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There has been much hand wringing and wailing over the malfeasance of the corporate officers and directors of FTX Crypto Exchange, Enron, WorldCom and others. No one, however, has gone to the root causes of the situation. It should be a foremost duty of the insurance industry to do whatever it can to defeat insurance fraud and work to compel prosecutors, police officers, fraud division of fraud bureau investigators, SIU investigators, and claims handlers to work to deter or defeat insurance fraud.
It is not that some corporate executives, suddenly turned to the dark side and became evil. It is not that police and prosecutors have turned to the dark side. It is, I submit, because they were all trained by the Department of Justice and local prosecutors to believe that there was almost no penalty for their crimes.
White-collar crime, especially insurance fraud, has been ignored for the last three decades as a serious crime.
A crime unpunished emboldens others who might never consider a life of crime to pursue wealth the easy way.
Prosecution of what the Coalition Against Insurance Fraud contends is a $308 billion annual insurance fraud take, the massive crime perpetrated against insurers and government “insurance” programs like Medicare are miniscule, to the point of non-existence. Fraud is rampant and almost universally unpunished.
In my 55 year career trying to defeat or deter insurance fraud I have been told by a prosecutor that the robbery of a convenience store, with a gun, where no one is hurt and $300 is stolen is more important than a $2,000,000 fraud against an insurer perpetrated by the stroke of a pen in the hands of an insurance criminal. The prosecutor refused to prosecute the insurance criminal and the insurer was compelled to defend the lawsuit filed by the fraud without any assistance from the criminal justice system.
CALIFORNIA SIU REGULATIONS
The full set of the Regulations are available at https://insurancefraud.us1.list-manage.com/track/click?u=a440c5b647697de580a2fd586&id=193011d9cb&e=5e34ee91b1
The California SIU Regulations were approved in their final form effective October 1, 2020. The SIU Regulations attempt to micromanage the work of insurance company efforts against insurance fraud and were enacted following a model act of the National Association of Insurance Commissioners (NAIC).
The California Department of Insurance (CDOI), since the first enactment of the Regulations, has audited hundreds of insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees, as an example, can result in a fine from $500,000 to $1 million.
In addition to the special assessments enacted to fund the fight against fraud, the California Department of Insurance audits insurers regularly to be sure that each insurer works hard to investigate and seek prosecution of the crime of insurance fraud in accordance with the California SIU Regulations.
Simultaneously, the same Department of Insurance punishes insurers for not paying claims rapidly or for not treating insureds or claimants fairly, many of whom are experienced insurance cheats who use the Department’s consumer unit to brow-beat insurers into paying fraudulent claims. In addition, when an insurer’s state mandated SIU accuses an insured of fraud by reporting to the California Department of Insurance or denying a claim for fraud, the insurer will invariably be sued for fraud. Courts and juries, believing the bad reputation that insurers have in the press and public, will assess punitive and exemplary damages against insurers who accuse their insured’s of fraud looking with 20/20 hindsight at the investigation.
Similar businesses in the financial sector, who are also regular victims of fraud and other crimes, are not taxed or compelled to investigate crimes committed against them. No one demands that the banking industry pay for prosecuting embezzlers or bank robbers. No one demands that convenience store operators pay for prosecuting people who hold up their stores on a daily basis. No Regulator require
s stockbrokers to investigate fraudulent transactions. The imposition upon the insurance industry – and the attendant cost passed to the insurance consumer – is unique.
Insurers are treated differently than all other businesses in the United States. George Orwell was right when, to paraphrase, what he had a character in “Animal Farm” say, “all businesses are equal, some are more equal than others.” Clearly, insurers are less equal with regard to crimes perpetrated against them than are other businesses.
The SIU Regulations set forth minimum standards. They are not intended to be a text on the handling of suspected fraudulent insurance claims that must be followed slavishly. They do not even claim to be a complete guide to handling suspected fraudulent claims or the investigation of suspected insurance fraud. The Regulations are, rather, an outline of basic claims handling techniques when dealing with a suspected insurance fraud.
