Investigating Fraudulent Claims, Part 2 (This article is part of an ongoing series)

As discussed in the first article, the most successful investigations occur when all involved departments of a carrier collaborate with the carriers' SIU attorney to provide the most thorough and complete investigation and defense possible. For example, in the case of a suspected fraudulent claim, a carrier's Claims Department should obtain all routine information necessary to process the claim, including Loss Notice, Sworn Proof of Loss, and a recorded statement, even if the matter is initially referred to the SIU. After obtaining oral and documentary evidence, the Claims Department should make that information available to the SIU, which can, in turn, attempt to verify it or confirm the fraudulent nature of same during the course of its investigation. All of this information should then be turned over to the SIU attorney for complete analysis. If the carrier deems that an Examination Under Oath (EUO) is appropriate, the attorney will then have the necessary information to conduct a concise, targeted EUO to uncover the true facts of the case. Acquisition of as much information as possible makes it easier for retained counsel to determine, with a high degree of confidence, whether a claim is fraudulent. If a claim is not deemed fraudulent, or if any fraudulent statements are immaterial, the claim can be promptly processed and paid. If, based on discovery, the claim is deemed fraudulent and the misrepresentations are material, the claim should be denied.

Making the Case for Fraud

Developing the information necessary to confirm the fraudulent nature of claims is the most important part of all insurance claim investigations. Depending upon carriers' internal procedures, all contact with SIU attorneys may occur through the SIU or the claims representative and they may each forward information to the SIU attorney.

The term “SIU attorney,” for the purposes of this article, refers to outside counsel retained by SIU departments, who have special expertise in analyzing fraudulent insurance claims, not an attorney employed by the carrier. This author's company is one such firm routinely retained by carriers' SIUs to assist with in-depth investigations and defense of fraudulent claims. The scope of representation at such firms ranges from consultation on claims, in-depth analysis and investigation, conducting EUOs, and/or defending carriers in the event that litigation is instituted.

Confidentiality

In New Jersey, an SIU may take advantage of certain statutory confidentiality provisions during the course of its investigation. By statute (the New Jersey Insurance Fraud Prevention Act N.J.S.A. 17:33A-1, et seq.), certain information developed by the SIU may be deemed confidential during the course of insurance fraud investigations. It is important to note that, when sharing information, both Claim Departments and SIUs should direct the flow of information directly to their SIU attorney(s). If communicated directly, the information may be transmitted under the attorney/client privilege. As long as no outside agencies or entities are copied on the correspondence, the privilege will not be waived. The information may eventually be turned over to the insured, but such production could be at a time, or under circumstances, favorable to the carrier.

Outside Experts

While claims representatives and SIU investigators each have their respective information-gathering duties, the unique nature of individual claims often requires the assistance of outside experts. In many cases, a forensic expert's input is crucial to a carrier's analysis, and ultimate determination, on a claim. A carrier's primary responsibility is to pay valid claims and to deny those deemed invalid. Forensic experts help carriers make that ultimate determination. In defense cases, this author routinely works with three specific types of experts to defend a variety of potentially fraudulent claims. They include accountants, doctors, and vehicle theft/arson experts.

Accounting experts are frequently used and can be invaluable to the investigation and defense of cases involving premium fraud. These experts (who are required in cases involving allegations of accounting malpractice) also can assist with business interruption claims. In cases involving premium fraud, having an expert's review and analysis of an insured's books and records can be a tremendous source of discovery. While an attorney may have an accounting, financial or tax background, he or she cannot prepare an expert report. The expert report needs to be generated by a qualified professional in the respective field. Working together, the attorney and the accountant should review the insured's books and records and elicit relevant facts and information, so that the expert may generate a report including the necessary evidence to prove the carrier's case. Some examples of invaluable accountant services include: analysis of payroll and financial information in commercial claims involving workers compensation premiums; review of accounting services and the standard of care in cases wrongfully alleging accounting malpractice; and analysis of payroll, financial and tax information in cases of business interruption loss.

