How to Investigate Fraudulent Claims

Part 1 in an in-depth series

Insurance carriers are routinely presented with claims for insurance benefits that contain elements of fraud. As a practical matter, fraudulent claims may be classified in three categories: fraud at the inception of the policy; fraudulent enhancement of an otherwise valid claim; and the staged loss. The elements of these types of claims often overlap, and the successful defense of a fraudulent claim for insurance benefits is based on a thorough understanding of the insurance policy and a complete analysis of the claim. Due to the scope of the subject matter, this topic will be addressed in a monthly series of articles. Each will focus on a different part of the investigation process. This first article begins with an overview of the investigative process.

Introduction

Insurance carriers are generally organized into various departments, such as Underwriting, Claims, and a Special Investigation Unit (SIU). The most effective investigation of a fraudulent claim occurs when the respective departments involved with the claim coordinate and cooperate with one another. The investigation is further enhanced when the carrier retains professionals, such as forensic experts with knowledge of the issues at hand, and attorneys that are well-versed in insurance law and who can coordinate the efforts of the various departments and the forensic experts.

An otherwise ordinary claim usually becomes noted as suspicious because one or more elements come to the attention of a claims representative or an underwriter. In some instances a claimant or provider may be under investigation by the carrier's SIU. Regardless of the reason for the claim being deemed suspicious, there is usually a particular element of the claim that brings it to the carrier's attention. While that suspicious element may be the key in the carrier's successfully defending against the claim, the fact remains that claims should not be analyzed with 'tunnel vision.'

Although certain claims may be quickly analyzed with a specific issue in mind, the best defense usually encompasses a complete analysis of the claim, taking into account the following issues: underwriting (eligibility, coverage and premium); claim (coverage, eligibility and appropriateness of amount claimed); and fraud defenses (misrepresentations, materiality, contractual and legal defenses). Often, there is more than one element of fraud in a claim and those other elements are only detected when one 'thinks outside of the box' and analyzes all elements and defenses applicable to the claim in question.

As stated above, many of these elements overlap, and a complete analysis does not automatically indicate that a thorough defense will be cost-prohibitive. From a legal point of view, the carrier is well served by retaining an attorney who is capable of reviewing a claim while considering all of the aforementioned elements. Such an analysis does not require multiple reviews of the same file; rather it entails one complete analysis of the claim to provide the carrier with the best defense available.

In analyzing a claim, both the carrier and the attorney must realize that not every claim that appears suspicious will be fraudulent. In some cases, although there are fraudulent elements to a claim, those elements may not be material and may not serve as a basis for denying a claim. For example, an insured may misrepresent an ancillary fact that does not affect or impact the carrier's investigation. Generally, such a misrepresentation would not warrant the denial of a claim.

In addition to addressing the investigative process, this initial article presents an overview of the various overlapping elements among several types of insurance claims. We also discuss, in general terms, the investigation of the claim from an underwriting point of view. In the succeeding articles, we will address in greater detail investigation and defense of claims involving an analysis of the claim itself, (including a discussion of forensic experts and professionals whose knowledge and talents may be utilized by the carrier in the investigative process), and the role of a carrier's SIU in investigating and ultimately defending against the fraudulent claim for insurance benefits. The series will conclude with a summary of the investigative process, encompassing all elements of a fraudulent claim.

Overlapping Issues Among Departments

Over the years, we have worked with several carriers in investigating and defending against such fraudulent claims. On different occasions, we have been retained by claims, underwriting and SIU departments individually, and in other cases we have been retained by the carrier as a whole with the request to coordinate the efforts of its different departments its successfully defending against fraudulent claims. Regardless of which of the carrier's departments is taking the lead, the most basic element of any insurance claim investigation is whether there is coverage for the claim. If there is no coverage, then no claim need be paid. A coverage inquiry must determine whether the particular claim is eligible for payment. The inquiry should address each element of the claim process to determine eligibility. I can best illustrate for you the overlapping nature of certain claims by providing you with examples of scenarios I have encountered over the years.

From an Underwriting standpoint, the carrier must determine whether the loss is eligible for coverage. For example, in an automobile property damage case, the carrier must determine whether the vehicle in question is subject to coverage. While an insured may maintain an automobile insurance policy with the carrier, the subject vehicle in the claim may never have been included on the policy. Therefore, the property damage claim may not be eligible for coverage.

