Fraud: An unwelcome but persistent visitor to the world of insurance.
Fraud – regardless of how and where it presents itself – is costly, time consuming, and requires a vigilant focus to detect it Dealing with fraud often requires reading between the lines in a claim or underwriting file and coming up with an innovative way to prevent someone from taking advantage of the company. Beyond the policy or the claim, fraud can also occur in litigation via a lying witness or an unethical lawyer. Exposing lies in litigation is critical and, when appropriately spotted, can be used to garner a favorable settlement or outright dismissal. Strategies for wrangling untruthful counsel and long-term partnerships can be fruitful in detecting and combatting both current and future fraud.
Fraud in the Claim
Fraud presents itself like a blurry picture coming into focus. A warning sign is when documents, witnesses and other information associated with a claim present more questions than answers. Other red flags also include written statements that don’t match up with supporting documents, a time line that doesn’t make sense, and witnesses gone missing or deemed non-existent.
A skilled response strategy includes requesting and scheduling additional information from the insured followed by an examination under oath (EUO) of the claimant. While an EUO may be initially perceived by the insured as an aggressive stance, the message can be managed by conveying the company is typing up lose ends. Often, when an insured is lying, he or she will request to postpone or fail to appear for the EUO. If the insured fails to appear for the EUO, the claim can be denied for failure to cooperate. If the insured does appear for the EUO, the examination will provide the insurer the opportunity to obtain further information about the unclear timeline, missing documents and unavailable witnesses. A transcript from the examination prevents the insured from changing his or her story later and provides a useful record to cite should the insurer decide to deny the claim. After an EUO, a fraudulent claim or resulting lawsuit may be abandoned all together.
Additional strategies to combat fraud in the claim include hiring a private investigator to conduct surveillance on the insured or interview third parties about the claim. Private investigators often have a law enforcement background and are useful at spotting what is missing on in a timeline, locating additional documents to run down a theory and accustomed to locating hard-to-find people. Many private investigators have prior experience in specific types of fraud, such as classic cars and title washing. Still, the cost for a private investigator should be weighed against the value of the claim. A low value claim may not justify such an expense. Also, criminals are often crafty, tell a good story, and can be skilled at avoiding surveillance. Ideally, a preliminary call with a trusted private investigator can assist to evaluate whether or not the type and amount of a claim justify retention.
Taking time to consider the material provided is often essential to assessing whether the insured has submitted a fraudulent claim. Yet, insurance codes often require a swift coverage determination that is at odds with a thoughtful, methodical approach. A reasonable middle ground is to keep communicating with the insured by providing short updates that confirm receipt of requested information, seek additional information and identify anticipated next steps. This type of correspondence will buffer against complaints of delay.
In the end, keeping the big picture and effect on the company’s business is key to handling a potentially fraudulent claim. Many companies have a zero tolerance approach to fraud with the intent of focusing on the numerous meritorious claims that remain to be processed. That position alone provides assurance to all insureds that their insurer is protecting their interests. While everyone has an outer limit for delay, both the company and the insured can get behind preserving company benefits for those who experience a true loss.
Fraud in the Underwriting
Fraud in the claim often has a unique, and useful, travel companion identified as fraud in the underwriting. Fraud in the underwriting occurs when the underwriting documentation contains a factual misrepresentation by the insured that is material to the risk taken on by the insurer such that the insurer would have issued the policy on different terms or not at all.
Resolving fraud in the underwriting can present an unfamiliar situation for a claims handler. Claims folks are likely focused on processing and resolving the claim and instead of studying the underwriting file. Claims may not even be provided with the underwriting file and have to specially request it.
Still, handling a potentially fraudulent claim with an eye on the underwriting can prove to be a fruitful endeavor. In many states, the legal standard for rescission or denial based on fraud in the underwriting is more lenient than the legal standard for denial for fraud in the claim. In certain states, the insurer does not need to prove that the insured intended to make a factual misstatement in the underwriting to rescind the policy or deny the claim as long as the misrepresentation was material to the underwriting decision. However, if that same insurer was to deny the claim based on fraud in the claim, then the insurer would be required to prove the insured intended to deceive it.
In addition to not having to prove intent to deceive, fraud in the underwriting is often easier prove than fraud in the claim. Finding evidence to support fraud in the underwriting can be located by looking beyond the fraudulent claim. Any number of seemingly benign items on an insurance application can be confirmed or contradicted by public records, witnesses or even the insured. Depending on the type of policy issued, material information in the underwriting file can include prior ownership or valuation of homes, vehicles or items, prior medication, life experiences, addresses, income, partnerships, jobs or marital status. Of course, the key to fraud in the underwriting is that the misrepresentation be material to the insured. The risk undertaken and premium charged are generally based on specific questions and information requested in the underwriting application. Thus, , when a misstatement is found it in the underwriting, it is usually considered material from the vantage point of the insurer.
