Rate evasion

Unknown operators

Vehicle titling

Building issues

Other structures

Animals

Online applications

Tools

Summary

Introduction

The application is the information the insured provides to the company for review so the company can determine whether or not to provide coverage, and if coverage is provided, what rates to charge. Therefore applications ask numerous questions about the risk to be insured. The application attempts to get all pertinent information about the risk so that it can be properly rated: what type of construction is it, what is it used for, is it residential or commercial, how old is it, how close to fire hydrants or stations, presence of flammable objects, chemicals, liquids or gasses, animals, type of business conducted, and many other factors. Various tools are used as well: driving records, loss runs, and Comprehensive Loss Underwriting Exchange (CLUE) reports are all used to view past history in an attempt to predict future losses or fraud potential.

The information on the application is so important to the ability of the carrier to write the risk that most applications have specific statements warning that material misrepresentation on the application can result in the policy being voided and that the applicant may be subject to criminal penalties as lying on an application constitutes insurance fraud. Material misrepresentation is the misrepresentation of a fact on an application that the carrier relied on the validity of to write the policy; had they known the truth, they would not have written the policy. Material misrepresentation means the applicant has misrepresented a key part of information to the carrier. A typical statement is as follows:

Any person who knowingly and with intent to defraud any insurance company or another person files an application for insurance or statement of claim containing any materially false information, or conceals for the purpose of misleading information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime and subjects the person to criminal and [NY: substantial] civil penalties. (Not applicable in CO, HI, NE, OH, OK, OR, or VT; in DC, LA, ME, and VA, insurance benefits may also be denied).

ACORD 80 (2001/04).

Rate Evasion

Rate evasion is one of the more common types of underwriting fraud, particularly among automobile owners. Most automobile policies are rated by territory; carriers develop rates based on the frequency of accidents and claims per zip code. Everyone wants a cheap rate, but not everyone can afford to live in the suburbs; houses and apartments are more expensive, but automobile rates are less expensive. Therefore, people will use addresses that they do not live at in order to get that cheap rate. They may use a relative or friend's address, they may use the street address of where they or friend's work, or they may even use the street address of the Mail Boxes Etc. business.

Rate evasion is not limited to areas within one state; it is not unheard of for people from one state to pretend to live in another state with much cheaper rates. Rates in areas that are particularly high, such as New York City, make it tempting for people to use an address from a neighboring state, or even a state as far away as North Carolina, to obtain a cheaper rate. New Jersey, with the highest automobile insurance rates in the country, passed legislation in March 2015 that made rate evasion a criminal offense with fines up to $150,000 and jail time up to ten years if convicted.

Students may be away at school in an urban area and the parents may not list the garaging address; again, this is often rate driven, although sometimes it is just parents not knowing the carrier needs to be informed as to where the vehicle is garaged. Even though the student's main residence is with the parents, when the student is at school eight to ten months out of the year, the car should be listed at the garaging address for those months. Businesses may claim their fleet of vehicles is garaged in another town or state to obtain lower rates.

Use of the Vehicle

Use of the vehicle is another way to avoid rates—someone with a long commute may say they only drive six miles to work or say they use the vehicle for pleasure only. It is not until after a claim when the mileage is looked at that it becomes apparent that the vehicle was being driven much farther than the application indicated.

Using the vehicle in a business is another issue; many people have started driving for ride-sharing companies and may not tell their insurer what they are doing. Some of this is because they do not know it is an issue, but others may do it deliberately. Using a pickup truck in a landscaping or other business but saying it is for personal use happens.

Unknown Operators

This is particular to automobile insurance, either personal or commercial. It is much easier to spot on the personal side since it is suspicious for a couple to have six vehicles, even if one of the pair is an auto enthusiast. Drivers go undeclared due to bad driving records or suspended or revoked driving licenses. With a bad driving record, rates could rise dramatically, and carriers do not want to write anyone without a valid license to drive a vehicle. Sometimes drivers are relatives, but it is not unusual for someone to loan a vehicle to a friend or lover for a length of time. Again, the inability to review the driving record makes the rate incorrect for the exposure. Likewise, rate evasion can apply here as well, as the extra vehicles could be garaged anywhere in town.