From a Claims standpoint, the carrier must determine whether the policy covers the type of loss in question. To continue with the automobile example from the preceding paragraph, while the subject vehicle may have been covered, the vehicle may not have been insured for collision damage, so no property damage to the vehicle should be paid even though the car may be insured by the carrier. Furthermore, if this subject vehicle is stolen, and contained $10,000 worth of personal property, the carrier should confirm whether the vehicle's contents are covered under the terms of the auto policy or, more likely, subject to coverage under the terms of a homeowner's insurance policy.

To many of you reading this article, these points will seem incredibly basic. The fact is that these are among the most basic analyses to be conducted by a carrier. Unfortunately, in a high-volume business like insurance, a number of claims can slip through the cracks. Whether by accident, mistake or fraudulent intent, many claims are paid although no coverage exists. On the other hand, as a result of numerous claims are denied for lack of coverage. Examples of such claims that I have encountered include: medical bills from an auto accident submitted under a homeowner's claims; property damage in a work-related accident submitted under the terms of the insured's personal auto insurance policy (when the loss should have been covered by the employers general liability policy); a homeowner's loss submitted under the terms of an automobile policy. Some of these claims were paid in full, some were denied as a result of diligence on the part of the carrier and some were partially paid before the carrier became aware of the available defense. So, while coverage analyses are basic, the fact is that many claims may be successfully challenged and defended by a thorough coverage examination. The coverage analysis should not be limited to either Claims or Underwriting, but should continue throughout the claims process.

During my years in government, I often heard it said that New Jersey has one of the highest fraud rates of any state in the union, if not the highest fraud rate. It was estimated that approximately 20% of the premium of every $1.00 of automobile insurance premium paid was the direct result of fraud committed against the carriers. Fraud is not limited to the insureds and the claimants. Often times, fraud is committed by the professionals consulted by the insureds and claimants. Those professionals may be doctors, lawyers or auto repair facilities. Because of the fraud that may be found in each element of the claim, a complete analysis of the claim is necessary to provide the carrier with the best investigation and defense of suspicious claims. This complete analysis may be illustrated by considering the three classes of fraudulent claims detailed in the beginning of this article: fraud at the inception of the policy; fraudulent enhancement of an otherwise valid claim; and a staged loss.

Underwriting ' Fraud at the Inception of the Claim

Fraud at the inception of the claim generally relates to a policy that was obtained under fraudulent pretenses. The fraud may relate to the insured's eligibility for coverage or in the amount of premium paid for coverage. In many cases, an Underwriting Department does not have the ability to determine whether an insured is eligible for coverage or whether the appropriate premium has been applied to the policy. Although an Underwriting Department can conduct certain inquiries, the fact remains that the Underwriting Department must take certain representations by the insured on faith. It may not be until an audit of the policy is conducted, or until a claim is submitted under the policy, that the carrier will be aware that the insured committed fraud.

If an insured submits false or forged documents to a carrier during the underwriting process in order to obtain coverage, the carrier may not discover the fraudulent nature of those documents until after an investigation is conducted. For business reasons, as well as practical reasons relating to available technology, the carrier may not be able to determine the underwriting fraud until a substantial period of time has elapsed. Nonetheless, it is important during the audit process or the claim process to thoroughly analyze the underwriting issues to determine whether the insured fraudulently obtained the policy. If so, the carrier may be entitled to rescind the policy, in which case the claim may be voided in its entirety. In the case of an audit, the carrier may be entitled to a substantial premium increase (or a corresponding claim offset) if it proves its case of premium fraud and elects not to move for rescission of the policy.

I have personally investigated numerous claims involving commercial premium fraud. By way of example, such claims may involve insureds fraudulently misrepresenting the number of employees for workers' compensation premium purposes; misrepresenting loss history for workers' compensation and liability purposes; insuring personal automobiles under a commercial liability policy; and insuring commercial vehicles under personal auto policies. In the first two examples, the carrier that completes a successful audit of the policy may be entitled to receive substantial additional premium based on its proof of the application fraud committed by the insured. In the latter two cases, the carrier may be able to successfully rescind the policies in question, thereby potentially avoiding any liability for property damage or medical bills relating to claims involving the vehicles in question.

