It is necessary that CFEs, insurers, prosecutors and police agencies work together as a team dedicated to reduce the crime of insurance fraud. Each must know and apply the various weapons available to deal with suspected cases.

Insurers are compelled by state statute and regulation to maintain Special Fraud Investigation Units, publish and fulfill a detailed anti-fraud program and train all of their anti-fraud personnel. Compliance by insurers is less than constant across the industry. Some have effective fraud units while others simply identify one employee as its anti-fraud director although his or her work is almost totally adjusting claims and not investigating fraud. Those that employ the services of CFEs often have the most effective anti-fraud efforts.

Do insurers get their money's worth from fighting fraud? The answer is “yes” and “no.” The more difficult question to answer is how to quantify the savings, if any.

What is Insurance Fraud?

Next to tax fraud, insurance fraud is the most practiced crime in the world. It is perpetrated by members of every race, religion and nationality. It is found in every profession. The possibility of a tax-free profit, when coupled with the commonly held belief that criminal prosecution will probably not occur, is sometimes too difficult for normally honest people to resist.

Insurance fraud is a tort, a civil wrong. Black's Law Dictionary, 6th Edition, defines fraud as:

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

In simple language, fraud can be defined as a lie told for the purpose of obtaining money from another who believes the lie to be true. Civil insurance fraud exists if an insured:

• Makes a representation to the insurer that the insured knows is false.

• conceals from the insurer a fact he or she knows is material to the insurer.

• Makes a promise he or she does not intend to keep.

• makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.

Next page: The 7 weapons to fight fraud

Weapon 1: The Interview

The beginning of a thorough insurance fraud investigation is the interview. An interview is not an interrogation. It can be performed best by a CFE, an experienced insurance lawyer, a claims person or a private investigator. The interview should be informal. The interview is a structured conversation. Everyone has been interviewed. Everyone has, at some point in his or her life, interviewed someone.

By interviewing insureds, claimants and independent witnesses the CFE can obtain important background information on the witness that the CFE could not obtain by hours of investigation. Knowledge from sources of information will give the CFE the ability to detect prevarication and direct the interview toward truth.

Weapon 2: Rescission

Rescission is an equitable remedy that has existed since 1766. California, New York and a few other states have enacted statutes that follow a House of Lords decision, Carter v. Boehm, S.C. 1 Bl.593, 3 Burr 1906, 11^th May 1766, and allow for rescission of a policy whenever the insurer is deceived even if the insured did not intend to deceive the insurer.

The remedy of rescission was created by the ecclesiastical courts of ancient England who were charged with reaching fair results rather than giving a money judgment. As courts of equity they voided contracts that were obtained by mistake, misrepresentation, concealment or fraud.

Facts raising rescission usually appear as part of a claims investigation. When a proposed insured lies to obtain the insurance the insurer may seek equity from the court and have the contract declared void from its inception. To do otherwise would be unfair and allow a fraud to profit from wrongful conduct.

Rescission is an important equitable remedy hoary with age. When an insurer learns it was deceived into insuring someone it would not have insured, it should be able to legitimately exercise the right provided to parties to an insurance contract without fear of a tort action. Rescission is not, as some members of the plaintiffs' bar would have courts believe, post loss underwriting. Underwriting is based on a belief that the facts presented by an insured in an application is presented truthfully and with utmost good faith. When it is not, rescission is a method to put fairness into a contractual relationship and put the parties to the contract back in the place they were before the contract was made.

The insurer should analyze the findings of its thorough investigation, and obtain competent legal advice whether:

• It can rescind in writing, return the premium, and accept the costs of its investigation.
• It can rescind in writing, return the premium, and—if the evidence available warrants—file suit against the broker who presented the false application to recover its investigation and legal costs.
• It can rescind in writing and file a declaratory relief to confirm the rescission and obtain restitution of expenses and legal fees incurred.

Weapon 3: Computer Databases

Databases, such as those operated by the Insurance Services Office, Equifax, Lexis/Nexis or NICB, allow an investigator to collect information from public records. Searches of property or bankruptcy records, court filings, and any criminal conviction records can give a complete picture of the person under investigation. Uniform Commercial Code (UCC) filings will reveal security interests in personal property. Securities Exchange Commission (SEC) filings also contain information concerning business acquisitions, liabilities, and any significant pending lawsuits.

Credit bureaus are often a source of information concerning an insured's or claimant's credit history. When using this information, insurers must be aware of the potential applicability of the federal Fair Credit Reporting Act (FCRA) and the limitations this act places upon the use of credit reports.

Courts have recognized the value of index reports to insurers investigating claims. In Tucker v. Colonial Ins. Co., 195 Ga. App. 842 (1990), the claimant told his auto carrier that he only had one prior accident. However, an index bureau search revealed he had at least four, and further investigation revealed he had about 20 prior accidents. The auto carrier counter-sued for insurance fraud. The Georgia Appellate Court cited the index bureau report as strong evidence that the claimant was committing fraud, and that the jury in the claimant's trial for insurance benefits under the auto policy was properly instructed on the fraud issue.