Common findings of SIU compliance reviews, that insurers should attempt to avoid, include:
SIU inadequate or non-existent;
Suspected fraud not reported to District Attorneys, CDOI;
Fraud referrals (FD-1s) contain errors/omissions;
Fraud referrals submitted on outdated forms (FD-1s);
Written anti-fraud procedures inadequate;
SIU investigation procedures inadequate or non-existent;
Continuing training not received by SIU;
Anti-fraud training not provided by SIU;
Training records incomplete or non-existent;
Annual compliance report delinquent;
Annual compliance report inaccurate or incomplete; and,
Third Party Administrators (TPAs), contracted SIU's not monitored by insurer.
When an insurer is found wanting it will be fined by the CDOI and could even lose its right to do business in the state. Other states have similar statutes to the California statute and Regulations following model statutes and regulations created by the NAIC.
Do Insurers Get Their Money’s Worth From The Special Taxes Paid for Fighting Fraud?
Not really. Since what drives fraudsters to pursue this type of crime is the fact that insurers and insurance regulators are unwilling to prosecute offenders. According to insurance fraud in the U.S. statistics, only a tiny portion — not even 2% — of frauds are prosecuted. The reasons for avoiding prosecution include high trial expenses and unpredictable outcomes. But even though it might be costly and demanding, the prosecution may serve as a plausible threat and thus deter fraudsters.
What Do The Results Really Show?
Insurance fraud prosecutions and investigations are anemic. Every two weeks I publish in Zalma’s Insurance Fraud Letter, reports of convictions for insurance fraud. Most convictions appear to be about frauds directed against federal “insurance” programs like Medicare, Medicaid, Flood and Crop Insurance programs. Many of the conviction are really the result of a qui tam or whistleblower suit. The criminals are laughing at the insurance industry, the police agencies and the prosecutors. If they are one of the few criminally convicted, they face an average sentence of only five years’ probation and 60 days in jail. Jail time is usually served on weekends so that they can still ply their fraudulent trade on weekdays. Some few convictions are other than health insurance fraud pursued by the state agencies.
Fraud bureaus are not as effective as they want to be or want insurers to believe. Because Fraud Bureaus and Fraud Divisions in the various states have minimal staff. Very few of the cases referred for prosecution resulted in a conviction. Those convicted were a minimal percentage of the cases referred by insurers to the Fraud Bureaus. In California, and many other states, the law requires insurers to report suspected fraudulent claims to the Fraud Bureau. California insurers report approximately 2,000 – 3,000 suspected fraudulent claims each month. Few are investigated; fewer are reported to prosecutors for prosecution and even fewer reported to prosecutors for prosecution result in a trial or conviction.
Contrary to the belief of many prosecutors, even though people are seldom physically injured by insurance fraud, it is a major crime with a statutory maximum punishment in most of those states where it is a crime, of five years in state prison. When an insured tries fraud by an arson-for-profit it is also a violent crime that often results in injury to bystanders, firefighters, or police officers.
Specialists who know insurance and insurance fraud investigate it. It is, at least in California and those states that have a criminal insurance fraud statute, a rather simple crime to prove. It should be the type of case a prosecutor would want to file and take to trial since simply presenting a single false document to an insurer is sufficient to involve a conviction for violation of the local Insurance Frauds Prevention Act like California Penal Code Section 550. Instead, as an ex-prosecutor said to me: “insurance fraud is a crime prosecutors run away from because the cases are usually heavy with documentary evidence and are complex.” It is easy to prosecute an armed robber. A witness and a video of the robbery is all that is needed.
When the public is told that a group of criminals steals $300 billion every year from the insurance industry the response is either a cheer or a yawn.
Everyone involved in the business of insurance and everyone who buys insurance must make it clear that they are angry with what is happening to their insurance premium dollar.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and zalma@zalma.comWrite to Mr. Zalma at zalma@zalma.com; http://www.zalma.com; http://zalma.com/blog; daily articles are published at
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