It happens with commercial coverage as well; a taxi company or company with drivers may not list all the drivers operating the vehicles, especially the ones with speeding, drinking, or other violations. The intent is the same—to keep the premium low and hide from the carrier those drivers who have poor driving and accident records. In event of a claim, on a personal policy the insured statement is often that the vehicle was just loaned to the person temporarily, and on a commercial policy the individual was supposedly just hired. With a large organization with multiple drivers and vehicles, it is easier to hide drivers, especially if the company has a high employee turnover rate.

Vehicle Titling

Another form of automobile fraud is the titling of a vehicle used in business as a personal use vehicle. The applicant does not want to pay the taxes on the business vehicle so uses it in business but titles it in his name instead of the name of the business. The applicant of course does not want to pay the rate for business use, so lists the vehicle as pleasure use only. This does not include situations where a real estate agent may be showing a home; this refers to Bud Bloom, who owns Flowers 'R Us, titling his vehicle and listing it on his personal auto policy instead of putting it on a commercial auto policy for the Flowers 'R Us company.

Another fraud using vehicle titling is the insuring of a nonexistent vehicle; the applicant gets a phony title for a vehicle that does not exist. Once the vehicle is insured, the applicant then claims the vehicle was stolen and files a claim. The insured is paid for something that never existed. This same scheme can be used for insuring imaginary boats that later sink.

Building Issues

Business use, except in some limited circumstances, is excluded on the homeowners policy. Coverage can be granted by adding an endorsement but again, this raises the premium. Some applicants simply do not list the business on the application. This happens with rental property as well, the applicant simply does not mention it in order to get a cheaper rate. Even though the policy excludes such activities, it still exposes the property to a higher risk of claims—tenants can damage the property, the glassblowing shop in the basement could set fire to the house, or a customer coming to the business could slip and fall and be injured.

An applicant may also state that the property is worth less than it actually is in order to obtain a lower premium. However, the insured may not benefit as much as he anticipates, since many policies have coinsurance clauses that require the property to be insured to a certain percentage of the value of the property. Conversely, an applicant may want unusually high amounts of coverage for a marginal property; this type of situation can be an indicator for a potential fire loss, triggered by arson.

Likewise the deliberate failure to advise the carrier of significant changes to the building—for example the addition of a recreational room, mother-in-law suite, or significant remodeling of the kitchen to add a breakfast nook, all of which increase the value of the home—is fraud. This is different than the insured simply not realizing that he needs to advise the carrier of such changes; many insureds may not realize advising the carrier of changes is important, while other insureds deliberately withhold information from the carrier knowing that it needs to be reported.

As far as commercial operations, important factors in underwriting the building are the type of operations and the presence and storage of hazardous materials. An applicant may claim to have flammables, explosives, or chemicals properly stored while knowingly having them not secured. The presence of proper safety gear for employees and safety programs is also critical information that may be lied about on an application that could affect insurability of a risk.

Vacancy is a particularly large concern and applies to personal and commercial risks. Property that is vacant is a magnet for thieves and vandals, which is why most policies exclude vacant property if it has been vacant for more than thirty or sixty days. An applicant may not disclose that the property is vacant, or has been vacant for a long time, and could set the premises on fire and create a large inventory list of property that supposedly burned with the building. It is not uncommon for rental properties to be vacant for a short period of time between tenants and this is allowable; it is the longer vacancies, beyond thirty or sixty days, that are usually excluded.

Likewise housekeeping is important. Sanitary conditions are important: is a restaurant keeping the kitchen as clean as required, especially where grease is present. It is not unusual for a less than well-kept occupancy to sustain an arson fire. While the carrier may send out loss control to inspect the property, it may not be possible to inspect every risk, especially before the underwriting period has expired.

Other Structures

Other structures can be problematic as well. With commercial risks, the number, size, location, and maintenance of other structures is important, and an applicant may omit a certain number of structures to lower premiums or simply fail to disclose the presence of buildings in poor condition.

In homeowners coverage, an applicant may not disclose other buildings as well for similar reasons; buildings may be run down so the insured fails to mention the old shed or gazebo in poor condition. Other structures that a homeowner might deliberately fail to list on the application are things that would outright deny them coverage, such as the presence of trampolines, unfenced swimming pools, and other hazards. Many insureds in remote areas feel that their pool is safe even though unfenced, since there are no neighborhood children around.

