Investigating Fraudulent Claims: The Role of SIU

For financial reasons, and to benefit insureds whose premiums are increased as a result of fraudulent claims, carriers should have sophisticated and dedicated fraud detection units. Unlike Claims Departments, which are frequently limited to acting upon claims received, a SIU can be proactive. Working with the Claims, Underwriting and Audit Departments, the SIU can target persons or providers engaged in or known to have engaged in fraudulent activities and address claims submitted by those persons or entities. A proactive approach to detecting and deterring fraud includes coordination of the SIU's efforts, activities and information gathering with the carrier's other departments. This coordination provides the SIU with the information and documentation necessary to sustain an initiative against the persons submitting the fraudulent claims. Rather than merely defending claims received, the carrier, through its SIU and SIU counsel, can then proactively initiate actions to recover wrongfully paid benefits, or lost or stolen premium dollars and to bar the submission of future fraudulent claims.

The results of successful SIU initiative cannot always be quantified. While the actual claim dollars saved or recovered can be assessed, the deterrent effects of a successful action are far reaching and are not readily quantifiable. Each fraud ring that is broken up and exposed is unlikely to perpetuate insurance fraud in the future. And, perhaps of even greater value, the carrier will develop a reputation for diligently investigating and pursuing fraudulent claimants, for successfully proving its allegations and for exposing the claimants to economic and possibly criminal sanctions.

Another noteworthy benefit of an aggressive fraud prevention program is the potential reduction in premium costs to the honest insureds and favorable economic results for the carrier's shareholders. While the idea of initiating legal action against insureds may seem disconcerting to some insurers, as many carriers view their insureds as valued customers, the fact remains that insureds and claimants engaging in fraudulent patterns of activity hurt not only the carrier, but those insureds who play by the rules (and may pay correspondingly higher premiums) and the carrier's shareholders.

Unless insurance carriers are ready, willing and able to not only investigate and defend against fraudulent insurance claims, but to aggressively pursue the perpetrators of those claims, they will continue to be the target of fraudulent schemes. Policyholder premiums will ultimately increase, shareholder dividends will be reduced, and the companies will receive little sympathy when applying to regulatory agencies for rate increases. In order to effectuate any insurance fraud detection plan, the carrier must have a properly trained and equipped SIU and the SIU must be able to effectively utilize the services of competent professionals, such as forensic experts and SIU attorneys that can assist the SIU in its antifraud activities.

In a best-case scenario, the different departments of an insurance company will act in concert and coordinate their respective efforts. The Claims, Auditing, Underwriting and SIU Departments can and should work together to identify the various types of fraud that one or more of those departments encounter regularly. Whether a particular case involves premium fraud, claim fraud, staged losses or commercial claims, the majority of cases are best investigated when all of the necessary departments are involved. The SIU should also seek to coordinate its fraud detection and prosecution activities, whether directly or through intermediaries, with government agencies and other insurance carriers. In gathering information to either defend fraudulent claims or to pursue actions against fraudulent claimants, the SIU should also consider engaging the services of an SIU attorney to maximize the value of the information provided by the SIU.

An insurance carrier has a duty to address fraudulent insurance claims. The SIU is the vehicle for doing so. The investigative tools available to the SIU can help the carrier confirm coverage, eligibility, and develop defenses against fraudulent insurance claims. The Examination Under Oath, (“EUO”) usually conducted by an attorney working with the SIU, is an invaluable tool for obtaining information necessary to determine coverage. A claimant's failure or refusal to appear for an EUO often will support a defense that the claimant has not cooperated with the carrier's investigation. A claimant's lack of cooperation is a well-recognized defense to a claim for insurance benefits. See, e.g,. N.J. Auto. Full Ins. v. Jallah, 256 N.J. Super. 134, 141 (App. Div. 1992), which held that an insurer is entitled, as a matter of law, to the EUO of a person who has received or seeks to receive insurance benefits. The insured's or the claimant's failure to cooperate may affect the rights of third-party assignees whose right to receive payment is conditioned upon the claimant's eligibility to receive benefits. The defenses available against an assignor are available against his assignee. Allstate Ins. Co. v. Lopez, 325 N.J. Super. 268, 278 (Law Div. 1999); Tirgan v. Mega Life & Health Ins., 304 N.J. Super. 385, 391-92 (Law Div. 1997); N.Y.Gen.Oblig. '13-105; and Westervelt v. Dryden Mut. Ins. Co., 252 A.D.2d 877, 878, 677 N.Y.S.2d 358, 359 (3d Dep't 1998), citing International Ribbon Mills v. Arjan Ribbons, 36 N.Y.2d 121, 126, 365 N.Y.S.2d 808, 811 (1975). An assignee's rights rise no higher than those of the assignor. Hartford Fire v. Conestoga Title, 328 N.J. Super. 456, 460 (App. Div. 2000) citing James Talcott, Inc. v. H. Corenzwit & Co., 76 N.J. 305, 309-310 (1978).

