It may seem like filing a bogus insurance claim is a victimless crime but it hurts everyone —driving up the cost to the insurance companies who in turn must raise policyholder rates. (Photo: Shutterstock)
All forms of insurance — from health to workers' compensation to homeowners — provide security and protection to individuals and companies in case of injury, illness, theft or damage. Most businesses carry several types of insurance to protect their assets and their people. One of the most common types of coverage is business interruption insurance, which provides compensation to an insured if its operations are interrupted due to damage or theft. Fire, floods, earthquakes and other unanticipated natural disasters can quickly destroy thriving companies and having business interruption insurance can help cover costs during a period of rebuilding.
While most business interruption claims are paid on legitimate loss, unfortunately, an estimated $80 billion in fraudulent insurance claims (across all lines) are made every year in the U.S. And fraudulent business interruption claims are no exception. Agents, brokers, insurers and claims professionals should scrutinize every business interruption claim cautiously. Even the most experienced professional may not recognize potentially fraudulent information if the claim appears straightforward and seemingly complete. For this reason, it's essential to examine every claim thoroughly to make sure it's legitimate. Insureds who intentionally manipulate their company's financials to create a false picture of the business's profitability are committing fraud.
Related: Investigating fraudulent claims: Keep detailed records to recover costs
|Three common business interruption claim fraud schemes
Overstating sales: Inflating the amount of lost revenue means increased insurance payouts.
For example, if a claimant's sales were strong for five years before the loss as per the tax returns or financial statements, but the financial records show a decrease in revenue in the months prior to the date of the claim for reasons other than the loss event (e.g. the loss of a major customer due to competition), that detailed analysis can significantly reduce claimed losses.
Understating expenses: Minimizing costs is a common way to manipulate financial documents to make a business appear more profitable. Understating expenses can come in the form of delaying their entry in the books and records or not recording them at all. Another example of this scheme is companies that intentionally capitalize expenses (i.e. record them as an asset on the balance sheet) instead of recording them on the income statement.
Inflating extra costs: Embellishing a claim with additional expenses — either by claiming the lost or damaged items were more expensive than they were or attaching completely unrelated costs to the claim (such as regular ongoing expenditures) — is fraud.
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