Fraud Investigations

General Information

 

June 15, 2015

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Summary

 

This article discusses fraud investigations and different methods used in that process.

 

Topics covered:

Introduction

 

The purpose of an insurance fraud investigation is to gather evidence to establish whether a suspected fraudulent claim is legitimate or is, in fact, an attempt to defraud the insurer. If the facts reveal the claim is legitimate, the fraud investigation stops and the claim is paid. If the facts support the suspicion, then further evidence must be gathered to allow the insurer to successfully deny the claim and refuse to pay.

 

If convinced that a preponderance of the evidence indicates the insured or claimant is attempting a fraud, the investigator should also refer the file to the state Insurance Fraud Bureau or Insurance Fraud Division, the local District Attorney, a State Attorney or US Attorney (whichever is appropriate), or other police or prosecutorial agency. A list of state agencies can be found here: Insurance Fraud Division Contact List.The investigator will simultaneously recommend that the insurance company refer the file to experienced insurance fraud defense counsel for advice and direction.

 

The Investigative Interview

 

When Edward Lloyd opened his coffee shop in the shipping center of the city of London, England, he knew information was the essence of insurance since an underwriter who was not fully informed lost his investment. Because his customers needed to be fully informed, Mr. Lloyd kept a chalk board in his coffee shop on which the latest intelligence concerning shipping at the port of London was written. Insurance underwriters, customers of Mr. Lloyd, could gather much of the information they needed to properly evaluate the risks their customers asked them to take. As insurance (and the people who bought insurance) became more sophisticated, underwriters found a need to gather and evaluate information more efficiently.

 

The beginning of a thorough insurance fraud investigation is the interview. The interview can be informal, it can be recorded with an audio recording device, it can be recorded with a handwritten statement signed by the witness, or it can be recorded by a certified shorthand reporter. The interview is a structured conversation; it is not an interrogation.

 

A thorough investigation is essential to defeating a claim that is, in whole or in part, fraudulent. With background information, the interview can be more detailed. Knowledge from various sources of information will give the professional the ability to detect prevarication and direct the interview toward truth. With proper preparation and source information from people who are normally not considered sources of information, the professional will have an edge.

 

The fraud investigator must practice, practice, and practice some more. A fraud investigator who wishes to be an artist must study the art form so that he or she knows as much as is available to know about the art. However, practice is not enough and does not guarantee success. The fraud investigator must know what to practice.

 

Lawyers, physicians, dentists, architects and other professionals describe their work as a practice since they are constantly learning more to make them more proficient in their profession. The lawyer or physician who stops learning is no longer a professional. When the fraud investigator stops learning, he or she becomes like a robot on an assembly line. The fraud investigator who stops learning will seldom be effective.

 

The fraud investigator should always try new methods of interviewing. Each new person interviewed imposes new challenges and lessons for the fraud investigator, and so, the investigator should develop personal variations and modifications to fit the circumstances. After completing every interview, the fraud investigator should always review his work.

 

Classification of Facts

 

The interview is a branch of study concerned with observation, accumulation, and classification of facts. The organization of the facts collected in the interview, the correlations of those facts to physical evidence available, combined with the legal consequences of the statements, make up the scientific collation of facts that complete an interview. The foremost aim of the interview is to uncover the truth, and this can only be done by a classification of facts. The interview that effectively obtains all of the facts available to each person interviewed, can give the investigator the tools necessary to establish a complete classification of the facts of the incident under investigation. For example, in a car theft investigation the insured may claim to have all the keys to the car and no one else has any keys. However the recovered car has no forced entry; how then did the vehicle get stolen without any keys or forcible entry? The matching of facts to physical evidence is critical. Details are important, and every detail must be considered when gathering facts. Without facts, the investigator is at a disadvantage when it gets to the interview, because the investigator does not have sufficient facts to question the insured or claimant about.

 

Interviewing Techniques

 

The fraud investigator should never let a person interviewed think that his truthful statements are more important to the fraud investigator than to the person interviewed. The person interviewed must want, for his own benefit, to tell the truth.

 

The claims professional has no power to compel the person interviewed to speak other than the terms of the insurance contract. He or she can only get thorough information by skill, wit and guile. If a claims person attempts to interview using the hard sell technique, he or she will find the person interviewed walking out of the room without disclosing anything or limit all answers to a single word.

 

An interview cannot work if the fraud investigator is unprepared. Before the interview begins, the fraud investigator must know as much as possible about the person interviewed and the details of the claim available so far before the interview begins. If a profession or trade is involved, the wise fraud investigator should be familiar with, or study to learn, the basic requirements of the trade, business or profession.

