Fraud Cashing in With Struggling Economy

By Dave Thomas
January 7, 2003

Fraud in all forms is as old as the industry itself. Given a struggling economy, the temptation to create fraud against or within the industry has been on the upswing recently.

According to Jim Quiggle, director of communications for the Coalition Against Insurance Fraud (CAIF), which is a national alliance of consumer leaders, insurance companies and state regulators, industry fraud is being fed by a struggling economy. "The economy has placed a lot of pressure on the business sector and consumers as well, and has created a tremendous amount of opportunities and temptations to commit fraud. Fraud is alive and well throughout America. Another trend we're seeing going along with this is the increase in ring activity. Many scams that were mom and pop variety scams are becoming large, well-managed corporate style criminal-ring operations."

The Insurance Information Institute (III) reports that property/casualty fraud cost the industry $27 billion in 2001. "It just demonstrates the magnitude of this problem," Jeanne Salvatore, vice president for consumer affairs at the III, notes. "We see different parts of the country being hit. You'll see one year there will be a big problem and then it will crop up somewhere else. Right now, New York is sort of fraud central for auto insurance fraud."

Quiggle notes that one area that has taken on a corporate look is the auto fraud ring. "California has been one of the epicenters of criminal ring activity in auto fraud. Many states with large port cities like California tend to see these rings thrive. Another large-style corporate ring activity we're seeing is in staged auto accidents. Those are continuing to crop up and operate especially in urban areas like New York, San Francisco, Miami, etc.

"In Texas, we're seeing a small increase in mold related frauds. It has not taken off as a full-scale crime wave, but the large growth in mold claims has definitely induced a number of fraudulent claims. We're seeing mold remediation outfits that are making false claims 'cooking' houses and charging insurance companies for equipment they're not using. They're also charging for larger mold cleanup than they actually do conduct. Cooking is the heating up of houses from the inside so mold spreads more quickly. Texas has also fallen victim as a center for a growing wave of phony group health coverage that is being sold to small businesses and consumers. A lot of firms have been operating inside Texas both headquartered inside the state and outside selling within the state. Small businesses in Texas are hurting because of the economy and small business owners are vulnerable to convincing sales pitches that peddle rock bottom prices for health coverage. These people are buying coverage without asking questions. Texas has busted several very large phony group health plans as well as a number of agents who have been selling it."

Ed Sparkman, public affairs manager for the National Insurance Crime Bureau (NICB), points out, " In general, we estimate fraud is about 10 percent of every claim. One of the trends we're dealing with is identity theft and all the things that surround that. It's not just stealing somebody's identity it's what you do once you steal it. The problem is the thieves and crooks become very enterprising. As you crack down on one thing, they turn to another.

Most experts agree, auto theft continues to be a problem for the industry.

"Dealing in theft especially, one of the things is the aspect of recovery rate," Sparkman continues. "It is the lowest (62 percent) it has ever been. Basically that means four out of every 10 autos stolen just disappears. Part of that also gets in from a fraud perspective with leased vehicles. We're seeing a real trend toward people committing fraud once their vehicle is due from the lease. They'll have high mileage on it and it is much easier to just have the vehicle just disappear and take an insurance hit on it and get reimbursed through your insurance company."

Another area seeing large activity in the fraud spectrum is workers' compensation, according to Quiggle.

Editor's Note: To see full story, please see the Jan. 13 issue of Insurance Journal and Insurance Journal Texas/South Central.