Study 7: Managing Fraud Risk During a Claim - Summary

Question 1

Fraud is a deceitful act or misrepresentation of the truth, with the intent of obtaining financial or personal gain. Three factors must be present at the same time for fraud to occur

Answer 1

1. Pressure: financial pressure from losing a job, having unpaid bills, or a struggling business, which causes someone to look for other ways of earning money
2. Opportunity: circumstances that allow a fraud to occur (ex. being in a position of trust with a low risk of getting caught, or lack of company internal controls)
3. Rationalization: a person’s justification for doing something (i.e. “I pay my premiums, it’s time I get something out of it.”)

Question 2

Common homeowner’s property losses which may require additional investigation include

Answer 2

• water losses;
• mysterious disappearance;
• fire; and
• theft.

Question 3

Water losses

(Homeowners Property Claims)

Answer 3

Homeowners policies provide some protection from water:

• Watermain breaks or leaking installations
• Water entering the home from a sewer backup (optional endorsement)
• Seepage of surface water from heavy rainfall (overland water)
• Flooding when a river, lake, or stream overflows (not covered by home insurance)

Claims could be an opportunity for fraud

Question 4

Mysterious disappearance

(Homeowners Property Claims)

Answer 4

Refers to a provision in property policies which excludes coverage for a lost item of high value (jewellery, designer handbags, computers, etc.) if the cause of loss cannot be sufficiently explained by the insured

Question 5

Fire

(Homeowners Property Claims)

Answer 5

• Fire investigation by fire marshal will rule out arson
• Evidence a fire was set is reinforced when other possible causes ruled out (i.e. electrical engineer rules the electrical equipment was not defective, so electricity as a cause can be removed)
• If arson is the cause, investigation will also look for motive (i.e. financial, competition, destruction of evidence, etc.)
• Arson is a crime of opportunity (i.e. insured had the opportunity to set the fire, unlikely anyone else could have set it)

Question 6

Theft

(Homeowners Property Claims)

Answer 6

• Theft claims are the costliest source of insurance fraud (most easily arranged, less risk to perpetrator)
• In a theft claim, proof of value, existence, and ownership of stolen items must be presented
• Receipts, cheques, photos, videos, credit card and bank statements can all be used and should be verified by the adjuster
• Fraud indicators refer to negative factors: absence of documents, no evidence of forced entry, no police report, inoperative burglar alarm, etc.
• Evidence of fraud can jeopardize an entire claim, even the legitimate losses

Question 7

Commercial property claims

Answer 7

• Building or property used to generate a profit (i.e. grocery store, restaurant)
• Insurers investigate the loss, including physical damage to the building and contents
• Will also review the business itself to determine how financially sound it is (look for financial motive to commit fraud)

Question 8

Common red flags in commercial property investigations

Answer 8

• The insured is knowledgeable about the insurance process
• The insured pushes for a quick settlement
• There is financial hardship
• The contents were removed from the property before the loss occurred
• The insured was the last person to attend the property
• The alarm system that is normally activated was not activated on the day of the loss
• The loss is not reported to the police
• There are no signs of forced entry
• The insured’s list of missing items differs from the list provided to the police
• Flammable liquids are present
• The property is listed for sale
• The business is suffering and on the brink of closure

Question 9

Common red flags with injury claims

Answer 9

• The insured added recent increases in coverage
• Injuries are not consistent with the reported loss or damages to the vehicle
• The injured person did not go to the hospital or was not examined by a medical professional
• The injured person received treatment from non-regulated professionals
• The injured person has subjective injuries, which are hard to disprove
• There was no initial report of the injuries
• All occupants in a vehicle are injured except the driver
• The injured person’s employer cannot be verified

Question 10

Products liability injuries and claims

Answer 10

• Manufacturers, wholesalers, repairers, installers, and retailers can be held liable if a product sold causes an injury
• Claims arise from the law of contract for the sale - privity of contract between buyer and seller
• Common law states products must be suitable for the purpose for which it is sold
• Only parties to the contract (buyer and seller) can enforce warranties

Question 11

In the case where a product is defective, if the finding is based on fraud, the plaintiff must show the following

Answer 11

• The defendant made certain assertions about the product.
• The assertions were not true.
• The defendant knew the assertions were not, or were unlikely to be, true.
• The defendant made the assertions to get the plaintiff to buy the product.
• The plaintiff was justified in relying on the defendant’s assertions.
• The plaintiff was damaged in some way because of the defendant’s false assertions.

Question 12

Three main tiers of accident benefits coverage

Answer 12

1. Minor injury
2. Non-minor injury, which covers medical rehabilitation and attendant care (this coverage allows for someone to be paid to take care of the injured party)
3. Catastrophic injury, which provides compensation for medical rehabilitation

Question 13

The three tiers of accident benefits coverage are just the medical limits, and do not include…

Answer 13

• coverage for income replacement if the injured party is off work due to the accident; or
• attendant care, if the injured party needs someone to take care of him or her due to the severity of the injury.

