Posted On: May 1, 2007, 2:28 pm CDT

Posted By: Melanie

Consider how easy it is to commit insurance fraud. Even insurance textbooks
admit that policies are unread and unreadable. According to Vaughan and Vaughan,
Fundamentals of Risk and Insurance (8th edition): "In most cases, the customer
is asked to purchase a product in which he or she becomes a party to a contract
that he or she has not read nor would understand if it were read." That is
almost an open invitation to fraud. When selling the contract or when paying
claims under it, insurance personnel know that the buyer or claimant may be at
their mercy. Claims adjusters, anxious to make a record by denying claims, have
a field day. Insurance agents, anxious to earn commissions, can also join the
field day in puffing and misrepresenting policies.



Consider also the strength and weaknesses of the parties. On the one hand, you
have an insurance company, with armies of experts and boxcars full of money. On
the other hand, you have a claimant, who may not be well advised, who knows
little about insurance or the policy in question, and who can't afford legal
battles and long delays. But to an insurance company, a legal battle is just
another routine cost of doing business. It has lawyers in house and all over its
operating territory. If it denies a claim, it's can be in a win-win situation.
There's a good chance the claimant will give up and go away. Even if the
claimant protests and appeals to higher levels of management or goes to the
state insurance commissioner, the insurance company can then pay and has the
benefit of the claimant's money sitting in the bank in the meantime. Even if the
claimant hires a lawyer and sues, the insurer can then settle. Only in
exceptional cases (when an attorney takes the case, proves that the insurance
company acted in bad faith, and wins an award of punitive damages for the
claimant), improper decisions by the company can be profitable for the company.