 

To determine the truthfulness of a person interviewed, the fraud investigator uses his or her experience, the physical clues given by the person interviewed as he or she answers the questions, and a comparison of physical evidence to the testimony. A person interviewed who states he purchased an item on a specific date at a specific store when investigation reveals the store does not sell the product is obviously untruthful. The person interviewed who claims the fire at his house was accidental after fire investigation finds liquid gasoline soaked into the carpets is untruthful. Physical evidence that does not match the insured's or claimant's statements is a clear indicator that fraud may be at hand.

 

When physical evidence does not exist, the fraud investigator is compelled to use subjective means to evaluate the truthfulness of the person interviewed. A fraud investigator must subjectively consider the possibility that the person interviewed is not truthful if, for example: the person interviewed has dry mouth; the person interviewed fidgets in the chair; the person interviewed perspires profusely in an air-conditioned building; the person interviewed constantly runs his fingers through his hair; the person interviewed twists or braids her hair while answering; the person interviewed has an excessive amount of saliva and is constantly swallowing; the person interviewed looks down at the table, at the fraud investigator's left ear or 3 inches above the professional's head.

 

The fraud investigator should also be concerned that the person interviewed is not being truthful if responses to all important questions are preceded by: “to tell the truth …; “honestly …”; “on my mother's grave, this is the truth…”; “as God is my witness…”; “truly …”; “truthfully …”; “I swear…” A truthful person interviewed does not need these preambles. They are often ploys used by the dishonest in an attempt to convince the fraud investigator that the statements are truthful. The fraud investigator should review the answers that follow such preambles carefully to determine truthfulness. The fraud investigator must look to see if the answers hold together logically, if they are consistent with previous answers and if they are consistent with investigation results. If not, the fraud investigator can conclude that the subjective indication of falsity has been confirmed as false.

 

If the fraud investigator determines from all objective and subjective tests that the statements made by the person interviewed are true, the fraud investigator can report that fact and go on to his next case. If it is established that the statements are false, the fraud investigator may need to seek legal advice as to the use of the information uncovered.

 

Interview of the Claimant

 

The claimant interview is the most important part of a fraud investigation, whether the claim is being made by the insured for loss or property (a first party claim) or for the insured's liability to another (a third party claim).

 

The investigator should, with the permission of the claimant, record the interview and attempt to confirm the truth of all of the representations made in the application for insurance and answer the who, what, why, where, when and how of the claim. The investigator must then prepare a transcript of the recorded statement, mail or otherwise deliver the transcript to the claimant, and ask that the claimant read, correct, and sign the transcript. If state law allows, the claimant can be asked to sign the transcript under penalty of perjury or under oath before a notary.

 

If recorded on audio tape the investigator may request that the claimant sign and date the tape after the no-copy plugs are broken out so it cannot be changed or recorded over by accident. No attempt should be made to put the claimant under oath while the examination is proceeding because (unless the investigator is a notary) he or she is not authorized to give an oath and, more importantly, because it will place the claimant on guard and reduce the effectiveness of the interview.

 

The investigator must verify every material fact provided by the claimant or insured. This will include, at a minimum the residence address, the employment of the insured or claimant, and the accuracy of receipts, appraisals, affidavits, medical bills, and gifts.

 

In first party claims the investigator should visit each and every vendor from whom a receipt, invoice, or estimate has been presented in support of the claim. When investigating a third party claim, the investigator should visit the scene of the accident, photograph and make a diagram of the scene, interview neighbors and businesspeople in the area in order to find independent witnesses, visit the doctor or clinic where a claimant is treated to verify that the facility is a true health care provider, and collect (with proper authorization) the medical records.

 

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

 

Once all the witnesses have been interviewed and all documents collected and verified, the investigator objectively reviews the information gained to determine whether the claim is legitimate or whether further investigation is required to establish that a fraud is being attempted.

 

Caution Required

 

Insurers must be cautious with reports so as to limit them to accurate information. Caution is also required with regard to the use of claims databases. Contributors to index bureaus are exposed to defamation/libel claims filed by persons identified in reports. The accuracy of the data bases are only as good as the people providing the information. Privileges should be protected and insurers should avoid placing information in claims databases open to others since the information is discoverable. They are investigative tools, not information that is absolutely accurate and must always be corroborated before the facts can be used to make a decision with regard to a claim.

 

Surveillance as an Investigative Technique

 

If fraud is suspected on the part of the claimant, further investigation techniques, such as surveillance, can be used.