Question 14

Health-care suppliers

Answer 14

• When a person is injured, they need some form of medical attention to try to return to pre-accident condition.
• This is where health-care clinics, medical practitioners, and lawyers are involved. These three parties can be a potential source of accident benefits fraud
• Clinics require two key elements to commit health-care fraud: a patient (injured party who has a claim) and a medical practitioner who will go along with the plan

Question 15

Types of fraud committed by health-care clinics

Answer 15

• Exaggerated and falsified injury
• Boilerplate reporting
• Stealing or buying medical practitioner signatures
• Submitting unnecessary treatment and assessment plans

Question 16

Exaggerated and falsified injury

(Health-care clinic fraud)

Answer 16

False or exaggerated claims for assessments and treatments (ex. someone seeks treatment after a minor car accident, but the assessment indicates the injuries are much more severe than they are)

Question 17

Boilerplate reporting

(Health-care clinic fraud)

Answer 17

• Assessments generate a report made from a boilerplate, designed to produce maximum number of referrals for other assessments and treatments
• Minimize the work required by the clinic to guarantee a profitable outcome
• Reports often mistake patient’s condition, feelings, and symptoms, to lead to recommendation for more treatment from the same provider

Question 18

Stealing or buying signatures and feigning treatment

(Health-care clinic fraud)

Answer 18

• Medical practitioners are paid for their signature, which the clinic then uses without guidance or review on treatment reports (like a blank cheque)
• Another method is when a practitioner bills the insurer as the person providing the treatment, while the actual treatment is provided by a less qualified and lower paid person (if at all). Prevalent in chiropractic and psychologist practices.

Question 19

Submitting unnecessary treatment and assessment plans

(Health-care clinic fraud)

Answer 19

• Lawyers and paralegals rarely commit outright fraud, but can help facilitate a clinic to commit fraud by recommending patients or pushing referrals
• Both parties benefit - the lawyer receives payment from exaggerated invoices, the clinic receives additional referrals

Question 20

Organized Fraud

Answer 20

Occurs when all three - insured, medical practitioner, and lawyer - all work together, and can generate a very large loss

Question 21

Automotive suppliers who can be engaged in fraud

Answer 21

• Towing
• Collision repair
• Vehicle storage
• Vehicle rental
• Appraisal
• Salvage
• Legal

Question 22

Towing

(Automotive supplier fraud)

Answer 22

• Excessive billing - bill for items above and beyond services rendered (ex. towing a phantom vehicle)
• Bill padding - adding items to a bill to receive more money (ex. wait time, kilometers driven, winching, clean-up, etc)

Question 23

Collision repair

(Automotive supplier fraud)

Answer 23

• Excessive damage—A body shop provides an estimate for more than the repairs are worth.
• Manufactured damages—A body shop purposely creates damage to increase the repair bill
• Fictitious damages—An insured or body shop manipulate damages to add to the insurance claim (ex. damages caused to the vehicle at a different time)

Question 24

Vehicle storage

(Automotive supplier fraud)

Answer 24

• Excessive storage rates—Storage facilities will charge a high storage fee for vehicles sitting in their compound (above the bylaw’s set rate).
• Holding vehicles hostage (not releasing vehicles)—Storage compounds will hold vehicles until the insured goes to the facility to sign paperwork
• Deliberate delays—not answering phone calls, moving vehicles to other storage compounds they are affiliated with.

Question 25

Vehicle rental

(Automotive supplier fraud)

Answer 25

• Excessive rental days—Rental companies will invoice for days that the insured did not have the rental.
• Economy versus luxury—Rental companies will provide the insured with an economy-class vehicle and bill the insurance company the luxury rate.

Question 26

Appraisal

(Automotive supplier fraud)

Answer 26

When an adjuster looks at an automobile repair appraisal, poor workmanship may indicate fraud (ex. body shop cutting corners, or only making cosmetic repairs)

Question 27

Salvage

(Automotive supplier fraud)

Answer 27

A salvage yard might remove undamaged parts from a vehicle and replace them with scrapped parts, sell the salvage as is, and then sell the undamaged parts to maximize the return.

Question 28

Legal

(Automotive supplier fraud)

Answer 28

Personal injury lawyers have the most to gain in automotive supplier fraud. They can litigate accident benefits and liability claims. Lawyers receive money from the fraud but carry very little of the risk.

Question 29

Building suppliers

Answer 29

• Emergency clean-up
• Building repair
• Building construction

Question 30

Emergency clean-up

(Building suppliers)

Answer 30

• Restoration contractors often required to do emergency clean-up, and to take photos / videos of damage
• However, some contractors start removing parts or making repairs before taking photos, which makes it difficult to assess the extent of the damage
• Some restoration firms will charge for equipment being present which wasn’t there, or was there but for a shorter amount of time

Question 31

Building repair

(Building suppliers)

Answer 31

• Bids from contractors on a repair job will come in lower than other bids to secure the job
• Insurers must complete a scope of repairs and ensure all contractors quoting on the job are estimating for the same repairs and the same quality of materials

Question 32

Building construction

(Building suppliers)

Answer 32

• Rebuilds required when a property has been destroyed due to a loss
• Insurers should obtain a scope of the rebuild with materials that are like, kind and quality
• Contractors may try to cut costs by changing a part of the building to something cheaper to build, or by saying a permit is not needed when it is, or using unskilled temporary workers
• Insurers should be careful when the contractor asks for a large sum up front