducing worker hazard. Greater the hazard to the worker, the higher the premiums that employers have to pay. The use of power tools and better ergonomically designed equipment has helped reduce the strain experienced by workers. Workplace-related fatalities dropped 2% to 5,915 in 2000 from 6,023 in 1999, according to preliminary data from the Bureau of Labor Statistics (BLS).

In an IRC survey conducted in 1999, over one third of those surveyed believed that it was acceptable for employees to stay out of work and collect workers compensation benefits because they still feel some pain, even though their doctor said they are able to return to work. This attitude has made workmen compensation premiums escalate in the last few decades. However, the public is also very skeptical of the doctors and the healthcare service providers as many of them do work very often in conjunction with the employers to make little of genuine injuries and accidents in order to not pay worker compensation claims. The workers are also afraid of recurrence of an injury if they are not completely healed, and the potential long-term consequences. In many cases, the state imposes laws that require monitoring doctors in workers compensation programs to ensure that "return-to-work" recommendations are justified.

Workers often collect compensation for injuries that may have occurred while they were not in the work place. One of the most common frauds is the 'Monday Morning Injury.' An employee falsely claims an injury sustained elsewhere to have occurred at the workplace.

Alternatively, employers try to fraudulently obtain benefits using worker compensation insurance programs. Employers often misrepresent their payroll or the type of work carried out by their employees in order to pay lower premiums. The number of employees and the type of work carried out are important determinants for the amount of premium that the employer will finally pay. The greater the number of employees working in an area the higher the chances that more people would be hurt in case of an. Occasionally, employers sometimes apply for coverage for the same employee under different names in an attempt to recover for previous claims or to avoid detection of their poor claim record, which would put them in a higher rating category.

Property/casualty insurance fraud:

Insurance companies were billed approximately $27 billion in 2001 due to property fraud. An IRC report stated that property/casualty insurers spent an estimated $650 million to fight fraud in 1996. Hurricane Andrew that hit south Florida in 1992 was the most costly catastrophe on record and caused $15.5 billion in insured property loss. This caused nine regional insurers to go belly up. (Hartwig, 2002) While most of the claims filed were genuine, many were fraudulent. In a few cases, clients padded the damages to obtain more from the insurance company. Consumers have to be better educated on how to protect their property from catastrophic loss. Federal Emergency Management Agency (FEMA), Insurance Departments and Agent Associations, all provide valuable information to help reduce these losses. (Stewart, Disasters: From Prognostication to Preparedness, 1995)

Most insurance policies are based on the principle of subrogation (it comes from the Latin word subrogoree meaning, to substitute) where the risk is passed on from the insured to the insurer. (Stewart, There's Gold in Subro Hills: A Guide to the Mining of Subrogation Recoveries, 1995) The burden of proof rests with the plaintiff. The property-casualty insurance policy is a contract of indemnity; a contract with the purpose of putting someone back in pre-loss condition, and in the true sense satisfy the meaning of subrogation. Unjust enrichment is a legal theory; it holds that one person should not be permitted unjustly to enrich himself at the expense of another through fraud, misrepresentation or another act of wrongdoing.

Over the past twenty-five years, the property casualty insurance industry has greatly broadened coverage to include the ever-changing consumer needs. Today, insurance also covers consumer goods. Claims for the loss or damage for these items offers clients the opportunity to inflate losses. Many policies also offer guaranteed replacement cost, off premises power failure, replacement cost on contents, debris removal and ordinance and law coverage. The greater the coverage offered the greater the number of claims that will be filed, and in turn the higher the number of fraudulent claims. More and more property/casualty insurers are utilizing value-based management approaches in managing risk and evaluating the property to be insured.

A.M. Best in 1991 published a study on property/casualty insolvencies that occurred between 1969 and 1990. A very important and salient feature was revealed, of the 302 insolvencies (from a total of 372) that were analyzed, A.M. Best concluded that 30, or 10%, were due to alleged fraud. For instance, excess inventory from a factory was reported stolen; on investigation however, it was proven that either the workers or the management were involved in fabricating these situations in order to collect insurance proceedings. Unscrupulous operators and contractors help persuade disaster victims to claim more damages than actually occurred. They then shortchange the victim on repairs and services although they collect money to repair damaged property but never complete the work.