 

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 claims. As with most investigative techniques, there are risks if the surveillance becomes overly aggressive. Unlimited or unreasonable surveillance may expose the insurer or investigator to a civil suit for invasion of privacy, trespass, or bad faith. Moreover, surveillance should never be used to harass or embarrass the claimant. Surveillance information must be obtained legally; internal adjusters must be trained in proper surveillance techniques or an outside agency that specializes in surveillance can be used. The representatives of the insurer conducting the surveillance must never attempt to coerce the claimant into a compromise settlement.

 

Courts recognize competing interests in this area, that is, the insurer's interest in exposing fraud and denying payment of fraudulent claims, and the claimant's interest in and right to privacy. Case law indicates that the insurer's use of these potentially invasive tactics must be reasonably related to the scope of the investigation. The purpose must be to gather valid information, material to the evaluation and investigation of the claim. The insurer can then make payment for valid claims, while denying fraudulent ones. Reasonable surveillance is recognized as a common method to obtain evidence to defend a lawsuit. It is only when such surveillance is conducted in a vicious or malicious manner not reasonably limited and designed to obtain information needed for the defense of a lawsuit or deliberately calculated to frighten or torment the plaintiff, that the courts will not countenance it.

 

An investigator should also be aware that surveillance can be construed as a violation of one's right of privacy. It is generally accepted that invasion of privacy consists of four limited and distinct wrongs: intruding into one's physical solitude or seclusion; giving publicity to private information about a person that violates ordinary decency; putting a person in a false, but not necessarily defamatory, position in the public eye; or appropriating some element of a person's personality for a commercial use.

 

The key point for the investigator is to recognize that a right of investigation exists if that investigation does not go too far or abuse the subject of the investigation. The investigator should also be aware that courts are loathe to allow invasions of privacy unless the evidence produced by the surveillance is damning and establishes actual fraud. Whenever a surveillance indicates the possibility of fraud, the insurer should allow the insured or claimant the opportunity to explain and consult with competent counsel before taking a position on the results of the surveillance.

 

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; and consent of at least one party to the conversation.

 

Some states require the consent of both parties. Before 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.

 

When the recording is done legally, it can usually be admitted into evidence at trial. Even in states that require consent of both parties, a recording can be made legally without the consent of one party if the statements are made in a public forum where privacy is not expected. These include public speeches, television interviews, sales pitches made to the investigator, and other comments not intended to be private. The credibility of the recording will depend on several factors, including the extent to which it is corroborated by other evidence and the degree it is audible and can be understood by judge and jury. Adjusters should know that recording without permission is a crime in many states.

 

Training the Investigator

 

To turn a claims person into a trained fraud adjuster, the adjuster must become familiar with all of the following: all insurance policy contracts used by the insurer; the rules applied by the courts for the interpretation of insurance contracts; the Fair Claims Practices Act of the jurisdiction in which the adjuster works; the regulations promulgated by the appropriate state department of insurance to enforce the Fair Claims Practices Act; the statutes in the state compelling the existence of a Special Investigation Unit (SIU); the regulations established by the state concerning the training and operation of the SIU and claims personnel; the law of contracts; the law of torts; the law of fraud; the obligations of an insurer to pursue anti-fraud activities; specialized knowledge for different types of claims (for example, sufficient medical terminology to understand the diagnoses of physicians, treatment of traumatic injuries and the cost of reasonable medical treatment for traumatic injuries, methods for determining the extent of damage to structures or vehicles and the cost of repair or replacement, and methods for establishing the fair market value of items of personal property, including vehicles); interview techniques that facilitate the obtaining of detailed information; negotiation skills required for obtaining fair, reasonable, and acceptable settlements; and the red flags of fraudulent claims.

 

This training does not occur overnight. It is a tall order that requires commitment by each insurer to thoroughly train their adjusters and other claims personnel concerning the indicators of fraud. Various insurer produced programs exist as well as programs by independent adjusting firms. Basic class-room type training for insurance personnel may be available across the country in local colleges and universities. The training programs should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce and supplement the information learned.

 

The insurer should also institute a regular program of auditing claims files to establish compliance with the subjects studied to see how effective the training was to discover and defeat fraudulent claims. Monthly meetings should be held with claims staff to reinforce what was learned in the training sessions and to discuss current investigations where fraud is suspected.

 

There is no quick and easy way to create insurance claims professionals who are knowledgeable about insurance fraud. The training takes time; the learning takes longer. Of course, without applying the training to actual claims, the training is wasted.