Accounting Experts

In a thorough investigation, it is best for the SIU attorney and the accountant to work with the carrier's representative in developing the defenses to the claim. It is important to note that there are tactical reasons for an accounting expert to be retained by the SIU attorney rather than the provider. These reasons relate to the privilege of communications between the attorney and the accountant, and maintaining the confidentiality of such communications.

Medical Professionals

Medical professionals are a second category of invaluable experts who can be tapped for help with certain claim analyses. Their knowledge can be particularly useful in analyzing claims for bodily injury damages and for medical benefits, such as personal injury protection (PIP). Medical professionals are typically retained by carriers to conduct independent medical examinations (IMEs) or to provide “peer reviews.” IMEs are an important part of the evaluation and potential defense of a claim. Statements obtained by an examining physician often provide counsel with a basis for cross-examining claimants and for defending against claims. The importance of IMEs should not be underestimated. At the same time, an IME alone may not be sufficient evidence for a carrier to prevail in arbitration or litigation. While carriers routinely refer claimants to physicians for IMEs, they do not typically avail themselves of the other services that physicians can provide. For example, medical professionals can provide information regarding appropriate billing practices, standards of care, and formal legal requirements imposed upon practicing physicians by entities such as a state's Board of Medical Examiners or Board of Chiropractic Examiners. Judges, jurors and arbitrators routinely accord great weight to a claimant's treating physician. In some jurisdictions, there may even be a “treating physician rule” that requires that deference be given to a claimant's treating physician.

An expert's peer review may provide a defense in one area that has a domino effect in defending other areas of the claim. For example, some carriers have begun routinely requesting peer reviews of magnetic resonance imaging (MRI) test results. For reasons ranging from liberal interpretation to allegedly interchangeable terms to outright fraud by MRI providers, carriers have encountered cases where MRI test results consistently indicate the presence of herniated discs. When the underlying MRI films have been referred to radiologists retained by these carriers to provide peer review, the subsequent reviews have frequently revealed that no such herniation exists. Obtaining these opinions and establishing the lack of herniated disc can potentially save carriers thousands of dollars in damages per bodily injury lawsuit and can save additional thousands of dollars in the event they are called upon to pay claimants' medical bills.

In high-volume medical practices, such as those that specialize in the treatment of PIP claimants, groups of medical professional often collaborate their services. For example, a chiropractor may refer a patient to an MRI facility, a physical therapist, a neurologist (for diagnostic testing) and a pain management specialist. Some or all of the treatment provided by each medical professional may be allegedly justified by the results of an incorrect or misread MRI. While testing and treatment may be rendered in good faith by an innocent physician, in other cases it is readily apparent, from the lack of objective and circumstantial indicia and the results of other diagnostic testing, that claimants did not actually require much of the treatment and testing rendered. Establishing these facts can serve a three-fold purpose: reducing damage awards in bodily injury lawsuits, reducing medical expense awards in PIP suits or suits for medical expenses, and alerting the SIU and Claim Department to groups of physicians whose collaborative actions should be investigated in other cases.

In addition to peer reviews and IMEs, a medical expert can provide carriers with personal knowledge regarding the requirements (such as record-keeping, delegation of duties, and scope of practice) of the governing administrative agency. In New Jersey, for instance, there are regulations governing the practices of medicine and chiropractic, which are promulgated by the Board of Medical Examiners and the Board of Chiropractic Examiners, respectively. A physician specializing in one of those disciplines is often the best candidate to review a colleague's services, the medical necessity of those services, and the propriety of billing for such services. The carrier should be aware that although certain medical modalities may be rendered to a patient, those same modalities might not be billable if the appropriate regulatory agency has deemed those treatments to be of little or no medical value. Whether based on a belief that the treatment is appropriate or in an attempt to increase billings, doctors and chiropractors routinely perform and submit bills for certain modalities even though those modalities are not eligible for payment. In-house and outside audit agencies routinely will assess those charges for “fee schedule” purposes, but they will not address the issue of medical validity. A carrier and its SIU attorney should be made aware of those modalities which lack medical validity and are not eligible for payment. This knowledge can potentially save carriers thousands of dollars in medical fees per claim.