Red flags should go up when the insured behaves suspiciously. The insured is willing to accept an inordinately small settlement rather than document all claims losses. The losses might include a large amount of cash and jewelry, the losses are incompatible with the insured's residence, occupation and/or income level, there has been a recent divorce or separation and the insured is overtly pushy in trying to get the claim settled. In some cases, the insured may have contacted the agent to verify coverage or extent of coverage just prior to loss date. If the fire-scene investigation reveals that items normally found in a home or businesses are missing there is a high probability that the property claim is fraudulent. In some cases the fire fighter may identify the cause of the fire or report that the fire cause was incendiary, suspicious, or unknown.

There is also another kind of Property Fraud -- Multiple Policies for Profit. In this case, the property or vehicle owner illegally buys numerous insurance policies for on property or vehicle and then damages or destroys it, collecting on all policies. Past Posting (a horse racing term in which a bettor tries to cheat the bookies by placing a bet on races that have already been run) is also very common in the property insurance type of business. The insured may buy coverage for an item or commodity that has already been stolen and may latter report the theft or damage thereby trying to claim insurance money for these damages.

Agent Fraud:

Barbara Stanwyck in the1944 film 'Double Indemnity' seduces an insurance agent into murdering her husband for his life insurance money so she and the agent can live happily ever after. Life scams and murder-for-hire deals are not just the story lines for Hollywood movies, they very often happen in real life too. A wide range of criminal gangs and mercenaries are involved in this operation raging from drug gangs, mafia organizations and lone entrepreneurs. An agent was fired by his company but continued pocketing premiums. Stealing from clients or life companies is a common swindle used by a small percentage of insurance agents in the business.

In some cases the insurance agent himself carries out the fraud. These nefarious agents use a number of ruses to swindle customers. One of the most common is called "sliding" where the agent secretly adds coverage to the policy. The policyholder does not know about the changes in is coverage as the changed amount is generally small and inconspicuous -- premiums may change but the value of change is low, less than $100 in most cases. The agent pockets the extra commission got from this deal. The second type of fraud is "twisting," where the agent replaces the entire policy with a higher valued and more expensive type. This type of switch may help reflect the ability of the agent to sell more policies and may obtain him a bonus from the insurance carriers.

Money laundering crime groups also use crooked agents in their operations. In a very common money-laundering tactic, the agents will buy a life insurance using cash from the 'client.' Most insurance companies offer a "free period" during which they promise to refund the premium if the client changes his or her mind. The new policyholder then calls the company either personally or through the agent and tells the insurer they don't want the policy. The insurer is obliged to send the policyholder a refund check -- laundering the money in the process. These policies are called single premium policies.

British insurance agent helped launder $1.5 million through single-premium policies, and in the process became the agency's top producer.

In some cases the agent goes one step further; an agent may collect premiums from the customer but never buys a policy for his client from the insurance company. Shocked beneficiaries often discover too late that the policies had been cancelled for nonpayment of premiums. Some may fail to forward refunds to policyholders who are owed premium refunds if they return new policies during the legal grace period. Occasionally, the agent may also create fictitious trust funds to siphon money from annuities owned by their clients into their own account. On face value, it appears that these individuals are helping and offering services above and beyond the requirements to their clients. Consumers also can be victimized by websites offering cut-rate "insurance" that doesn't exist.

Since the agents are privy to important client information they may use the information to open bank accounts and trading business using the clients good credit reputation and information for the purpose. Often the stolen money pays for vacations, houses, gambling debts and other personal hobbies. Sometimes this stolen money help perk up failing insurance agents businesses financial records. http://www.insurancefraud.org/fraud_focus_winter2002.htm

Fake and Real deaths to collect Life Insurance Money:

Faking a death is a very easy way for policyholders and beneficiaries to bilk life agents and insurers. In many cases the insured would travel on vacation and then either request a spouse to call in the death or produce a fake death certificate for the death. A Mississippi barge captain once tried to fake his death using the help of his wife who would benefit by about 1.1 million. Fake death certificates are very easy to come by especially in third world countries where bribery and corruption is rampant. It is very difficult to prove fraud especially with international legal issues and the criminal underworld that may exist in these foreign countries. Some unscrupulous individuals, with the help of modern technology, can create authentic looking documents and "proofs" of death. http://www.insurancefraud.org/fraud_focus_winter2002.htm