Privileged Communications

As a general rule, internal communications among a carrier's employees may not be privileged. SIU communications during the course of an investigation may, however, be privileged by statute, depending on the jurisdiction of the claim. In New Jersey, for example, depending upon the progression and circumstances of an investigation, a level of confidentiality may be accorded by statute. N.J.S.A. 17:33A-11. Working directly with other SIU investigators or through an intermediary such as a state Attorney General's Office or the National Insurance Crime Bureau (“NICB”), the SIU investigators are often in a position to develop information not available to other insurance carrier employees. Communicating with or through a state Attorney General's Office, Department of Insurance or the NICB may provide a carrier with immunities that may not otherwise be available to the carrier or to its individual departments.

Outside Counsel ' SIU Attorneys

While some SIU attorneys are generally defense attorneys, others are specialists in investigating and defending fraudulent claims for insurance benefits. In addition to their knowledge and expertise regarding fraudulent claims, many SIU counsel have a background in a variety of insurance areas, as well as being experienced litigators and investigators. Working with seasoned SIU investigators, they can not only develop defense strategies in those cases where the carrier is being sued, but they can also develop proactive lawsuits and initiatives to be instituted by the carrier. Examples of such initiatives include declaratory judgment actions to disclaim coverage and affirmative actions to recover lost premium dollars or insurance benefits that were wrongfully obtained.

Fraud claims should not be scrutinized from a “defense” perspective only. When confronted with a suspected fraudulent claim, the carrier should not merely seek to minimize the amount of the payment to the wrongdoer. In fact, in certain circumstances, the payment of any money to the fraudulent claimant merely provides the claimant with a further incentive to continue submitting fraudulent claims. It is not until the fraudulent claims are denied, and the carrier's position is prosecuted in court, that the fraudulent claimant will be deterred. While business activities often require a carrier to assess investigative efforts from a profit/loss standpoint based on the value of an individual claim, the carriers should not lose sight of the fact that the deterrent effect of discouraging the submission of future fraudulent claims, while not readily quantifiable, may be of immense long-term value to its future bottom line.

Screening All Cases for Potential Fraud

Regardless of the dollar value of a claim, there are several facts that should be scrutinized in each case: whether the policy was in effect on the date of loss; whether the claim involves a loss covered by the policy; and whether the claim was submitted by a person or entity covered under the terms of the policy. The carrier should also determine: the value of the claim; whether the claim was fraudulently enhanced; whether the loss was staged; and whether the insured made material misrepresentations in support of the claim.

With regard to claims for payment of medical benefits, the carrier should determine whether the treatment is causally related to a covered loss; was the treatment actually rendered; is the treatment covered under the terms of the policy; was the treatment billed in accordance with the applicable policy standard and the statutory or regulatory provisions that are applicable to the claim; were the services performed by someone legally authorized to perform them; whether the provider's treatment notes and records were kept in accordance with the requirements of the governing regulatory board and whether those records document the treatment for which payment is sought; and whether the provider is legally entitled to receive payment for the services rendered. It is only after these questions have been answered that a payment/coverage decision should be made. The carrier, its investigators or its counsel may be required to conduct an investigation in order to answer these questions. SIU investigators and SIU counsel are well trained and experienced specialists and are equipped to determine what type of investigation is necessary to determine coverage and/or defenses.