This is where the agent becomes part of the problem. Most carriers require agents to take photos of the property for just such reasons so that the carrier knows the nature of the risk they are writing. Unfortunately, so many agents neglect this part of writing a risk that many properties are written without the carrier having full knowledge of the risk. While carriers will often inspect properties, it generally takes three years for a carrier to inspect an entire book of homeowners business. This makes even acknowledged items dangerous; the applicant may claim to have a swing set but fail to state that it is not cemented or sturdily fastened to the ground. This makes it much more likely that the swing set will turn over and injure children at play. An application can only ask so many questions before the process becomes too cumbersome.

Animals

The thinking on dangerous dogs has gone back and forth; some carriers still maintain lists of breeds that they will not insure, and some carriers no longer use such lists. However, an insured can list a pit bull or other restricted breed of dog as a mutt or mixed breed, and unless the agent sees the pet and recognizes the breed or its characteristics, the insured can get away with insuring a dangerous dog. Many states have specific definitions in statute for what constitutes a dangerous dog, and most often it is based on aggressive behavior and bite history of the animal. Bite history is another area where and insured may claim that the dog has never bitten anyone when in fact he has, a factor in whether the carrier would write the risk had it known about the dog bite. Even cats can cause a problem if the animal has a history of aggressive behavior. While many cats are aloof there are those that will scratch at a stranger when annoyed, and cat scratch disease can cause nausea, vomiting, fever, chills, fatigue, and other symptoms.

Exotic animals are another issue—poisonous snakes and fish, various reptiles or monkeys may be kept as pets and not disclosed and are not barking at the door the way the dogs might and give themselves away. There has been more than one case of a neighbor or friend being attacked and seriously injured by a friend's pet monkey.

Farm animals are also an issue—an insured may be hiding goats, pigs, or even cows in an outbuilding on the premises and does not want to have to obtain coverage for a farm exposure. Again, if the agent does not see the property, the applicant can claim there are no animals on the premises and that is all the carrier knows.

Online Applications

The prevalence of insurance being available over the internet makes online applications more susceptible to fraud than paper applications. With a paper application an applicant is usually dealing with an agent or a customer service representative, and some fraudsters may chicken out when in front of a real person. Casual conversation may lead to the disclosure of information the fraudster had intended to hide. However, when submitting underwriting information online, it is very easy to make all sorts of false statements without feeling guilty about it, and without a person asking follow-up questions that could highlight suspicious information. If the carrier has an automated underwriting system, the policy can be issued without human intervention unless the application triggers certain red flags. This allows potentially or outright fraudulent applications to become policies without any scrutiny.

Tools

CLUE reports, motor vehicle records, loss runs, inspections, and predictive analytics are all tools used to discover potential fraud. The standard CLUE reports, driving records, and loss runs fill in gaps where the insured either forgot, or deliberately tried to hide, past losses or claims. These are standard tools that have been used for years, and many are well known by applicants, even though many still try to hide past losses.

Predictive analytics is the extraction of information from existing data sets in order to determine patterns and predict future outcomes and trends. Predictive analytics does not tell you what will happen in the future, but it helps to identify risk of loss. A specific score is developed for each applicant in order to determine the likelihood of claims or fraud. Credit scoring is one form of predictive analytics. While it has been controversial, as many people do not see the logic in how one manages one's finances relates to the filing of automobile or homeowners claims, statistics support evidence that people with a poor credit score are more likely to file a claim.

A spotty employment history can indicate financial strain, a motive for setting fires to insured property, or can highlight potential rate evasion issues if the insured has moved around for various jobs. Likewise an applicant with a menial job and significantly valuable items could indicate a problem; the insured could have inherited the property from a rich uncle but could be padding an inventory list with the intent to burn the structure later and claim nonexistent property as lost.

Summary

The application provides the carrier with critical information for underwriting and establishing a proper rate, and it provides an applicant with the potential to lie and falsify belongings, condition, even ownership of certain items. An insured can list a large inventory and intend to destroy the items later and file a claim. Applications must be reviewed carefully, even if automatic systems are reviewing portions of the application. While most applicants are honest, there is enough insurance fraud on the application side that it is a concern for the industry and deserves significant attention.