Vehicle Theft/Arson Experts

The third category of invaluable experts for investigating insurance fraud cases is in vehicle theft/arson. These people are usually former law enforcement officers or insurance investigators who have specific training in vehicle theft and arson cases. They can provide detailed analysis of whether a vehicle was or could potentially have been stolen under the circumstances described by the insured. They have detailed and extensive knowledge regarding automobiles and commercial vehicles relating to doors, keys, and locking systems, ignition and steering issues, and vehicle security features, among other things.

The detailed reports provided by these experts frequently help carriers construct an ironclad defense to fraudulent vehicle theft claims. In addition, most claimants and sometimes even their attorneys have no knowledge that these professionals exist, and are not familiar with the complex reports they generate and the terminology contained therein. The vehicle theft expert should have thorough knowledge of older vehicles as well as up-to-date information on current changes in vehicles and their security features. Their reports not only assist in defending staged theft claims but can also serve as the cornerstone of governmental prosecutions for insurance fraud. While these reports are generally commissioned by the carrier during the investigative stage, it is imperative that the carrier retain an SIU attorney who is familiar with such reports, the terminology and technology addressed therein, and is able to elicit from the expert, in layman's terms, the testimony necessary to prove before a jury that the insured has, in fact, submitted a fraudulent claim.

A vehicle theft forensic expert may also have experience in investigating arson cases. If not, a separate expert may be retained. Arson experts provide carriers with Cause and Origin reports that clearly state, if determinable, the origin of fires, the causes thereof, and analyses of those facts as they relate to the claims in question. Cause and Origin reports are extremely helpful in investigating, analyzing and potentially defending claims for arson damages to personal and commercial property.

Fraudulent Enhancement

Earlier in this article, fraudulent enhancement of otherwise valid claims was addressed. Each of the case types referenced above could readily be the subject of a fraudulent enhancement of an otherwise valid claim. For example, in the case of business interruption claims, an insured may claim an extensive loss that is not justified by its books and records. While the loss itself may have been a valid event, the insured may attempt to use that valid event as a springboard for the submission of a fraudulently enhanced claim. In personal and commercial property claims (whether real property, durable goods and/or inventory) an insured may attempt to utilize an initially valid loss as the catalyst for a fraudulently enhanced claim.

Based upon case experience, this author can attest to the value of using qualified experts to successfully defend fraudulent claims. In one such claim, an insured whose abandoned house was destroyed by fire claimed to have lost in excess of $100,000 of personal property in the fire. The forensic expert report confirmed that the house was empty at the time of loss and that the $100,000 property claim submitted by the insured was fraudulent. Expert analysis has also led to successful defense against fraudulent business interruption cases where insureds presented inflated sales and income information, and business theft claims where insureds fraudulently inflated the amount of inventory that was allegedly stolen.

While some claims involved losses that were legitimate, the insureds attempted to inflate the value of their claims in order to obtain additional benefits. Depending upon the language of the carriers' underlying policies, carriers may be able to deny claims in their entirety (both the valid and invalid portions) as a result of insureds' commission of fraud in connection with claims. In defending the cases noted above, it was imperative to have knowledge of the underlying policy and its terms and conditions, and to apply that knowledge to the facts provided by the claims personnel, the SIU investigators and the forensic experts.

When confronted with such complete and detailed defense, fraudulent claimants are left with little or no ability to prove their claims or to prevail in court. By filing counterclaims, where appropriate, carriers can not only defend against claims, but may also be entitled to recover damages from insureds based upon their filing of fraudulent claims. One of the greatest deterrents to insurance fraud is for carriers to actually end up collecting damages from the insureds who submitted fraudulent claims.

The first article in this series (Insurance Coverage Law Bulletin Volume 2, Number 1, February 2003) provided an overview of upcoming articles, and addressed the issue of fraud at the inception of an insurance claim. This second installment focuses on insurance carriers' analysis of fraudulent claims and the use of forensic experts to defend against claims. It also addresses the issue of fraudulent enhancement of otherwise valid claims.