Claims that are analyzed at face value only are claims that are often paid even when one or more viable defenses exist. I have seen numerous claims where a carrier focused on one issue only and paid a claim. In those same claims, if the carrier had investigated the issues described above, it would have found that it had a number of defenses available to the claim in question. While not every suspicious claim is fraudulent, not every unsuspicious claim is payable. A thorough analysis of claims will benefit not only the carrier, but also its innocent policyholders, by keeping their premiums low, and its shareholders by boosting earnings. The carrier should always keep the big picture in mind when considering fraudulent or suspicious claims.

While carriers tend to be protective of their insureds, the fact remains that a small number of individuals have actively targeted insurance companies as the focus of their fraudulent claim activities. It is not enough to merely defend claims submitted by such individuals. A carrier needs to aggressively take a stand against such claims to send the clear message that such claims will not be tolerated and, if pursued, will lead to potential civil or criminal sanctions being imposed against the fraudulent claimant.

Furthermore, carriers should pursue all avenues to recover premium dollars wrongfully withheld by insureds or benefits that were unlawfully obtained by claimants. Through an effective fraud detection and prevention plan, a carrier can recover millions of dollars in unpaid premiums and improperly paid benefits annually and produce a direct, positive benefit to a carrier's bottom line as well as its competitive position in the marketplace. While a well-run, efficiently implemented fraud detection plan is only one aspect of the maintenance of a healthy insurance business, this aspect can be extremely profitable to the carrier. As the wrongdoers become more sophisticated and coordinated in the implementation of their fraudulent schemes, so too should the carriers become more sophisticated and more coordinated in their proactive efforts to combat the problem of insurance fraud.

Previously we have addressed the issues of fraud at the inception of an insurance claim, a carrier's analysis of fraudulent claims and the use of forensic experts to investigate and defend claims. This article will focus on the role of the carrier's Special Investigation Unit (“SIU”) in investigating and defending against fraudulent insurance claims and the role of SIU counsel in the investigative process.

Introduction

Each year, insurance carriers lose millions of dollars as a result of fraudulent insurance claims. In some instances, these claims are the result of individuals submitting fraudulent or inflated individual claims. But an increasingly costly trend is the submission of claims by organized rings involving both hired laypersons and sophisticated professionals. These rings employ schemes that become more sophisticated each year and involve the participation of lawyers, doctors, chiropractors and other licensed professionals. In some instances, even producers and/or insurance company employees are involved in these schemes. In an economy and environment where policyholders routinely seek premium reductions or where carriers have to petition regulatory agencies for premium increases, the failure to adequately investigate and defend against fraudulent insurance claims will adversely affect the carrier in significant ways.

For financial reasons, and to benefit insureds whose premiums are increased as a result of fraudulent claims, carriers should have sophisticated and dedicated fraud detection units. Unlike Claims Departments, which are frequently limited to acting upon claims received, a SIU can be proactive. Working with the Claims, Underwriting and Audit Departments, the SIU can target persons or providers engaged in or known to have engaged in fraudulent activities and address claims submitted by those persons or entities. A proactive approach to detecting and deterring fraud includes coordination of the SIU's efforts, activities and information gathering with the carrier's other departments. This coordination provides the SIU with the information and documentation necessary to sustain an initiative against the persons submitting the fraudulent claims. Rather than merely defending claims received, the carrier, through its SIU and SIU counsel, can then proactively initiate actions to recover wrongfully paid benefits, or lost or stolen premium dollars and to bar the submission of future fraudulent claims.

The results of successful SIU initiative cannot always be quantified. While the actual claim dollars saved or recovered can be assessed, the deterrent effects of a successful action are far reaching and are not readily quantifiable. Each fraud ring that is broken up and exposed is unlikely to perpetuate insurance fraud in the future. And, perhaps of even greater value, the carrier will develop a reputation for diligently investigating and pursuing fraudulent claimants, for successfully proving its allegations and for exposing the claimants to economic and possibly criminal sanctions.

Another noteworthy benefit of an aggressive fraud prevention program is the potential reduction in premium costs to the honest insureds and favorable economic results for the carrier's shareholders. While the idea of initiating legal action against insureds may seem disconcerting to some insurers, as many carriers view their insureds as valued customers, the fact remains that insureds and claimants engaging in fraudulent patterns of activity hurt not only the carrier, but those insureds who play by the rules (and may pay correspondingly higher premiums) and the carrier's shareholders.

