Fighting Fraud – Five Perspectives

The insurance industry is working more closely together in the battle against fraud. As a result of this, for the first time in Canada, nine individuals are facing section 467 Criminal Code charges with respect to insurance-related activities. This charge — acting for or instructing on behalf of a criminal organization — is usually reserved for drug rings and outlaw motorcycle gangs. If not for the dedication and cooperation among all facets of the industry, these fraudulent activities may not have been detected, these charges may not have been laid and these alleged criminals could still be on the road increasing claims costs and endangering innocent victims.

In order to catch fraudsters and further reduce fraudulent activity, all areas of the insurance industry must continue work together, delegates at the 43rd Annual CICMA/CIAA Ontario Chapter Joint Conference heard.

The sophistication level of fraudsters is growing exponentially, with a diversity of characteristics not seen previously. The staged accidents are far more advanced than they were in the past, with far more thought and preparation put into the execution of the “accident.”

Relationships and teamwork are extremely important in combating fraud. Project 92, which was initiated in 2007 and saw police activity by 2008, is an ongoing investigation into staged accidents which has succeeded because of partnerships. During the investigation of a complex and relatively dangerous staged collision conspiracy 15 people have been convicted of 38 charges in association with 12 distinct orchestrated collisions, Kirk Quinn, Ontario team leader, injury rings investigative unit, IBC, said. “Those numbers in itself are a tremendous acknowledgement of the teamwork that’s required,. . . if you understand how many hurdles there are from the point of offense detection to the point of conviction then having 15 people convicted of 38 charges is a tremendous accomplishment.”

“There are more good results to come, I promise that,” he added.

Under the criminal investigation, 38 people have been charged with more than 220 criminal offenses in 17 alleged staged collisions. More than 50 collisions and dozens of claimants have been identified as part of the scheme, due to partnerships between member companies, partners and the IBC.

Those who have been brought up on charges are but one individual in a complex web that can include tow truck drivers, paralegals, mechanics and so on.

“We’re talking about an organization of people with a purpose,” Quinn said. “An organization working together to achieve the goals and what we’re talking about is organized crime.” These groups think in terms of maximized profits — just like an entrepreneurial business — in terms of costs and profits and investments. They steal identities of providers, use salvage vehicles with mock repairs, they do what’s required to increase productivity, they withhold payments to the claimants in order to improve the bottom line. “It’s a cold and calculated business for them,” Quinn said.

In house staff

Claims managers, directors of claims or vice presidents of claims face numerous challenges in their day-to-day operations, Dan Little, corporate claims technical advisor, investigate services, The Economical Group, said.

When it comes to claims handling, interaction between claims representatives and the insureds is often limited to a short conversation, making fraud detection difficult. “In our experience, fraud is identified by less than 10 per cent of the people in our claims department,” Little said.

There must be a place for those identifying fraud to take the potentially fraudulent claims. If there are 10 per cent of adjusters identifying fraud and nothing is done with those files, the number of adjusters reporting potentially fraudulent claims will decline to near zero, Little adds. When a company starts to look at leakage and fraud it needs to determine how to handle suspected fraud files and how to ensure 100 per cent of employees are detecting potential fraud.

“If you are serious about suppressing fraud, you need to have two things in place at the company you work for: Number one is ongoing fraud awareness training and number two you must have internal and/or external resources available to deal with the fraud cases once you find them,” Little says. “If you are missing either one of those, your fraud investigation strategy is going to fail.”

To investigate loss or fraud, internal and external resources are leveraged, including private investigators, professional engineers, cause and origin experts, accident reconstructionists, forensic accountants, independent adjusters and legal counsel.

Each resource plays a role in the investigation. The private investigator provides surveillance — usually in the area of personal injury — because adjusters are not licensed, which is used on files where all other lawful means to collect information have failed, Little said. It is determined that in order to determine whether or not a claim is fraudulent surveillance information will be required.

“Make certain that the firms that you use could stand up to the scrutiny of the privacy commissioner’s office,” Little said.

Independent adjusters continue to play a valuable and necessary role in the investigation of claims and fraudulent claims. “Our use of independent adjusters continues to be triggered by claims volume or where there is a specific skill set met,” Little said. He went on to note that a very limited number of independent adjusters have extensive fraud investigation training and suggested that adjusters increase their fraud training through associations such as the International Association of Arson Investigators, among others.

‘The point at which a lawyer is retained to assist an insurer is also the point where a plaintiff’s lawyer will say you formed your opinion on the validity of a claim,” he said. “It is important to recognize that the time you decide to retain counsel becomes equally as important as the time you decide to use surveillance or other experts.”

While a fraud file is often based on an investigation that began years ago, the courts judge the merits of the case based on law that has evolved. “Fraud defense cases are unique . . . and the results at trial are often unpredictable,” Little said. When hiring defense counsel ensure the lawyer has trial experience handling fraud cases in addition to knowledge of the intricacies of the type of experts required in fraud detection.

