Insurance fraud - whether committed by sophisticated criminals, otherwise honest consumers, or by insurance company employees and owners - is an increasingly expensive burden on the U.S. economy, taking money out of the pockets of all citizens. This illegal activity diverts vital resources away from businesses, law enforcement, the civil justice system, regulatory agencies and local emergency services.
There are no easy solutions to the problems of insurance fraud. Consumers, legislators, regulators and insurers must work together over the long term to create an environment that either prevents insurance fraud or detects it easily when it occurs. The first step in this process is creating a baseline understanding of the problem and potential solutions. That is the purpose of this document.
What is insurance fraud?
Insurance fraud is any deliberate deception perpetrated against or by an insurance company or agent for the purpose of unwarranted financial gain. It occurs during the process of buying, using, selling and underwriting insurance.
Insurance fraud is often classified as being either "hard" or "soft." Hard fraud is usually a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy.
Sophisticated conspiracies involving medical doctors, lawyers and their patients/clients are widespread and one of the most costly forms of insurance fraud in the United States. A single crime ring can cost the insurance system millions of dollars a year.
Executives and employees within the insurance industry also commit hard fraud. An employee may defraud an insurance company by accepting bribes or kickbacks from body shops or doctors to verify false claims. Another example is an insurance agent who fails to remit policyholder premiums to the insurance company. The agent pockets the premiums and hopes the policyholder does not file a claim.
This internal fraud also includes con artists who set up phony insurance companies and collect premiums from unsuspecting consumers, but never or infrequently pay claims. When too many claims are filed or when regulators start investigating, the con artists disappear with the company assets.
Soft fraud, which sometimes is called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim. One example is the car owner involved in a "fender bender" who inflates the claim to cover the policy deductible or the cost of insurance premiums.
Soft fraud also occurs during the underwriting process when people apply for new or renewal coverage. Some people provide false information to lower insurance premiums or increase the likelihood that the application for insurance will be accepted.
+ Underreporting the number of miles driven,
+ Giving a false location where a car is garaged,
+ Failing to report an accurate medical history when applying for health insurance,
+ Exaggerating the amount and value of items stolen from a home or business.
What is the scope of insurance fraud?
The extent of insurance fraud is difficult to quantify because much of it goes undetected. Comprehensive research to estimate the total cost of fraud has yet to be undertaken. However, studies focusing on specific aspects of insurance fraud suggest that the cost is enormous. The Coalition Against Insurance Fraud estimates the annual cost to be more than $79 billion per year. The amount is a hidden tax of more than $900 per family each year on the costs of goods and services. These estimates of the costs of external insurance fraud suggest that it is the second largest economic crime in America, exceeded only by tax evasion.
Individual studies also provide evidence of how pervasive the problem is:
+ A study of injury claims from auto accidents in Massachusetts found that 48 percent have some aspect of fraud or abuse.
+ A 1992 audit of workers compensation policies in Florida indicated 46 percent of employers underreported the level of their payroll or misclassified employee occupations.
+ At least 30 percent of 302 property/casualty insurance company insolvencies from 1969 to 1990 were due to fraudulent activities.
+ A 1995 study by the Rand Institute for Civil Justice concluded more than 35 percent of people hurt in auto accidents exaggerate their injuries, adding $13-$18 billion to the nation's annual insurance bill.
What are some examples of hard fraud?
Hundreds of news media reports underscore that insurance fraud is on the rise. To illustrate the range of cases, the Coalition Against Insurance Fraud had once release a list of 1996's "Top 10 Insurance Fraud Cases." A summary of each case follows:
Two firefighters died while attempting to put out a fire at Stormy s Seafood Restaurant in New Smyrna Beach, Fla. The fire was discovered to be arson-for-profit. The owner, Forrest Utter, was convicted of conspiracy, mail fraud, and arson resulting in the death of the firefighters. Strangely enough, three other properties Utter owned had also been destroyed by fire over the years.
A father and son team and two licensed insurance brokers were indicted in February on numerous fraud charges related to at least six years of selling phony commercial policies to at least 50 companies in the New York City area. Dean W. Sanders and his son, Scott E. Sanders, took an estimated $30 million. The pair even worked their scams from behind bars, as one or the other was imprisoned on other charges during the six years.
More than 100 people were indicted in Texas for their roles in a staged auto accident scheme. The ring may have taken in as much as $5 million with the help of at least two doctors and two lawyers indicted in the crimes. Some of the ring's members had been operating since the late 1980s.
Mark Kaplan, a former Beverly Hills doctor, was sentenced to eight years in state prison for masterminding one of the biggest workers' compensation insurance scams in California history. Kaplan and his ex-wife were charged in a scheme that bilked insurers out of approximately $30 million dollars.
Glenn H. Martin and his sister, Candace L. Cooper, were convicted in Orlando, Fla., on charges they looted $9.75 million in premiums from the failed Twentieth Century Life Insurance Co.
Caremark International Inc. agreed to pay $161 million in criminal and civil fines for paying kickbacks to doctors and submitting false billings to the government. The Northbrook, Ill., company pled guilty to paying doctors for patient referrals and defrauding government medical programs. The investigation focused on whether the company disguised kickbacks to doctors as research grants or payments for legitimate work.
The founders of California's Amerimed Medical Corp. were arrested as part of a 50-count indictment charging the company bilked employers of an estimate $30-$50 million in inflated or unnecessary medical expenses. Dr. James W. Eisenberg, Michael J. Lightman and 10 others, including four attorneys, allegedly used a statewide network of illegal medical referrals, treatment incentive programs and billing practices to collect as much as $2 million a month from insurance companies in the workers' compensation system.
Forty-seven people, including 21 lawyers and 16 insurance company adjusters, were indicted in New York for allegedly defrauding companies by bribing claims