Unless insurance carriers are ready, willing and able to not only investigate and defend against fraudulent insurance claims, but to aggressively pursue the perpetrators of those claims, they will continue to be the target of fraudulent schemes. Policyholder premiums will ultimately increase, shareholder dividends will be reduced, and the companies will receive little sympathy when applying to regulatory agencies for rate increases. In order to effectuate any insurance fraud detection plan, the carrier must have a properly trained and equipped SIU and the SIU must be able to effectively utilize the services of competent professionals, such as forensic experts and SIU attorneys that can assist the SIU in its antifraud activities.

In a best-case scenario, the different departments of an insurance company will act in concert and coordinate their respective efforts. The Claims, Auditing, Underwriting and SIU Departments can and should work together to identify the various types of fraud that one or more of those departments encounter regularly. Whether a particular case involves premium fraud, claim fraud, staged losses or commercial claims, the majority of cases are best investigated when all of the necessary departments are involved. The SIU should also seek to coordinate its fraud detection and prosecution activities, whether directly or through intermediaries, with government agencies and other insurance carriers. In gathering information to either defend fraudulent claims or to pursue actions against fraudulent claimants, the SIU should also consider engaging the services of an SIU attorney to maximize the value of the information provided by the SIU.

An insurance carrier has a duty to address fraudulent insurance claims. The SIU is the vehicle for doing so. The investigative tools available to the SIU can help the carrier confirm coverage, eligibility, and develop defenses against fraudulent insurance claims. The Examination Under Oath, (“EUO”) usually conducted by an attorney working with the SIU, is an invaluable tool for obtaining information necessary to determine coverage. A claimant's failure or refusal to appear for an EUO often will support a defense that the claimant has not cooperated with the carrier's investigation. A claimant's lack of cooperation is a well-recognized defense to a claim for insurance benefits. See, e.g,. N.J. Auto. Full Ins. v. Jallah , 256 N.J. Super. 134, 141 (App. Div. 1992), which held that an insurer is entitled, as a matter of law, to the EUO of a person who has received or seeks to receive insurance benefits. The insured's or the claimant's failure to cooperate may affect the rights of third-party assignees whose right to receive payment is conditioned upon the claimant's eligibility to receive benefits. The defenses available against an assignor are available against his assignee. Allstate Ins. Co. v. Lopez , 325 N.J. Super. 268, 278 (Law Div. 1999); Tirgan v. Mega Life & Health Ins., 304 N.J. Super. 385, 391-92 (Law Div. 1997); N.Y.Gen.Oblig. '13-105; and Westervelt v. Dryden Mut. Ins. Co., 252 A.D.2d 877, 878, 677 N.Y.S.2d 358, 359 (3d Dep't 1998), citing International Ribbon Mills v. Arjan Ribbons , 36 N.Y.2d 121, 126, 365 N.Y.S.2d 808, 811 (1975). An assignee's rights rise no higher than those of the assignor. Hartford Fire v. Conestoga Title , 328 N.J. Super. 456, 460 (App. Div. 2000) citing James Talcott, Inc. v. H. Corenzwit & Co., 76 N.J. 305, 309-310 (1978).

Privileged Communications

As a general rule, internal communications among a carrier's employees may not be privileged. SIU communications during the course of an investigation may, however, be privileged by statute, depending on the jurisdiction of the claim. In New Jersey, for example, depending upon the progression and circumstances of an investigation, a level of confidentiality may be accorded by statute. N.J.S.A. 17:33A-11. Working directly with other SIU investigators or through an intermediary such as a state Attorney General's Office or the National Insurance Crime Bureau (“NICB”), the SIU investigators are often in a position to develop information not available to other insurance carrier employees. Communicating with or through a state Attorney General's Office, Department of Insurance or the NICB may provide a carrier with immunities that may not otherwise be available to the carrier or to its individual departments.