Introduction

When a claim has been noted as containing, or potentially containing, fraudulent elements, it is usually referred to the carrier's Special Investigation Unit (SIU). A carrier's SIU is generally charged with investigating fraudulent claims, working with specially trained, outside counsel, and, where required, making referrals to the appropriate criminal, civil or administrative agencies.

As discussed in the first article, the most successful investigations occur when all involved departments of a carrier collaborate with the carriers' SIU attorney to provide the most thorough and complete investigation and defense possible. For example, in the case of a suspected fraudulent claim, a carrier's Claims Department should obtain all routine information necessary to process the claim, including Loss Notice, Sworn Proof of Loss, and a recorded statement, even if the matter is initially referred to the SIU. After obtaining oral and documentary evidence, the Claims Department should make that information available to the SIU, which can, in turn, attempt to verify it or confirm the fraudulent nature of same during the course of its investigation. All of this information should then be turned over to the SIU attorney for complete analysis. If the carrier deems that an Examination Under Oath (EUO) is appropriate, the attorney will then have the necessary information to conduct a concise, targeted EUO to uncover the true facts of the case. Acquisition of as much information as possible makes it easier for retained counsel to determine, with a high degree of confidence, whether a claim is fraudulent. If a claim is not deemed fraudulent, or if any fraudulent statements are immaterial, the claim can be promptly processed and paid. If, based on discovery, the claim is deemed fraudulent and the misrepresentations are material, the claim should be denied.

Making the Case for Fraud

Developing the information necessary to confirm the fraudulent nature of claims is the most important part of all insurance claim investigations. Depending upon carriers' internal procedures, all contact with SIU attorneys may occur through the SIU or the claims representative and they may each forward information to the SIU attorney.

The term “SIU attorney,” for the purposes of this article, refers to outside counsel retained by SIU departments, who have special expertise in analyzing fraudulent insurance claims, not an attorney employed by the carrier. This author's company is one such firm routinely retained by carriers' SIUs to assist with in-depth investigations and defense of fraudulent claims. The scope of representation at such firms ranges from consultation on claims, in-depth analysis and investigation, conducting EUOs, and/or defending carriers in the event that litigation is instituted.

Confidentiality

In New Jersey, an SIU may take advantage of certain statutory confidentiality provisions during the course of its investigation. By statute (the New Jersey Insurance Fraud Prevention Act N.J.S.A. 17:33A-1, et seq.), certain information developed by the SIU may be deemed confidential during the course of insurance fraud investigations. It is important to note that, when sharing information, both Claim Departments and SIUs should direct the flow of information directly to their SIU attorney(s). If communicated directly, the information may be transmitted under the attorney/client privilege. As long as no outside agencies or entities are copied on the correspondence, the privilege will not be waived. The information may eventually be turned over to the insured, but such production could be at a time, or under circumstances, favorable to the carrier.

Outside Experts

While claims representatives and SIU investigators each have their respective information-gathering duties, the unique nature of individual claims often requires the assistance of outside experts. In many cases, a forensic expert's input is crucial to a carrier's analysis, and ultimate determination, on a claim. A carrier's primary responsibility is to pay valid claims and to deny those deemed invalid. Forensic experts help carriers make that ultimate determination. In defense cases, this author routinely works with three specific types of experts to defend a variety of potentially fraudulent claims. They include accountants, doctors, and vehicle theft/arson experts.

Accounting experts are frequently used and can be invaluable to the investigation and defense of cases involving premium fraud. These experts (who are required in cases involving allegations of accounting malpractice) also can assist with business interruption claims. In cases involving premium fraud, having an expert's review and analysis of an insured's books and records can be a tremendous source of discovery. While an attorney may have an accounting, financial or tax background, he or she cannot prepare an expert report. The expert report needs to be generated by a qualified professional in the respective field. Working together, the attorney and the accountant should review the insured's books and records and elicit relevant facts and information, so that the expert may generate a report including the necessary evidence to prove the carrier's case. Some examples of invaluable accountant services include: analysis of payroll and financial information in commercial claims involving workers compensation premiums; review of accounting services and the standard of care in cases wrongfully alleging accounting malpractice; and analysis of payroll, financial and tax information in cases of business interruption loss.