Separate from the premium issue is that of the individual's eligibility for insurance. We routinely encounter cases involving persons not otherwise eligible for insurance who have submitted fraudulent identity information in order to obtain coverage. Often, the same individuals will participate in staged losses submitted against the terms of their improperly obtained policies. A thorough investigation will result not only in the carrier's successful defense of the claim, but may also support a rescission of the policy and the carrier being entitled to retain any premium paid in conjunction with the policy (as an offset to their investigative expenses), as well as potentially receiving damages from the insured.

The New Jersey Insurance Fraud Prevention Act (N.J.S.A. 17:33A-1 et seq.) provides that an insurance carrier that has been subjected to a pattern of violations of the Act by an insured or claimant may be entitled to recover treble damages, reasonable attorneys fees and costs of suit from the offending party. We have successfully invoked the Fraud Act during litigation to obtain treble damage awards in favor of our carriers and against the fraudulent insureds and claimants who intended to victimize those carriers.

As I indicated, although a fraud may have taken place at the underwriting level, that fraud may not be detected until a claim is submitted under the policy. At those times, proof of fraud is often developed by the claims and SIU departments. Working together, these departments and the carrier's counsel can successfully defend against the claim in question, recover lost premium, rescind coverage and/or obtain a punitive damages award in favor of the carrier.

The next article in this series will analyze the investigation of the claim itself, and cases involving fraudulent enhancement of an otherwise valid claim.

Anthony J. Golowski II is a partner with the Newark, NJ, law firm of Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, where he concentrates his practice in the areas of investigating and defending fraudulent insurance claims, corporate law, tax law and commercial litigation. In between stints in private practice, Golowski spent 4 years in the New Jersey Attorney General's Office conducting financial investigations and prosecuting cases of insurance fraud and tax fraud. In his last assignment, he supervised a civil Insurance Fraud Unit. Since returning to private practice, he has represented numerous insurance carriers and general business corporations in investigating and defending fraudulent claims for benefits.

Part 1 in an in-depth series

Insurance carriers are routinely presented with claims for insurance benefits that contain elements of fraud. As a practical matter, fraudulent claims may be classified in three categories: fraud at the inception of the policy; fraudulent enhancement of an otherwise valid claim; and the staged loss. The elements of these types of claims often overlap, and the successful defense of a fraudulent claim for insurance benefits is based on a thorough understanding of the insurance policy and a complete analysis of the claim. Due to the scope of the subject matter, this topic will be addressed in a monthly series of articles. Each will focus on a different part of the investigation process. This first article begins with an overview of the investigative process.

Introduction

Insurance carriers are generally organized into various departments, such as Underwriting, Claims, and a Special Investigation Unit (SIU). The most effective investigation of a fraudulent claim occurs when the respective departments involved with the claim coordinate and cooperate with one another. The investigation is further enhanced when the carrier retains professionals, such as forensic experts with knowledge of the issues at hand, and attorneys that are well-versed in insurance law and who can coordinate the efforts of the various departments and the forensic experts.

An otherwise ordinary claim usually becomes noted as suspicious because one or more elements come to the attention of a claims representative or an underwriter. In some instances a claimant or provider may be under investigation by the carrier's SIU. Regardless of the reason for the claim being deemed suspicious, there is usually a particular element of the claim that brings it to the carrier's attention. While that suspicious element may be the key in the carrier's successfully defending against the claim, the fact remains that claims should not be analyzed with 'tunnel vision.'

Although certain claims may be quickly analyzed with a specific issue in mind, the best defense usually encompasses a complete analysis of the claim, taking into account the following issues: underwriting (eligibility, coverage and premium); claim (coverage, eligibility and appropriateness of amount claimed); and fraud defenses (misrepresentations, materiality, contractual and legal defenses). Often, there is more than one element of fraud in a claim and those other elements are only detected when one 'thinks outside of the box' and analyzes all elements and defenses applicable to the claim in question.