Outside Counsel ' SIU Attorneys

While some SIU attorneys are generally defense attorneys, others are specialists in investigating and defending fraudulent claims for insurance benefits. In addition to their knowledge and expertise regarding fraudulent claims, many SIU counsel have a background in a variety of insurance areas, as well as being experienced litigators and investigators. Working with seasoned SIU investigators, they can not only develop defense strategies in those cases where the carrier is being sued, but they can also develop proactive lawsuits and initiatives to be instituted by the carrier. Examples of such initiatives include declaratory judgment actions to disclaim coverage and affirmative actions to recover lost premium dollars or insurance benefits that were wrongfully obtained.

Fraud claims should not be scrutinized from a “defense” perspective only. When confronted with a suspected fraudulent claim, the carrier should not merely seek to minimize the amount of the payment to the wrongdoer. In fact, in certain circumstances, the payment of any money to the fraudulent claimant merely provides the claimant with a further incentive to continue submitting fraudulent claims. It is not until the fraudulent claims are denied, and the carrier's position is prosecuted in court, that the fraudulent claimant will be deterred. While business activities often require a carrier to assess investigative efforts from a profit/loss standpoint based on the value of an individual claim, the carriers should not lose sight of the fact that the deterrent effect of discouraging the submission of future fraudulent claims, while not readily quantifiable, may be of immense long-term value to its future bottom line.

Screening All Cases for Potential Fraud

Regardless of the dollar value of a claim, there are several facts that should be scrutinized in each case: whether the policy was in effect on the date of loss; whether the claim involves a loss covered by the policy; and whether the claim was submitted by a person or entity covered under the terms of the policy. The carrier should also determine: the value of the claim; whether the claim was fraudulently enhanced; whether the loss was staged; and whether the insured made material misrepresentations in support of the claim.

With regard to claims for payment of medical benefits, the carrier should determine whether the treatment is causally related to a covered loss; was the treatment actually rendered; is the treatment covered under the terms of the policy; was the treatment billed in accordance with the applicable policy standard and the statutory or regulatory provisions that are applicable to the claim; were the services performed by someone legally authorized to perform them; whether the provider's treatment notes and records were kept in accordance with the requirements of the governing regulatory board and whether those records document the treatment for which payment is sought; and whether the provider is legally entitled to receive payment for the services rendered. It is only after these questions have been answered that a payment/coverage decision should be made. The carrier, its investigators or its counsel may be required to conduct an investigation in order to answer these questions. SIU investigators and SIU counsel are well trained and experienced specialists and are equipped to determine what type of investigation is necessary to determine coverage and/or defenses.

Claims that are analyzed at face value only are claims that are often paid even when one or more viable defenses exist. I have seen numerous claims where a carrier focused on one issue only and paid a claim. In those same claims, if the carrier had investigated the issues described above, it would have found that it had a number of defenses available to the claim in question. While not every suspicious claim is fraudulent, not every unsuspicious claim is payable. A thorough analysis of claims will benefit not only the carrier, but also its innocent policyholders, by keeping their premiums low, and its shareholders by boosting earnings. The carrier should always keep the big picture in mind when considering fraudulent or suspicious claims.

While carriers tend to be protective of their insureds, the fact remains that a small number of individuals have actively targeted insurance companies as the focus of their fraudulent claim activities. It is not enough to merely defend claims submitted by such individuals. A carrier needs to aggressively take a stand against such claims to send the clear message that such claims will not be tolerated and, if pursued, will lead to potential civil or criminal sanctions being imposed against the fraudulent claimant.

Furthermore, carriers should pursue all avenues to recover premium dollars wrongfully withheld by insureds or benefits that were unlawfully obtained by claimants. Through an effective fraud detection and prevention plan, a carrier can recover millions of dollars in unpaid premiums and improperly paid benefits annually and produce a direct, positive benefit to a carrier's bottom line as well as its competitive position in the marketplace. While a well-run, efficiently implemented fraud detection plan is only one aspect of the maintenance of a healthy insurance business, this aspect can be extremely profitable to the carrier. As the wrongdoers become more sophisticated and coordinated in the implementation of their fraudulent schemes, so too should the carriers become more sophisticated and more coordinated in their proactive efforts to combat the problem of insurance fraud.