Topics covered:
Staged incidents
Swoop and squat
Faked injuries
Drive down
Faked theft
Arson
Mold
Phantom driver
Counterfeit airbags
Post-dating a loss
Paper property
Claim mills
Agent fraud
Faked death
Murder for insurance
Mail fraud
Summary

Staged Incidents

Some losses are created for the sole purpose of presenting a claim, and the number of variations of staged losses are limited only by the imagination. Automobiles are often used in staged frauds. Law enforcement officials state that fraud occurs in one in three auto claims in New York City. National Insurance Crime Bureau (NICB) states that Los Angeles may even have a worse problem as it generates the most questionable claims potentially linked to organized crime.

Swoop and Squat

One of the most common frauds is known as the swoop and squat. In a swoop and squat, a driver pulls in front of the insured and slams on his brakes; the insured does not have time to stop and rear ends the fraudster. The fraudster may also stop suddenly in busy traffic or at an intersection or an on-ramp. Many times the fraudster also claims to have neck and back pain, creating both a collision and an injury claim against the insured. The fraudster may also be carrying several passengers who also claim soft tissue injuries such as neck and back pain, strains, and sprains that have no objective symptoms and are, therefore, rather easy to fake. There are no effective tests available to a physician to accurately determine whether a person is being honest when complaining of pain. Quick settlement is reached with the “victims” of the “accident” who share the money received with the fraudster.

Faked Injuries

While faked injuries are common in swoop and squat situations, any injury claim is easy to exaggerate, as often happens in workers compensation cases. But why go to the bother of staging an accident when you can simply jump into one that already happened? This is particularly popular in downtown areas with public transportation; a bus will have an accident and suddenly more passengers are on the vehicle than the driver remembers picking up, and several of these new passengers have injuries and file claims. Again, soft tissue injuries are common in these situations since they are hard to identify objectively, and physicians must rely on the information provided by the patient.

Drive Down

In the drive down, a fraudster waves a driver on, signaling that it is safe to go, but at the last minute hits the driver. The fraudster of course denies ever having waved the driver on, leaving the driver at fault for damages. Or two parties work this one together; one waves the driver on and another fraudster drives into the innocent, but framed, driver. This is known as a wave down. Sometimes the accident is legitimate, but the fraudster further damages the vehicle to inflate the claim or fakes injuries.

Faked Theft

It is not unusual for someone to hire a fraudster to get rid of a vehicle, which the fraudster then reports as stolen. The accomplice will give the vehicle to a shop that cuts up the vehicle and sells the parts, known as a “chop shop.” Vehicles may also be just abandoned on a city street and then reported as stolen; many times this is because the insured can no longer afford the payments on the vehicle and is trying to get out from under a loan. Likewise, vehicles can be dumped in a lake or other body of water. This makes the evidence of dumping much harder to find and an accomplice is not necessary. Vehicles are not the only faked theft—any property can be claimed to be stolen, and this happens frequently with valuable jewelry that by chance was just added to a policy. Fraudsters will hire people to break in to the home and take things or will fake it outright.

Arson

Arson is another way to get rid of a vehicle, especially if the insured cannot make the payments or does not want to pay the mileage overage fee from a leasing company. Often the insured takes the vehicle to a remote spot and sets it on fire or hires someone to set the fire. The insured then reports the vehicle as stolen, and when it is found burned, so much the better. Autos are not the only property burned for a profit; houses also are burned to get out of mortgage payments or to simply gain the insurance proceeds, or even get back at a soon to be ex-spouse. Arson is most often set to occur in the afternoon and evening hours, between 3 p.m. and midnight. The issue with burning property is that in first-party coverage, fire is a covered peril. The insurer has to rely on proving that the insured concealed information, made misrepresentations, or committed other fraudulent activity. If an insured sets fire to his furniture or car to defraud the insurer, the defense available to the insurer is fraud. To defend a claim based on fraud by arson, the insurer must prove the following:

1. The property was insured under a contract of insurance.

2. The contract of insurance contained a provision allowing the insurer to void insurance because of misrepresentation, concealment, false swearing, fraud, or an exclusion for intentional acts of the insured similar to that in the New York Standard Fire Insurance Policy.

3. The fire was not accidental.

4. The fire was caused by the acts of a person or persons.

5. The fire was set by the insured or someone acting for the insured.

6. The fire was set for the purpose of defrauding the insurer.

There is rarely direct evidence that a fire was set by an insured. Without an eyewitness or other direct evidence the insurer must rely on circumstantial evidence of the insured's motive, opportunity, and ability to cause the fire to prove arson-for-profit.