As stated above, many of these elements overlap, and a complete analysis does not automatically indicate that a thorough defense will be cost-prohibitive. From a legal point of view, the carrier is well served by retaining an attorney who is capable of reviewing a claim while considering all of the aforementioned elements. Such an analysis does not require multiple reviews of the same file; rather it entails one complete analysis of the claim to provide the carrier with the best defense available.

In analyzing a claim, both the carrier and the attorney must realize that not every claim that appears suspicious will be fraudulent. In some cases, although there are fraudulent elements to a claim, those elements may not be material and may not serve as a basis for denying a claim. For example, an insured may misrepresent an ancillary fact that does not affect or impact the carrier's investigation. Generally, such a misrepresentation would not warrant the denial of a claim.

In addition to addressing the investigative process, this initial article presents an overview of the various overlapping elements among several types of insurance claims. We also discuss, in general terms, the investigation of the claim from an underwriting point of view. In the succeeding articles, we will address in greater detail investigation and defense of claims involving an analysis of the claim itself, (including a discussion of forensic experts and professionals whose knowledge and talents may be utilized by the carrier in the investigative process), and the role of a carrier's SIU in investigating and ultimately defending against the fraudulent claim for insurance benefits. The series will conclude with a summary of the investigative process, encompassing all elements of a fraudulent claim.

Overlapping Issues Among Departments

Over the years, we have worked with several carriers in investigating and defending against such fraudulent claims. On different occasions, we have been retained by claims, underwriting and SIU departments individually, and in other cases we have been retained by the carrier as a whole with the request to coordinate the efforts of its different departments its successfully defending against fraudulent claims. Regardless of which of the carrier's departments is taking the lead, the most basic element of any insurance claim investigation is whether there is coverage for the claim. If there is no coverage, then no claim need be paid. A coverage inquiry must determine whether the particular claim is eligible for payment. The inquiry should address each element of the claim process to determine eligibility. I can best illustrate for you the overlapping nature of certain claims by providing you with examples of scenarios I have encountered over the years.

From an Underwriting standpoint, the carrier must determine whether the loss is eligible for coverage. For example, in an automobile property damage case, the carrier must determine whether the vehicle in question is subject to coverage. While an insured may maintain an automobile insurance policy with the carrier, the subject vehicle in the claim may never have been included on the policy. Therefore, the property damage claim may not be eligible for coverage.

From a Claims standpoint, the carrier must determine whether the policy covers the type of loss in question. To continue with the automobile example from the preceding paragraph, while the subject vehicle may have been covered, the vehicle may not have been insured for collision damage, so no property damage to the vehicle should be paid even though the car may be insured by the carrier. Furthermore, if this subject vehicle is stolen, and contained $10,000 worth of personal property, the carrier should confirm whether the vehicle's contents are covered under the terms of the auto policy or, more likely, subject to coverage under the terms of a homeowner's insurance policy.

To many of you reading this article, these points will seem incredibly basic. The fact is that these are among the most basic analyses to be conducted by a carrier. Unfortunately, in a high-volume business like insurance, a number of claims can slip through the cracks. Whether by accident, mistake or fraudulent intent, many claims are paid although no coverage exists. On the other hand, as a result of numerous claims are denied for lack of coverage. Examples of such claims that I have encountered include: medical bills from an auto accident submitted under a homeowner's claims; property damage in a work-related accident submitted under the terms of the insured's personal auto insurance policy (when the loss should have been covered by the employers general liability policy); a homeowner's loss submitted under the terms of an automobile policy. Some of these claims were paid in full, some were denied as a result of diligence on the part of the carrier and some were partially paid before the carrier became aware of the available defense. So, while coverage analyses are basic, the fact is that many claims may be successfully challenged and defended by a thorough coverage examination. The coverage analysis should not be limited to either Claims or Underwriting, but should continue throughout the claims process.

During my years in government, I often heard it said that New Jersey has one of the highest fraud rates of any state in the union, if not the highest fraud rate. It was estimated that approximately 20% of the premium of every $1.00 of automobile insurance premium paid was the direct result of fraud committed against the carriers. Fraud is not limited to the insureds and the claimants. Often times, fraud is committed by the professionals consulted by the insureds and claimants. Those professionals may be doctors, lawyers or auto repair facilities. Because of the fraud that may be found in each element of the claim, a complete analysis of the claim is necessary to provide the carrier with the best investigation and defense of suspicious claims. This complete analysis may be illustrated by considering the three classes of fraudulent claims detailed in the beginning of this article: fraud at the inception of the policy; fraudulent enhancement of an otherwise valid claim; and a staged loss.