Weapon 4: Verify Information

The CFE must verify every material fact provided by the claimant or insured in the application for insurance and in the presentation of a claim.

If investigating a crime against the insured a major auto accident where police responded, or a fire the police or fire-cause investigators must be interviewed in person to learn if any suspects have been identified, arrests made, or property recovered, or if the police investigators have issued any supplemental reports.

A network of doctors and medical companies were allegedly involved in a scheme aimed to entice people from across the country to partake in unnecessary medical procedures to bill millions of dollars to the Blue Cross and Blue Shield insurance companies

Even if the insurer catches the insured or claimant in the attempt and refuses to pay the fraudulent part of the claim, the entire policy is void. An insured or claimant who commits fraud in part of his or her claim loses the entire claim and cannot collect for the honest part of his claim because, regardless of size, fraud makes the entire policy voidable.

Weapon 5: Proactive Fraud Investigation

If fraud is suspected, further investigation techniques, conducted carefully and in compliance with local law, can be used. Some proactive investigative techniques follow:

Surveillance—If the initial investigation suggests that a fraudulent claim has been made, surveillance may be useful. Investigators follow or watch the insured, often photographing, filming, or videotaping to establish whether the claim is valid. Most often this technique is used to investigate claims in fraudulent bodily injury and workers' compensation cases to prove that the insured or claimant is not injured as he or she claims.

Electronic Eavesdropping—Eavesdropping is an ancient practice which at common law was condemned as a nuisance. Electronic eavesdropping is generally illegal under federal law, subject to two exceptions:

• A business extension exception that applies to intercepts made by use of a business telephone extension in the ordinary course of business.
• Consent of at least one party to the conversation.

Some states require the consent of both parties to a recording; others do not. Before a recording is made with single-party consent, careful research of the law of the jurisdiction where the recording is to be made should be completed with the advice of competent counsel.

Weapon 6: The Examination Under Oath

An examination under oath is an oral interview taken under oath before a notary or certified shorthand reporter. The reasons for the examination under oath is to allow the insurer to cross-examine, as it were, the documents submitted by the insured in proof of his or her loss. [Claflin vs. Commonwealth Insurance Company of Boston, Mass. 110 U.S. 81, 94-95, 3 S.Ct. 507, 28 L.Ed. 76 (1884); Hickman vs. London Assurance Corp. 184 Cal. 524, 529-530, 195 P. 45 (1920).]

The New York Standard Fire Policy provides as follows:

“The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described and submit to examination under oath by any person named by this company, and subscribe the same; and as often as may be reasonably required, shall produce for examination and copying all books of account, bills, invoices, and other vouchers…”

A false answer as to any matter of fact material to the inquiry, knowingly and willfully made, with intent to deceive the insurer, would be fraudulent. The position taken by the U.S. Supreme Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945). In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgment because of the refusal of the insured to answer material questions. The court stated:

“It is well settled in other jurisdictions that noncompliance with a provision in an insurance policy requiring the insured to submit to an examination under oath precludes recovery by the insured.”

Weapon 7: The Insurer's Right to Documents & Things Is the Civil Equivalent of a Search Warrant

The Mississippi Supreme Court in Southern Guaranty Insurance Co. v. Dean, 252 Miss. 72, 172 So.2d 553 (1965) denied the insured recovery for failing to produce documents pertinent and material to her insurance and the loss. That documentation can be relevant to the insurance and have no relevance to the loss, but must still be produced.

Most Insureds (who have something to hide or who believe in taking stands on principle) will refuse to disclose tax returns. Usually they state the taxpayers' privilege which is a court-made protection in some states. The court-made protection is against a court compelling production. The policy language acts as a waiver of the so-called privilege or protection against disclosing tax returns.

CFEs, like everyone else, can become frustrated. Every CFE, adjuster and fraud investigator have had “gut feelings” about a case that are not supported by the evidence. Before recommending the declination of an insurance claim the CFE must establish that he or she has collected sufficient admissible evidence that will establish the elements of civil fraud.

Beware:

• Violate the rights of an insured.
• Falsely accuse someone of fraud.
• Succumb to frustration and create evidence of fraud that is false.

Such conduct can be dangerous to the insurer's bottom line. In addition, the individual employee may find himself or herself a defendant of a civil or criminal action. The only protection against the overzealous investigator or claims person is to properly train and support the insurer's claims and anti-fraud personnel. An ethical fraud investigator will do a thorough and complete investigation. He or she will never accuse an insured of fraud without first obtaining sufficient information to defeat a civil case or cause a prosecutor to bring a criminal case or both.