Accounting Experts

In a thorough investigation, it is best for the SIU attorney and the accountant to work with the carrier's representative in developing the defenses to the claim. It is important to note that there are tactical reasons for an accounting expert to be retained by the SIU attorney rather than the provider. These reasons relate to the privilege of communications between the attorney and the accountant, and maintaining the confidentiality of such communications.

Medical Professionals

Medical professionals are a second category of invaluable experts who can be tapped for help with certain claim analyses. Their knowledge can be particularly useful in analyzing claims for bodily injury damages and for medical benefits, such as personal injury protection (PIP). Medical professionals are typically retained by carriers to conduct independent medical examinations (IMEs) or to provide “peer reviews.” IMEs are an important part of the evaluation and potential defense of a claim. Statements obtained by an examining physician often provide counsel with a basis for cross-examining claimants and for defending against claims. The importance of IMEs should not be underestimated. At the same time, an IME alone may not be sufficient evidence for a carrier to prevail in arbitration or litigation. While carriers routinely refer claimants to physicians for IMEs, they do not typically avail themselves of the other services that physicians can provide. For example, medical professionals can provide information regarding appropriate billing practices, standards of care, and formal legal requirements imposed upon practicing physicians by entities such as a state's Board of Medical Examiners or Board of Chiropractic Examiners. Judges, jurors and arbitrators routinely accord great weight to a claimant's treating physician. In some jurisdictions, there may even be a “treating physician rule” that requires that deference be given to a claimant's treating physician.

An expert's peer review may provide a defense in one area that has a domino effect in defending other areas of the claim. For example, some carriers have begun routinely requesting peer reviews of magnetic resonance imaging (MRI) test results. For reasons ranging from liberal interpretation to allegedly interchangeable terms to outright fraud by MRI providers, carriers have encountered cases where MRI test results consistently indicate the presence of herniated discs. When the underlying MRI films have been referred to radiologists retained by these carriers to provide peer review, the subsequent reviews have frequently revealed that no such herniation exists. Obtaining these opinions and establishing the lack of herniated disc can potentially save carriers thousands of dollars in damages per bodily injury lawsuit and can save additional thousands of dollars in the event they are called upon to pay claimants' medical bills.

In high-volume medical practices, such as those that specialize in the treatment of PIP claimants, groups of medical professional often collaborate their services. For example, a chiropractor may refer a patient to an MRI facility, a physical therapist, a neurologist (for diagnostic testing) and a pain management specialist. Some or all of the treatment provided by each medical professional may be allegedly justified by the results of an incorrect or misread MRI. While testing and treatment may be rendered in good faith by an innocent physician, in other cases it is readily apparent, from the lack of objective and circumstantial indicia and the results of other diagnostic testing, that claimants did not actually require much of the treatment and testing rendered. Establishing these facts can serve a three-fold purpose: reducing damage awards in bodily injury lawsuits, reducing medical expense awards in PIP suits or suits for medical expenses, and alerting the SIU and Claim Department to groups of physicians whose collaborative actions should be investigated in other cases.

In addition to peer reviews and IMEs, a medical expert can provide carriers with personal knowledge regarding the requirements (such as record-keeping, delegation of duties, and scope of practice) of the governing administrative agency. In New Jersey, for instance, there are regulations governing the practices of medicine and chiropractic, which are promulgated by the Board of Medical Examiners and the Board of Chiropractic Examiners, respectively. A physician specializing in one of those disciplines is often the best candidate to review a colleague's services, the medical necessity of those services, and the propriety of billing for such services. The carrier should be aware that although certain medical modalities may be rendered to a patient, those same modalities might not be billable if the appropriate regulatory agency has deemed those treatments to be of little or no medical value. Whether based on a belief that the treatment is appropriate or in an attempt to increase billings, doctors and chiropractors routinely perform and submit bills for certain modalities even though those modalities are not eligible for payment. In-house and outside audit agencies routinely will assess those charges for “fee schedule” purposes, but they will not address the issue of medical validity. A carrier and its SIU attorney should be made aware of those modalities which lack medical validity and are not eligible for payment. This knowledge can potentially save carriers thousands of dollars in medical fees per claim.