 

Red Flags of Fraud for Investigators

 

Suspicious claims have common attributes. Insurers and their anti-fraud organizations have collated the common attributes into lists of indicators or red flags of fraud. The lists were created as training aids and to be used to determine whether further investigation is required in order to establish if a claim is legitimate or false and fraudulent. There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit. See the section on checklists including [Master Red Flag Checklist.xml^Master Red Flag Checklist.xml^Master Red Flag Checklist].

 

If, when assessing a claim, three or more red flags are found, the need for further investigation should be considered and evaluated by the claims person, a supervisor and the insurer's special investigative unit. The existence of red flags does not mean a fraud has occurred. Red flags are only a signal to the adjuster to investigate further so that the suspicion may be either removed or confirmed. It is not any single indicator that alerts the adjuster to the possibility of a fraudulent claim, but a combination of the red flag or red flags discovered coupled with the results of the thorough claims investigation. As the Nebraska Department of Insurance states in its booklet, Fraud Detection Hints, “it is important to remember that the … possible red flags indicate that there may be some evidence consistent with an insurance fraud scheme. Any one or two of these by themselves may not raise your suspicions; however, when you have several of these hints (red flags) present or a pattern begins to emerge, you should investigate further or forward your suspicion to the Insurance Fraud Prevention Division.”

 

Red Flags Common to a Claim, the Facts of a Loss, the Insured, and the Claimant

 

An adjuster should consider further investigation if a claim occurs: shortly after the issuance of the policy; shortly after the limits of the policy are increased; shortly before the expiration of a policy; within days of a notice of cancellation being served; or, on a policy acquired from an agent far from the insured's home or business.

 

Some red flags to raise suspicions relating to the facts of a loss are: witness version does not agree with claim as presented; presence of an overly enthusiastic witness at the scene of incident; no police report; all injuries are subjective; CPT codes appear inflated or up-coded; losses include a large amount of cash; commercial losses include old or non-saleable inventory; the building is in deteriorating condition or located in a deteriorating neighborhood; the fire scene investigation suggest property or contents were heavily over-insured; the fire scene investigation reveals no remains of non-combustible items of scheduled property; the fire scene investigation reveals no remains of expensive items used to justify an increase of limits; the fire occurs at night; if the risk is a commercial property, the fire occurs on a holiday, weekend, or when the business is closed; the fire alarm fails to work; or, the sprinkler system fails to work at time of loss.

 

Adjusters should evaluate the manner in which the insured makes a claim. A few red flags that may raise suspicions include some of the following when the insured: retains or is represented by counsel on the day of the loss; does not want to retain counsel; wants a settlement approved quickly; does not want the claim to go to a supervisor, regional office, or claims committee for authority; is exceedingly demanding and threatens a bad faith suit from the date of first contact; is familiar with the adjuster's authority limits and wants to settle for a sum within those limits; handles all business in person (thus avoiding mail and potential prosecution for violation of federal mail fraud statutes); provides an address that is a post office box, mail drop, or hotel; or reduces the demand for settlement when it is suggested by the adjuster that he or she file suit.

 

The adjuster or investigator should also pay attention to the insured's personal history and background, including his financial situation. Once again, red flags indicate that further investigation may be needed if the insured: has a history of multiple, similar claims; has a history of more than two lawsuits; is recently separated or divorced (indicating a possible financial strain); was recently laid off a job, has a spotty work history, or extended period of unemployment; or, has a history of gambling, alcohol, or drug abuse. (The National Insurance Crime Bureau, individual state fraud bureaus, and other agencies publish similar more detailed lists of red flags that would lead an investigator to suspect fraud and begin a more thorough investigation.)

 

As for the claimant, the investigator should pay attention to when the following actions occur: the insured is eager to accept blame for an accident; the claimant retains a lawyer immediately after the incident is reported; the claimant and insured are from the same family and/or have the same address; one or more parties present damages that are inconsistent with the facts of the loss; claimant's lost earnings statement is handwritten or typed on blank paper rather than on a business letterhead; claimant has multiple insurance claims; several or all claimants are treated at the same clinic on the same day; the damaged vehicle was purchased for cash and/or the claimant has no proof of ownership of vehicle; the vehicle is recovered surgically stripped; or, the claimant and insured know each other.

 

Investigative Methods

 

In order to successfully deny a claim for insurance fraud or allow the state to prosecute the fraudulent insured or claimant, the insurance fraud investigator must answer six questions with regard to each loss: who; what; why; where; when; and, how. The following information details the steps that an investigator should follow in order to answer these questions.

 

When a claim is referred for investigation, the investigator immediately reads and analyzes the claims file, ensuring the claim is properly documented, and then gathers and studies all the information in the underwriting file and the files of the sales agent.