“The analysis of a claim where you feel elements of fraud exists requires a careful review prior to being denied,” he said. “Litigation of a fraud file is nothing that you should fear provided you have done a thorough and objective investigation.”

“The courts will allow us to take position on the denial of a claim, provided it isn’t done recklessly,” he said. “Before and since Whiten v. Pilot, insurers have conducted, and thorough investigations have been successful in, defending fraudulent claims. From Britton v. Royal Insurance in 1866 to Sagl v. Chubb in 2009, there are various cases that provide insight into how these cases should be handled.”

When it comes to claims handling, investigation is integral as it is not only invaluable for fraud detection and investigation, but to help identify sub-rogation opportunities. Fraud and arson cases do not get less expensive; spend money at the front end of the investigation so that evidence that is objectively obtained can be collected and informed decisions can be made. “Too often policy defenses are waived in the interest of providing faster claims services,” Little said. “The courts will have little sympathy for us if we waive our rights by our own actions.”

Independent perspective

The independent adjuster sits in a bit of a different place in the process, because of their more hands-on role in the handling of a claim. “We’re often in the front line of the investigations, we’
ve been delegated a task to gather evidence,” Dan Buch, branch manager and special investigations, Cunningham Lindsey Canada, said. The duties of an independent adjuster in the context of a fraud investigation are even higher than those specified in the adjuster’s code of conduct, Buch said. “I think that the duties for independent adjusters in fraud situations are such that we have to give an even higher level of service in the likelihood of litigation,” he said. “Our files have to be properly prepared in such a way that topics from a litigation standpoint are nothing less than professional.”

The investigating of a claim must have some objectives to it, which are three-fold. The first is to establish whether the risk or contract is how it was intended by the underwriter. The second is to determine whether the subject of the claim actually exists. Sometimes in fraud cases the item in question disappeared long before the claim was reported, and therefore the item does not exist in the context that is has been presented. As a result, the adjuster must investigate the existence of the item and the context within which it is being presented. The third criteria is the incident itself: Did the incident occur and did it occur as it is being reported.

During the investigation itself, independent adjusters face a number of issues. These include, but are certainly not limited to, issues with credibility, testing the insured’s credibility, and establishing methods to test that credibility. Adjusters go through a preliminary stage where the investigation itself is planned out and some initial investigation occurs. This usually includes the first statement or the first piece of evidence gathered. “There is no point in collecting this evidence unless we circle back and try and test this evidence,” Buch said. Adjusters often have to “circle back” to re-evaluate evidence. By re-questioning the insured, it helps to verify the claimant’s credibility and ensure that his/her story remains congruent with each telling. As the information is collected coverage issues and credibility must always be kept in mind as any misrepresentations in the context of the insurance contract is, in essence, a breach.

In short, evidence gathering as an independent adjuster is not unlike evidence gathering as a staff adjuster. “We find ourselves grouped with other experts in the process and subject to the decisions of our clients,” Buch said. “We’re not often left with the ultimate decision, it’s our principles that are making the decision, but we are involved in the process . . . one of reconciliation with coverage and reconciliation with the evidence as presented.”

The private investigator

A recent guideline issued by the Office of the Privacy Commissioner of Canada states that third parties must be blurred out in surveillance footage, creating a massive increase in costs for insurers.

The OPC published guidelines on covert surveillance in the private sector in May of 2008. By and large, the industry had no issue with most of the recommended practices, save for the issue of pixelating third parties, Brian King, president of King Reed & Associates, said.

The issue came about because of a complaint to the privacy commissioner based on surveillance conducted in 2004. The privacy commissioner received the complaint in 2005 and, within days of the commissioner ruling on the case — in May 2009 — draft guidelines came down with very little industry consultation, King said.

The case in question involved typical surveillance on a third-party claim. The investigator videotaped a woman (the subject of the surveillance) coming out of a store. She was accompanied by her sister (who lodged the privacy complaint) and her sister’s daughter.

The case involving the surveillance subject settled. But the sister made a complaint to the privacy commissioner, was arguing that her right to privacy was violated when she was captured on the investigator’s videotape.

The sister was never identified, her name was never used in the report, and the tape never left the possession of the insurer or the legal counsel, King said.

As a result of the case, the privacy commissioner issued its new guidelines, calling for videotaped surveillance to mask the identities of third parties. However, masking involves extreme labour costs, he continued.

King filmed a test videotape roughly 36 minutes long. It took 41 hours to mask the third parties for that tape, King said.

“So what insurer is going to pay for surveillance that might have been two days or 16 hours, another 41 or 50 hours for someone to mask the third parties?” King asked.

“We responded by agreeing to all of the points the privacy commissioner outlined, with the exception of the last one which was video masking,” King said. “The reason we did this with counsel is we wanted to challenge this in federal court as being unconstitutional with respect to litigation and all the unfairness, etc.