Vehicle Theft/Arson Experts

The third category of invaluable experts for investigating insurance fraud cases is in vehicle theft/arson. These people are usually former law enforcement officers or insurance investigators who have specific training in vehicle theft and arson cases. They can provide detailed analysis of whether a vehicle was or could potentially have been stolen under the circumstances described by the insured. They have detailed and extensive knowledge regarding automobiles and commercial vehicles relating to doors, keys, and locking systems, ignition and steering issues, and vehicle security features, among other things.

The detailed reports provided by these experts frequently help carriers construct an ironclad defense to fraudulent vehicle theft claims. In addition, most claimants and sometimes even their attorneys have no knowledge that these professionals exist, and are not familiar with the complex reports they generate and the terminology contained therein. The vehicle theft expert should have thorough knowledge of older vehicles as well as up-to-date information on current changes in vehicles and their security features. Their reports not only assist in defending staged theft claims but can also serve as the cornerstone of governmental prosecutions for insurance fraud. While these reports are generally commissioned by the carrier during the investigative stage, it is imperative that the carrier retain an SIU attorney who is familiar with such reports, the terminology and technology addressed therein, and is able to elicit from the expert, in layman's terms, the testimony necessary to prove before a jury that the insured has, in fact, submitted a fraudulent claim.

A vehicle theft forensic expert may also have experience in investigating arson cases. If not, a separate expert may be retained. Arson experts provide carriers with Cause and Origin reports that clearly state, if determinable, the origin of fires, the causes thereof, and analyses of those facts as they relate to the claims in question. Cause and Origin reports are extremely helpful in investigating, analyzing and potentially defending claims for arson damages to personal and commercial property.

Fraudulent Enhancement

Earlier in this article, fraudulent enhancement of otherwise valid claims was addressed. Each of the case types referenced above could readily be the subject of a fraudulent enhancement of an otherwise valid claim. For example, in the case of business interruption claims, an insured may claim an extensive loss that is not justified by its books and records. While the loss itself may have been a valid event, the insured may attempt to use that valid event as a springboard for the submission of a fraudulently enhanced claim. In personal and commercial property claims (whether real property, durable goods and/or inventory) an insured may attempt to utilize an initially valid loss as the catalyst for a fraudulently enhanced claim.

Based upon case experience, this author can attest to the value of using qualified experts to successfully defend fraudulent claims. In one such claim, an insured whose abandoned house was destroyed by fire claimed to have lost in excess of $100,000 of personal property in the fire. The forensic expert report confirmed that the house was empty at the time of loss and that the $100,000 property claim submitted by the insured was fraudulent. Expert analysis has also led to successful defense against fraudulent business interruption cases where insureds presented inflated sales and income information, and business theft claims where insureds fraudulently inflated the amount of inventory that was allegedly stolen.

While some claims involved losses that were legitimate, the insureds attempted to inflate the value of their claims in order to obtain additional benefits. Depending upon the language of the carriers' underlying policies, carriers may be able to deny claims in their entirety (both the valid and invalid portions) as a result of insureds' commission of fraud in connection with claims. In defending the cases noted above, it was imperative to have knowledge of the underlying policy and its terms and conditions, and to apply that knowledge to the facts provided by the claims personnel, the SIU investigators and the forensic experts.

When confronted with such complete and detailed defense, fraudulent claimants are left with little or no ability to prove their claims or to prevail in court. By filing counterclaims, where appropriate, carriers can not only defend against claims, but may also be entitled to recover damages from insureds based upon their filing of fraudulent claims. One of the greatest deterrents to insurance fraud is for carriers to actually end up collecting damages from the insureds who submitted fraudulent claims.