 

The investigator reviews every factual statement made by the insured to the sales agent and the insurer at the time the policy was acquired. This part of the claims investigation is necessary because in most cases the insurer will not learn of a misrepresentation or concealment in the application process until a claim is made.

 

Fraud in the inception of a policy will never be discovered if a thorough investigation is not completed. This includes, at the very least, the application submitted by the insured at the policy acquisition. This information is necessary to every fraud investigation because it may make available the legal defenses of voidance and rescission.

 

Before meeting the insured or claimant, the investigator should work to learn as much about the individuals as possible, including their history with present and prior insurers. Information can be gathered from many different sources and there are a number of tools available to aid the investigation.

 

The sales agent or broker should be interviewed. The interview should be limited to the sales agent's knowledge of the people involved in the claim. The investigator can also take advice from the sales agent on how best to deal with those involved throughout the investigation.

 

The complete insurance fraud investigation should always include a recorded statement of the agent or broker. This statement should establish whether the relationship is that of an agent who transacted insurance with and on behalf of the insurers or a broker who only represents the insured and transacted insurance with but not on behalf of the insurer. The insurance professional understands that an agent represents both the insured and the insurer, while a broker represents only the insured in transacting the business of insurance with the insurer. The increasing prevalence of individuals buying insurance online makes this important step impossible; the investigator has to start just with information gathered from various reports and histories of the insured.

 

Insurer's Inspection Service

 

Most insurers have a staff of risk assessment personnel or can hire independent firms to inspect properties under consideration for coverage. Reports can be prepared on both commercial and personal risks. These reports contain information as to the physical condition of the property at the time of inspection, its dimensions, construction materials, contents, and any potential hazards. They also can contain information that was provided to the inspector by the insured, such as values at risk, loss protection devices, and claims history. Many carriers reinspect their personal book of business on a regular basis, and send out internal loss control personal to inspect commercial risks. Effective use of such inspections can discover discrepancies in applications and the actual risk before a loss occurs, and the policy can be corrected in advance.

 

Many people use the services of an accountant or bookkeeper to keep their financial records. These professionals will have information, such as tax returns, accounting work papers, purchase orders, sales invoices, and receipts that may either establish a loss or prove the insured is attempting fraud. The investigator can, with proper authorization from the insured, obtain this essential information from the insured's accountant(s) or bookkeeper(s) shortly after a loss. By obtaining copies of the financial records (profit and loss statements, accounts receivable and accounts payable records, for example) as early as possible, the investigator will be in a position to help the insured present his or her claim and remove the temptation to attempt fraud.

 

People sometimes confide in tradespeople, such as hairdressers, barbers, grocers, auto mechanics or bartenders more than their friends, relatives, or lawyers. By interviewing these people, the investigator can obtain important background information on the claimant that could not be obtained by hours of interviewing the claimant. With background information, an investigator can be better prepared to interview a fraud suspect.

 

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.

 

Comprehensive Loss Underwriting Exchange gathers history on past claims reported, and driving records give an indication as to an insured's tickets and accidents.

 

Needless to say, the inspector should gather all relevant and material documents and place them in the investigation file.

 

The Issue of Prejudice

 

If the insurer can prove that a claim is fraudulent and that all elements exist, there is no need to prove that the insurer was prejudiced by the fraud. The prejudice is presumed by the proof of the fraud. An insurer need not pay a suspected fraudulent claim to effectively deny a claim for attempted fraud. The insurer, to defeat a fraudulent claim, need only prove that the insured presented a claim with knowledge that it was false in whole or in part, that the insured knew the insurer was unaware of the false part of the claim, and that the insured intended that the insurer rely on the false information to the insurer's detriment. An attempted fraud is as serious a crime as an actual fraud, and a fraud attempted is as much a defense to an insurance claim as an actual fraud.

 

The SIU

 

Once an adjuster identifies a possible fraudulent claim, it is often passed on to a Special Investigation Unit (SIU). This frees up adjusters to handle straightforward claims swiftly and lets the SIU take time with the investigation. States require claims to be handled in a timely manner. Most states require insurers, by statute, to maintain an SIU. An industry study conducted during the mid-1980s revealed that by 1983, 47 of 399 insurers had SIUs in operation. Although this figure represented only 10 percent of the companies participating in the survey, the 47 companies with SIUs accounted for over 50 percent of the industry's premium volume at the time. Today, as a result of statutory compulsion, almost every insurer has an SIU. An effective SIU presents a major return on investment and gives a competitive edge to the insurer with an effective SIU over the insurer with no SIU or an ineffective SIU.

 

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