Big price tags for little lies - insurance fraud

Nation's Business, Oct, 1993 by John S. DeMott

From innocent fudging to outright lies, cheating on insurance claims is widespread, costing insurers--and, ultimately, policyholders such as small companies--large sums in higher premiums. There are no figures on insurance fraud overall, but there are estimates for some industry segments. In the property/casualty field, for example, Sean Mooney, chief economist at the Insurance Information Institute, says it has been conservatively figured that one of every 10 claims is fraudulent in some respect.

In workers' compensation, phony claims have driven up premiums nationally an estimated 10 percent, says Chris Campos, senior partner of the Campos & Stratis accounting firm, in Teaneck, N.J. The firm evaluates large insurance claims on behalf of insurers.

Another type of cheating on workers' comp occurs when employers misclassify themselves to understate the riskiness of their work-calling themselves general contractors when they're really roofers, for example--to avoid paying higher workers' comp premiums.

Such fraud only adds to the upward pressure on premiums and, in its way, is almost as damaging as the destructive storms that caused $23 billion in claims in 1992 alone. Insurers are now restricting some coastal coverage, and premiums may start heading up. (See "Business Insurance Will Cost You More," June.)

While insurance executives resist labeling ordinary insurance buyers as common criminals, insurance professionals say millions do inflate, exaggerate, and even lie to get money from their insurance companies or to get lower rates.

It can be as "innocent" as what is called "soft fraud," which occurs when a parent, for example, lies about the garaging address of a daughter's car to avoid paying the higher premium for coverage in a riskier location. Or it can be the "hard stuff," such as arson or staged accidents.

To catch cheaters, the New Jersey Insurance Department parked empty buses on busy roads, arranged to have cars bump into them, then videotaped "passengers" who appeared from nowhere to board the buses and then claim they had been hurt in the "accidents."

Why is fraud happening?

Adrian Tocklin, executive vice president of Continental Insurance, in New York, says it's partly the nature of the insurance product. She says: "If I go out and I spend $1,000 on a new television set, I've got it. But when I spend $1,000 on traditional liability insurance and nothing happens--there's no accident--well, I've spent that money, and I didn't get anything back ... and they're going to want something back."

Campos says it's the lure of the quick buck: "They're looking to make money, whether it's on workers' comp, or an auto claim, or a slip and fall--you name it."

Despite long-standing efforts by the insurance industry and state governments to expose chicanery, insurance fraud is seen as an epidemic and has led to formation earlier this year of the Coalition Against Insurance Fraud. The group is co-chaired by Stephen Brobeck, executive director of the Consumer Federation of America, in Washington, D.C., and Tocklin of Continental.

The coalition's 17 chartering organizations include Brobeck's consumer group, seven large insurance carriers, and several associations representing government officials, among them the National Association of Insurance Commissioners.

With an initial annual budget of about $500,000, the coalition's mission is to emphasize that if policyholders cheat, they drive up insurance costs for everyone.

One of the coalition's planned tactics, along the lines of investigatory reports on "60 Minutes" or "Prime Time Live," is to have ordinary policyholders pose as customers with medical or auto-repair problems. The results would be secretly filmed and then offered to local television stations for broadcast. Eventually, the group will press for federal anti-fraud legislation that could result in the suspension of licenses of physicians and lawyers who participate in insurance fraud.

Dennis Jay, the coalition's executive director, who helped form insurance-industry and consumer groups as communications vice president of the National Association of Professional Insurance Agents, in Virginia, says, "We are going after insurance fraud wherever it occurs, from whatever source." That also means going up against fly-by-night and untoward insurers who refuse to divulge information to the public, Jay says.

The group also intends to go after anyone who takes improper advantage after disasters such as hurricanes and floods. Hurricane Andrew, for example, produced what Florida insurance investigators are calling a cesspool of fraud-- from the adjuster accused of stealing $326,178 from an insurer to the woman who said Andrew's rain ruined her rugs, which had already been damaged.

Brobeck estimates that if all kinds of insurance fraud could be cut by $5 billion a year, the typical American household would save $60 annually in premiums for auto and homeowners' insurance. Small businesses could save even more.