Next page: When fraud voids coverage

Insurance fraud in the presentation of a claim, by definition, voids insurance. In 1884 the U.S. Supreme Court considered the issue and decided that a fraud in the presentation of a claim, even if it was not intended to deceive the insurer and would have had little effect on the indemnity paid, still caused the policy to be void and the claim to be denied.

In Claflin & Others v. Commonwealth Insurance Company.; Same v. Western Assurance Company.; Same v. Franklin Insurance Company, 110 U.S. 81; 3 S. Ct. 507; 28 L. Ed. 76; 1884 U.S. LEXIS 1661, after a loss, Murphy assigned his claims against several companies under the policies to the plaintiffs.

Defendant insurers issued insurance policies on certain goods. Plaintiffs were assigned the goods and brought suits under the policies against defendants as assignees of the original insured. After determining that the lower court had jurisdiction over the matter, the court affirmed judgment for defendants because the record showed the assignor had made false statements and therefore plaintiff assignees could not prevail.

In any view, there was a fraud attempted upon the insurers, and it is not lessened because the motive that induced it was something in addition to the possible injury to them that it might work. The supposition proceeds upon the very ground of the false statement of a material matter, knowingly and willfully made, with the intent to deceive the defendants in error; and it is no palliation of the fraud that Murphy did not mean thereby to prejudice them, but merely to promote his own personal interest in a matter not involved in the contract with them. By that contract the companies were entitled to know from him all the circumstances of his purchase of the property insured, including the amount of the price paid and in what manner payment was made; and false statements, willfully made under oath, intended to conceal the truth on these points, constituted an attempted fraud by false swearing which was a breach of the conditions of the policy, and constituted a bar to the recovery of the insurance.

Intentional Misrepresentation

When an insured lies during the course of a claim investigation, like Murphy did in the Claflin case, the prudent insurer, if the lie is discovered, will declare the policy void and deny the claim. A lie in the course of a claim investigation is a clear breach of the covenant of good faith and fair dealing by the insured.

Almost every insurance policy issued in the United States has a clause equal to or similar to that in the New York Standard Fire Insurance policy, that like the standard fire policy in most states, provides, that provides in relevant part, as follows:

Concealment, fraud

“This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.”

An insured who lied intentionally about a claim to prevent her criminally violent son from harming her physically sued the insurer who denied the claim when it learned she had lied to them. She failed to recover any benefits because the concealment or fraud provision of her policy effectively barred her claim.

In Cummings v. Fire Insurance Exchange, 202 Cal. App. 3d 1407, 249 Cal. Rptr. 568 (Cal.App.Dist.2 07/22/1988) Mary L. Cummings, (plaintiff), appealed from a summary judgment granted to defendant Fire Insurance Exchange (defendant) on her complaint seeking damages from defendant for its failure to pay a property damage claim and its allegedly malicious instigation of an unsuccessful criminal prosecution of plaintiff. Because the record demonstrates (1) that plaintiff knowingly and willfully filed a false claim on a casualty policy issued by the defendant and (2) that defendant had a reasonable basis for believing that plaintiff had violated the law in so doing.

Claflin holds that the materiality of a statement is not defined and determined by the effect it has on the outcome of the investigation. Rather, a question and answer are material when they relate to the insured's duty to give to the insurer all the information he has as well as other sources of information so that the insurer can make a determination of its obligations.

In Fine v. Bellefonte Underwriters Ins. Co. (2d Cir. 1984) 725 F.2d 179, 182-184 (citing Claflin), the court held that a statement is not material only if it relates to a matter which ultimately proves to be significant in the ultimate disposition of the claim. Rather, if the misrepresentation concerns a subject reasonably relevant to the insured's investigation, and if a reasonable insurer would attach importance to the fact misrepresented, then it is material.

Plaintiff admits that she knew she was lying to the defendant and did so with the intent that defendant not find out the actual facts. Second, under Claflin, the intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity. Thus, plaintiff's intent to deceive was established as a matter of law.

This conclusion is in no way avoided by plaintiff's contention that she was motivated to make such false statements by her very reasonable fear of her son. In the context of this case, that means that plaintiff's motive of fear of her son's violence was irrelevant to the question of whether she intended to deceive the defendant.

As plaintiff's misrepresentations were material and were intentionally made with knowledge of their falsity and with the intent to deceive defendant, the trial court was correct in ruling that, as a matter of law, they were a defense to the breach of contract causes of action since they voided the insurance contract. Summary judgment was therefore proper.

Cummings committed fraud under duress. She was frightened that if she told the truth to her insurer she would lose her life at the hands of her evil, violent son.

She later admitted that she lied to her insurer and that she did so with intent to deceive the insurer. That is why she had no case. She made a decision to lie. Whether she had a good reason to lie or not, she lied and she did so with knowledge of the lie with intent to deceive the insurer to its damage. Cummings' conduct, by definition, is common-law fraud.