Policyholders pay cost of white-collar crime ...Price of insurance fraud now exceeds $85 billion

by Richard Ollis

for the Business Journal

Did you know that insurance fraud is the second largest economic crime in the United States, second only to tax evasion? It's an $85.3 billion problem that costs each American family $1,030 each year in insurance premiums, taxes and costs of goods and services. About $200 to $300 of your personal insurance premium can be attributed to fraud.

Insurance fraud is defined as a deliberate deception against or by an insurance company or agent for the purpose of unwarranted financial gain. Fraud is also aggravated by insurance carriers who will pay a demand rather than fight it based on a business decision (i.e. it's cheaper to pay than to fight it in court).

There are basically two types of fraud, hard and soft. Hard fraud is usually an attempt to fake or invent an accident, injury, theft, arson or other type of loss. Soft fraud, sometimes called opportunity fraud, occurs when someone exaggerates or milks a legitimate claim. Soft fraud also occurs when people provide false information to lower insurance premiums.

The extent of insurance fraud is also difficult to quantify, because much of it goes undetected. Studies provide evidence of how widespread the problem really 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 and casualty insurance company insolvencies between 1969 and 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 billion to $18 billion to the nation's annual insurance bill.

The sad thing is that many Americans tolerate insurance fraud, thinking it is a victimless crime. A 1995 Roper Study for the Insurance Research Council found that 24 percent of Americans feel it is acceptable to pad a claim, and nearly 40 percent of residents in large cities found it an acceptable practice. Some people justify fraud because they feel the insurance premiums they pay are unjust, not realizing they are contributing to those higher premiums by "padding" their claims.

The Coalition Against Insurance Fraud released a list of recent cases:

?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 in 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.

?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 refer rals 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 estimated $30 million to $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 adjusters to inflate settlements. The scheme was alleged to involve at least $39 million and was uncovered when an honest lawyer reported a contact by a middle man in the ring.

?Raif Dentkas, once a Prudential agent, and his wife, Figen (ne? Laurie Elizabeth), and son, Callit, were indicted in Minneapolis for faking the couple's deaths in two separate auto accidents in Dentkas' native Turkey. Raif "died" first; his wife's "death" followed a year later. The family collected more than $500,000 before the scam was uncovered. Clues included a letter to Prudential signed by Figen some two weeks after she supposedly died.

?Recently, Springfield was the site of an extensive insurance fraud trial. Catherine Jolivet stood trial on 11 felony counts for allegedly collecting $50,000 in false insurance claims for auto accidents that never happened. She conspired to collect on phony claims paid to fictitious victims.

The insurance checks were funnelled to bank accounts in Springfield, and the wrecks reportedly occurred in Louisiana. She was found guilty of eight federal felony charges, one count of conspiracy, three counts of money laundering and four counts of mail fraud. Jolivet could face up to 85 years in prison and $2.75 million in fines.

So, what's being done to fight insurance fraud?

?In 1994, the omnibus crime bill attacked white collar insurance fraud by setting prison terms and fines for individuals who embezzle, file false reports or steal funds from insurance companies, and it set strict penalties for anyone convicted of submitting false financial information to state insurance regulators.

?In addition, the crime bill extended the U.S. mail fraud statutes to include overnight private mail carriers. Too often sham operators, realizing that mail fraud laws only cover the U.S. Postal Service, sent material through private carriers without fear of federal prosecution.

?Most major insurers have created specific entities within their claims departments to detect and investigate suspicious claims. These Special Investigative Units often are staffed by former law enforcement professionals.

Additionally, in 1992 insurance companies created the National Insurance Crime Bureau, a not-for-profit organization dedicated to fighting insurance fraud and vehicle theft.

Its activities include collecting information about more than 56,000 claims in 1995, a 30 percent increase in two years.

NICB investigators have recorded a 34 percent increase in prosecutable and administrative actions since 1992.

In addition, NICB and several other industry groups have created insurance fraud database networks now accessible online.

?The state of Missouri has established Fraud and Noncompliance Unit. The unit is charged with investigating all allegations of fraud and noncompliance.

In Missouri, the punishment for fraud is: Any person convicted of committing fraud shall be guilty of a Class A misdemeanor and is liable to the state of Missouri for a fine not to exceed $10,000 or double the value of the fraud, whichever is greater (RSMo Chapter 287.128.3).

Effective Aug. 28, 1998, a second offense of the fraud provisions contained in sections 287.128 and 287.129 RSMo is a class D felony.

If you suspect fraud, be a part of the solution and report it.

For workers' compensation fraud in Missouri, call the Fraud Hotline, 800-592-6003.

For other fraud-related crimes, call the National Insurance Crime Bureau, 800-835-6422.

Although many believe that insurance fraud just costs the insurance company, it really costs all of us.

(Richard Ollis is a commercial insurance specialist with Ollis & Company Insurors.)

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