“[The privacy commission had approximately] 45 days in which to appeal our decision not to comply and take this to court — we never heard word one. So I don’t know what that tells us as an industry, because we said: ‘Listen, we are not going to comply. We want the federal court to decide.’ They did not even respond.”

The issue of video masking extends beyond the added cost it would create. When surveillance is being done, it is not know whether someone might potentially be relevant to the case or not. “By altering videotape prior to trial, we are actually altering evidence,” King said. Additionally the issue of unreasonable expectation of privacy in public places is raised. While a person’s home is their sanctuary, a person out and about is captured on countless numbers of cameras on a daily basis.

In the end, however, King points out that the privacy commissioner is effectively an ombudsman. “They have no power to fine you, they have no power to get you to do anything,” he said. “The only thing they can do is rule against you. When you disagree like we did they can make an application to federal court to get a ruling.”

The legal perspective

After all of this work the case often ends up in court, but when insurance companies got to court they face a completely uneven playing surface, said James Dunn, partner, Blouin, Dunn LLP. “We arrive in a courtroom before a judge and a jury and we are the insurance company with the money . . . and we’re facing an individual person who is all by himself or herself with no money,” he said. “So when we give lead the judges think that they have to help this poor individual . . . we have to claw our way forward at the beginning of the trial.”

Between 20 and 30 per cent of all property and casualty claims have some element of fraud, according to a December 2006 article published in Canadian Underwriter. “I wonder if you look at your portfolio of claims and whether you have identified 20 or 30 per cent of the active files that have some element of fraud in them,” Dunn said. “I suspect that it’s a much smaller percentage than that, but if these statistics are accurate, then in each of your claims portfolios that’s the percentage of fraud files, or files that have some element of fraud in them, that you should be recognizing.”

The Canadian Coalition Against Insurance Fraud reported in 2000 that 46 per cent of Canadians believe it is easy to submit a fraudulent claim and that five per cent believe it’s acceptable to pad the claim. “As everyone knows the policy of insurance is a policy of utmost good faith and the insurer owes that to the insured and the insured supposedly owes that to the insurer,” he said. “In practice, however, the situation is different. We are held to a much stricter testing and handling of claims than insureds are.”

The Ontario Court of Appeal has recognized that there is a lower standard for insureds when presented the claim. Courts will ensure that honest mistakes and some exaggerations are not held against an insured. Two separate cases,
Pereira v. Hamilton Township Farmers’ Mutual Fire Insurance Co. and National Development Corporation Limited v. The Halifax Insurance, found that it is doubtful that many proofs of loss filed in insurance claims are exactly accurate. Some leeway must be made to allow for puffery or establishing the negotiating position. If it is determined that the claimant is indulging in puffery, or attempting to establish a negotiating position, fraud should not be imputed to the claimant.

“Part of our job is to differentiate between those honest mistakes, those embellishments, those exaggerations, and actual fraud,” Dunn said. “The stakes in doing that are extremely high. On the one hand, if we are able to successfully prove fraud and defend a claim on that basis, then nothing has to be paid on the claim itself. The only cost exposure [for the claims industry] is to pay for defense lawyers.”

On the other hand, if the fraud is not proven successfully, the claimant receives 100 per cent of the claim, plus interest, in addition to aggravated damages, punitive damages and costs. In a number of cases, fraud is not proven because a party other than the insured committed the fraudulent act.

“Realistically what you have to prove is that the insured intended to commit the fraud, that’s the test,” Dunn said. The strategy at the outset of these claims is to identify the insured and deal with the insured only as much as possible. Take the statement from the insured, get the insured to sign it, if possible obtain a video statement. “Deal with the insured as much as you possibly can because it’s the insured’s credibility that you are going to have to destroy at trial if you are going to successfully establish a fraud defense,” he added.

A good plaintiff’s lawyer will take a good fraud case rife with good evidence and fraud and turn it around and point out all the claims handling mishaps and missteps taken and turn the whole trial into a bad faith claim. Ensure that a claim is reviewed by a supervisor or a committee to ensure everything is in order and there’s nothing missing.

When it comes to investigating fraudulent claims, while still avoiding bad faith claims, there are a few things to bear in mind: respond to the claim objectively, manage documents carefully and gather evidence to prove the fraud.

When handling claims, a company- wide protocol can help prevent any mishaps and reduce allegations that the adjuster is out to get the claimant, while frequent review of a file by peers, supervisors or claims committees can help maintain objectivity.

When writing claims notes, be very careful about what is written, as privilege can protect some documents, but it can also be revoked. Notes and investigation reports made for the purpose of adjusting a claim, will not necessarily be privileged, Dunn said.

In the end, ensuring that claims are investigated in their entirety, that partners and vendors work together to fight fraud and that fraudulent claims are reported instead of settled will help to mitigate the cost of fraud.