Motive is not required to prove arson although showing a trier of fact a motive makes it easier for the trier of fact to believe the insured caused the fire to occur to defraud the insurer. For example, showing an insured's financial difficulties or anger at a spouse or significant other can establish motive. Also, an insured who has access to a building shortly before a fire has “opportunity.” If opportunity and motive combine and all accidental causes are eliminated, fraud by arson or arson-for-profit can be proved. A restaurant that is struggling may suddenly burn down, relieving the insured of many financial difficulties. This is often referred to as “the insurance getting hot.”

Mold

Even household mold claims have been staged. In these instances the insured intentionally promotes damage by wetting down the residence or business property with a hose or disconnecting a plumbing fixture to generate water damage and encourage mold growth. The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002, by federal investigators, working in conjunction with the Texas Department of Insurance. The defendants were charged with presenting insurance claims for water and mold damage to a succession of homes that they purchased, bought policies for, and then intentionally flooded using water hoses or by damaging water pipes. At least one house was “cooked” to speed up the mold growth. Other members of the ring, posing as vendors and contractors, filed false claims to repair the damage and sold the homes to each other to repeat the process. Six of the conspirators were found guilty. The remaining conspirator, Ramnatah Ramcharan, was found guilty by a federal jury for conspiracy, four counts of mail fraud, and ten counts of money laundering.

Phantom Driver

An insured may have an accident with a stationary object, such as a pole, jersey wall, or tree, and not want to claim it and have it charged against him as an at fault accident. The fraudster solution to this is to claim that he was hit by a phantom vehicle: someone hit his car and drove off, and of course there are no witnesses. The fraudster has sketchy information as to the description of the phantom vehicle, and the damage may be in a place that seems unlikely to be caused by contact with another vehicle. The insured's deductible is probably lower too, so the insured wins on all sides.

Counterfeit Airbags

Counterfeit airbags are a very dangerous form of insurance fraud. After a loss the shop charges to put in a new airbag, but instead puts in a cheap knockoff or just fills the space with junk and garbage. This can be deadly for the insured, and there is no visible way to tell from the outside. The shop however has been paid by the insurer for the replacement, while the insured thinks his car has been repaired when in reality it has not been.

Post-dating a Loss

This is quite common. Someone without insurance will have a loss and then immediately after a loss apply for insurance, and shortly after the application is signed report the loss as if it happened after the policy was bound. Depending on the nature of the loss, some fraudsters report the loss before the ink is dry, others may wait until they are sure the application has been approved. This is why it is important for the agent to see the property, why carriers expect agents to view autos before putting physical damage coverage on the vehicle, and visit and take pictures of the dwelling.

Paper Property

This sort of fraud involves property that never existed or was never owned by the insured. Paper property can appear in a staged loss or in an inflated claim. In the presentation of the claim, the insured produces a receipt (original or duplicate) or an appraisal. The document is either fraudulent (examples include the use of computers or even white-out and a photocopier to change the name of the owner) or represents the value of an item owned by another individual or an item the insured no longer owns. For example, an insured purchases jewelry at a department store on a credit card, takes the jewelry to an appraiser, and then returns the jewelry for full credit. The jewelry (no longer in her possession) is then insured by means of the appraisal and a loss is reported shortly thereafter. This is readily doable with any type of property, but jewelry is particularly easy to do this with. Mysterious disappearance of jewelry items that have not really disappeared is common, and one sign of potential fraud is that the insured wants cash instead of replacement of what is supposedly a sentimentally valuable (as well as monetarily valuable) item of jewelry.

Claim Mills

Claim mills can turn up in various types of fraud, but the end result is always the same. Someone is recruited to file a false injury claim, often supposedly from an auto accident or workers compensation injury. The supposedly injured person is referred to certain medical clinics or legal referral centers, which refer the patient to a doctor or lawyer who is in on the scheme. The doctor or lawyer then bills the carrier for often thousands of dollars in tests and services that were never conducted. The supposedly injured person may get a cut of the proceeds, and the rest is split among the doctors, lawyers, and claim referral centers. Sometimes the person is in on the fraud, while other times an individual's legitimate claim is being used to file false claims that the person does not know about.