Claims-handling individuals may feel out of place scrutinizing underwriting as he or she likely had nothing to do with placement of the policy. Yet, the skill set necessary to analyze claim documentation is the same as those needed to analyze the underwriting and, ultimately, presents a unique opportunity to address and deny a fraudulent claim.
Fraud in the underwriting also provides the opportunity to remove the emotion from the investigation and, if necessary, the denial. The insurer can present the discrepancy in a non-confrontational manner identifying the information provided, the risk undertaken and premium charged. In the end, a fraudulent claim is unearthed and resolved.
From a business standpoint, insurers are often reluctant to move forward with rescission based on fraud in the underwriting because it is perceived that either the underwriting department or the broker made a mistake. No one wants to place blame as everyone understands the advantages of playing nice in the company sandbox. Still, fraud in the underwriting should not be perceived as a “mistake” for someone to catch. No insurer independently verifies every item on an underwriting form. Still, the perception of “mistake” can originate from the fact that the paid premium on a rescinded policy often has to be returned and the question arises as to which budget – claims or underwriting – owes the funds. Do not let this “refund” obscure the big picture. Catching fraud in the underwriting is a win for the company. A refund of premium is often much less than payment of any single claim, prevents further bogus claims on this or later policies and is typically on much more solid legal ground than a valid denial of a fraudulent claim. Internal company politics should not undercut the upside of routing out fraud by looking to the underwriting.
Fraud in the Litigation
The fraud in underwriting or claim often spills over into litigation regarding delay or denial of that very claim. Sadly, fraud can also originate in insurance litigation when a party, witness or lawyer lies during the course of the litigation. Insureds, parties or witnesses may feel compelled to bend the truth about claim-related events, information or documents to benefit their litigated case. These individuals – who often represent themselves – continue to affirm their untruths despite documentary evidence to the contrary. Attorneys even engage in this behavior in the face of their oath to represent facts and law accurately to the court. Creative strategies can be employed to address this type of fraud and are often successful in ridding the company of the case.
When witnesses lie, a reasonable counter-attack is to quickly schedule and take a video-taped deposition. Witnesses may lie to claims examiners, their lawyers and even sign a false declaration under penalty of perjury. But, when that red-light turns on witnesses are forced forever document their false account, confront key documents and respond to hard questions – all making their story susceptible to scrutiny. Once taken, should the party or witness still stand behind their story, this documented account can be submitted to the court or opposing counsel to rectify the falsities and often resolve the in the case.
Response strategies for unethical attorneys require additional creativity since attorneys are not witnesses and cannot be the subject to a deposition. First, the insurer’s counsel should issue a strong written warning identifying the misstatements and contradictory evidence. Counsel should also limit communications with the opposing lawyer to writing only. Oral conversations can and often will be misconstrued and misrepresented. The insurer should also consider making an early motion in the case that allows the relevant evidence to be submitted to the court. Most jurisdictions permit a motion on the pleadings, where documents can be submitted as evidence if they are either referenced in the complaint or prove that a statement in the complaint is false. Once a court gets a whiff of dishonesty – especially from an attorney, it is often more lenient with the evidentiary standards and will consider the documents to dispose of the case. Sanctions can also be a useful. Even the threat of sanctions may be enough to put a stop to the lying attorney. If more than a threat is required, sanctions motions can accompany a motion to dismiss, usually permit evidence of unethical conduct, and provide a mechanism to get relevant evidence before the court that cannot be officially considered on a motion to dismiss.
If these recommendations do not assist in resolving the matter or curbing unethical behavior from the other side, then attempt to schedule ADR early in the case. This protected arena provides a venue to bring misstatements to light and empower a neutral to deliver a strong message about legal standards and ethics. At a minimum, ADR provides a vehicle for a third party to convey your message about the lack of merits of the insured’s case and an opportunity for resolution of the matter.
In the end, the insurance company must be alerted to the existence of the lying witness or unethical attorney early in the litigation. Misstatements and untruths in litigation will increase attorney time spent to unravel and prove the truth driving up litigation costs. Still, as always, the goal is to protect policyholders, keep fraud to a minimum and pay only meritorious claims.