Underwriting ' Fraud at the Inception of the Claim

Fraud at the inception of the claim generally relates to a policy that was obtained under fraudulent pretenses. The fraud may relate to the insured's eligibility for coverage or in the amount of premium paid for coverage. In many cases, an Underwriting Department does not have the ability to determine whether an insured is eligible for coverage or whether the appropriate premium has been applied to the policy. Although an Underwriting Department can conduct certain inquiries, the fact remains that the Underwriting Department must take certain representations by the insured on faith. It may not be until an audit of the policy is conducted, or until a claim is submitted under the policy, that the carrier will be aware that the insured committed fraud.

If an insured submits false or forged documents to a carrier during the underwriting process in order to obtain coverage, the carrier may not discover the fraudulent nature of those documents until after an investigation is conducted. For business reasons, as well as practical reasons relating to available technology, the carrier may not be able to determine the underwriting fraud until a substantial period of time has elapsed. Nonetheless, it is important during the audit process or the claim process to thoroughly analyze the underwriting issues to determine whether the insured fraudulently obtained the policy. If so, the carrier may be entitled to rescind the policy, in which case the claim may be voided in its entirety. In the case of an audit, the carrier may be entitled to a substantial premium increase (or a corresponding claim offset) if it proves its case of premium fraud and elects not to move for rescission of the policy.

I have personally investigated numerous claims involving commercial premium fraud. By way of example, such claims may involve insureds fraudulently misrepresenting the number of employees for workers' compensation premium purposes; misrepresenting loss history for workers' compensation and liability purposes; insuring personal automobiles under a commercial liability policy; and insuring commercial vehicles under personal auto policies. In the first two examples, the carrier that completes a successful audit of the policy may be entitled to receive substantial additional premium based on its proof of the application fraud committed by the insured. In the latter two cases, the carrier may be able to successfully rescind the policies in question, thereby potentially avoiding any liability for property damage or medical bills relating to claims involving the vehicles in question.

Separate from the premium issue is that of the individual's eligibility for insurance. We routinely encounter cases involving persons not otherwise eligible for insurance who have submitted fraudulent identity information in order to obtain coverage. Often, the same individuals will participate in staged losses submitted against the terms of their improperly obtained policies. A thorough investigation will result not only in the carrier's successful defense of the claim, but may also support a rescission of the policy and the carrier being entitled to retain any premium paid in conjunction with the policy (as an offset to their investigative expenses), as well as potentially receiving damages from the insured.

The New Jersey Insurance Fraud Prevention Act (N.J.S.A. 17:33A-1 et seq.) provides that an insurance carrier that has been subjected to a pattern of violations of the Act by an insured or claimant may be entitled to recover treble damages, reasonable attorneys fees and costs of suit from the offending party. We have successfully invoked the Fraud Act during litigation to obtain treble damage awards in favor of our carriers and against the fraudulent insureds and claimants who intended to victimize those carriers.

As I indicated, although a fraud may have taken place at the underwriting level, that fraud may not be detected until a claim is submitted under the policy. At those times, proof of fraud is often developed by the claims and SIU departments. Working together, these departments and the carrier's counsel can successfully defend against the claim in question, recover lost premium, rescind coverage and/or obtain a punitive damages award in favor of the carrier.

The next article in this series will analyze the investigation of the claim itself, and cases involving fraudulent enhancement of an otherwise valid claim.

Anthony J. Golowski II is a partner with the Newark, NJ, law firm of Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, where he concentrates his practice in the areas of investigating and defending fraudulent insurance claims, corporate law, tax law and commercial litigation. In between stints in private practice, Golowski spent 4 years in the New Jersey Attorney General's Office conducting financial investigations and prosecuting cases of insurance fraud and tax fraud. In his last assignment, he supervised a civil Insurance Fraud Unit. Since returning to private practice, he has represented numerous insurance carriers and general business corporations in investigating and defending fraudulent claims for benefits.