Agent Fraud

Not just insureds and claimants commit fraud, however. Agents may also commit fraud, often in terms of premium fraud. An agent will quote a policy and collect premium payment from an insured but never send the funds to the company, so the insured has no policy and no coverage. The insured has no knowledge of this, since the agent may have created fraudulent dec pages and ID cards in order to make it look good. This does not come to light until the insured has a loss and reports the claim; the insured is then horribly surprised to find that his money is gone, there is no insurance coverage, and the insured is out the amount of the loss. An insured may make payments for months or years before a loss occurs, allowing the agent to build up quite a sum of money. This may also include lapping, where an agent uses premium from another insured to cover up the stolen premium; however this becomes a vicious circle, as the agent keeps having to rob Peter to pay Paul so to speak, so that there is always a premium for a policy, but the agent keeps having to lap premiums the more he steals premiums.

Another form of agent fraud is sliding, when an agent slips in extra coverage that the insured does not know about, raising the premium and the agent's commission, but costing the insured extra for coverage that he may not want or need. This one is easy for the agent to get away with since most insureds do not read their policies, and chances are they assume they have more coverage than the policy actually grants anyway. In some way the insured can benefit as well if a loss is covered, although he did pay out premiums he had not planned on paying for.

Churning is another common form of agent fraud. The agent persuades an insured to terminate his policy with one carrier in order to place it with another, supposedly better, carrier. What the agent is really doing is earning extra commission, while the insured loses money. Insureds often trust their agents to get them the best deals and are not aware that there are some dishonest agents looking out for themselves only.

Faked Death

A highly profitable fraud is faking death for the insurance proceeds. This is common between couples, as one spouse will fake his death so that the remaining spouse can collect the proceeds. The supposedly dead spouse goes into hiding, sometimes with an elaborate set up nearby where he changes his identity and then starts dating the widow. While most fakers of death get caught, it is a profitable fraud if it can be pulled off. It is not uncommon for the faker to move to a different country where money goes farther and set up a new life. The faker must be diligent however as investigators will watch social media, track phone calls, track passport activity, and even travel to the fraudster's favorite vacation spots in hopes of catching him alive and well there. Sometimes there is no real person—a fictitious person has been created and insured, only to have the death faked so the fraudster can collect on the insurance.

Murder for Insurance

Less common is the murder of people for the life insurance proceeds. Sometimes homeless people are conned into signing applications making someone a beneficiary only to be later killed for the payout, or very sick homeless people are conned into signing applications with the fraudster expecting the ill person to die very soon. There are also cases of spouses discreetly poisoning a spouse in order to collect the life insurance. There have been cases when a fraudster has been caught poisoning her husband, only to have investigators go back and look at the cause of death for the previous one or two husbands who also died of mysterious illnesses. Again, this can be profitable if it can be pulled off.

Mail and Wire Fraud

Mail and wire fraud is a large part of insurance fraud convictions, although most fraudsters have no idea at the time that they are committing mail fraud. The sending of fraudulent proofs of loss, incident reports, and other claim information through the mail constitutes mail fraud. Wire fraud is similar, involving information sent via wire versus postal service. Technically, mail and wire fraud is any fraudulent plan to intentionally deprive another of property or services via mail or wire communication and has been a federal crime since 1972. Mail fraud is investigated by U.S. Postal inspectors and the FBI. Inspectors have the authority to seek prosecutive or administrative action against the violator.

In order to be convicted, the government must prove beyond a reasonable doubt that the person used mail or wire communications in the foreseeable furtherance of a scheme to defraud someone, while using material deception with the intent to deprive another of property or services. Penalties are stiff; offenders may be jailed for up to twenty years, with a fine of not more than $250,000; or thirty years if the victim is a financial institution, with a fine up to $1 million, an order to pay restitution, and the confiscation of any property realized from the commission of the fraud.

When an insured sends a falsified proof of loss through the postal service or via email, he has committed mail or wire fraud. His intent is to defraud the insurance company and receive claim services and payment.

The defendant does not have to even actually have mailed or wired a communication; it is enough that he caused a mailing or transmission, in that it was the foreseeable consequence of his intended scheme. For example, one member of an insured couple burns the house but lets the other half of the couple submit the claim forms and proofs of loss. The arsonist insured has committed mail and wire fraud while never having touched the documents. Likewise, the fraud does not have to even be successful for the action to be mail or wire fraud if the intent was to deceive or cheat in order to receive financial gain that can be seen as mail or wire fraud.

Summary

These are just some of the more well-known types of insurance fraud, and there are many variations on a theme. Many people see defrauding the insurance company as an easy way to get money without anyone getting hurt since the perspective is that the insurance company is large and has plenty of money. It is not as risky as robbing a bank or a store, and there is no need to try to break into a business or home under the cover of darkness. However fraud costs the industry billions, and efforts to stop fraud continue. Mail fraud is a federal offense and penalties are stiff. The FBI works closely with state fraud investigators and regulators to stop and prevent fraud.