Personal Injury Fraud: Time for Healing

Last year the insurance industry in Canada paid $500 million for personal injury claims that contained some form of fraud. At least, this is the claim made in a new study released by the Canadian Coalition Against Insurance Fraud (CCAIF) and conducted by St. Francis Xavier University.

It is the first study to quantify the property and casualty insurance industry’s fraud losses as a result of these types of claims, although their profile has grown recently. “We know the number of personal injury claims has been rising in Canada even though the number of serious automobile collisions has been falling,” says Nancy Tibbo, director of CCAIF.

For instance, in 1991, just 75 of every 1,000 claims had a bodily injury (BI) component, but by 1998 this number had more than doubled. In 2000, insurers paid $2 billion for private passenger BI and accident benefit (AB) claims alone. The Insurance Bureau of Canada (IBC) has been on a campaign to deal with the industry’s rising healthcare costs as a result of AB and BI claims, particularly from auto collisions. The CCAIF now plans to take a similar focus on personal injury fraud.

Opportunity knocks

CCAIF’s researched cases include over 4,000 AB, BI and personal liability claims either through auto or home policies. Using both subjective and objective measures, it was determined that 26% of the test cases contained fraud. This includes both premeditated acts, such as staged or deliberate accidents, and opportunistic acts, such as inflated medical expenses and false injury claims. Opportunistic acts made up the overwhelming majority of the fraudulent cases, with staged or deliberate acts accounting for only 1%.

The cost of AB and BI fraud to private insurers is estimated at 15% to 22% of all paid losses, equivalent to about $430 million, while the combined cost to private and government insurers is closer to $540 million.

Personal liability fraud is less common, accounting for 4.8% to 8.3% of paid losses, or $19-33 million, the study notes. Fraud was also found to be less prevalent in small towns and rural areas as compared with cities. Ontario is paying the most for fraud, where 21% to 31% of personal injury cases are estimated to be fraudulent. Alberta was the lowest of the provinces studied at 7% to 21%. Researchers attribute this to the low ceiling on benefits in that province. In response to the study results, the CCAIF says it plans to train claims handlers on how to spot the “red flags” for this form of fraud and revamp its fraud indicator manual.

Fraud fad

At the recent Toronto Fraud Forum, sponsored by the Association of Certified Fraud Examiners (ACFE) and the Canadian Association of Special Investigation Units (CASIU), attendees learned that new measures are being developed to investigate personal injury claims in auto accidents.

Speaking about low-impact, low-speed collisions in particular, Sam Kodsi of Origin and Cause Inc. says there are now qualitative thresholds for injury in collisions that investigators can apply to suspect BI and other claims. For example, in a front-end collision a minimum of 12-20 km/h of relative force is required to cause injury to a normal person, while in a rear-end collision, 14-16 km/h is required to cause the most common injury, whiplash.

The new “fad” in fraud is said to be the “sideswipe collision”. With all the attention being paid to rear-end collision investigation, fraudsters are now turning to sideswipes as an alternative. “The insurance industry is on to their rear-end cons,” Kodsi observes. Injuries are not as common in sideswipe accidents because of the low level of force, he explains. Generally only one to two Gs of force are created in such accidents, about the same as flopping down in a chair or coughing. Injury claims from sideswipes are therefore “big red flags” to investigators.

Another important investigation tool in these cases is physical evidence, including photographs of the vehicles involved. Evidence of paint transfers from one vehicle to the next or even depictions of where vehicles have not been damaged all give clues to help recreate the collision scenario. In speaking to claims handlers and investigators, Kodsi points out that in his line of work there is no such thing as too much information. “As an engineer, I can only be as good as the information I’m provided.” Kodsi predicts that investigators may need these tools even more in the future. With the coming economic recession, personal injury, like all other kinds of fraud, could be on the rise.

Potential danger

Another new forum for fraud could be developing in life insurance, the conference attendees learned. Kelly Picard, manager of life and critical illness claims at Munich Re, says the potential lifting of a ban on “viatical” settlements in Ontario has the potential to lead to rampant fraud.

In general, life insurance tends to experience less fraud, with incidences often low profile and unorganized. Such has not been the case with viatical settlements in the U.S., which have been making headlines. Essentially, a viatical settlement involves an insured selling their life policy to one or more investors. The insured would have a terminal illness and therefore want cash to use while they are still living, often to pay medical expenses. The investor pays a percentage of the policy’s value, pays the premiums until the insured dies and then collects on the policy. Profits for the investor are usually 50% to 70% of the policy’s value.

Picard is appalled with both the concept of viatical settlements, which she describes as “the marketing of someone’s illness”, as well as their potential for fraud. “Somebody’s bad luck generates the whole industry.”

And an “industry” has cropped up around the settlements. In the U.S., there are now viatical settlement and escrow companies, agents and brokers. But it is an industry ripe for fraud because viaticals are not regulated. According to a U.S. court decision, “it’s not insurance and it’s not a security” and thus falls outside of financial services regulations, Picard explains. Much of the industry expansion came with the rise of AIDS, as did the potential for fraud. People already diagnosed HIV-positive would take out fraudulent policies and then sell them. If the fraud was not discovered within two years, the settlement would go through regardless of the original fraud. In other cases, settlement companies were taking investors’ money and not buying policies at all. Many investors were elderly people who believed their investment was helping sick people pay their medical bills.

In 2000, the U.S. Postal Authority, the FBI and the National Association of Insurance Commissioners (NAIC) set up “Operation Cleansheet” to crack down on viatical fraud. Numerous indictments were handed down and “people were arrested left, right and center”, Picard says. “The vast majority of life insurers were affected by this,” she adds, some of them with hundreds of policies being uncovered as fraudulent. The finally estimate by the U.S. Postal Authority is that insurers and investors lost about US$1 billion.

Despite this, the Ontario government has plans through its “Red Tape Commission” to lift the ban on viatical settlements here. In response, the Canadian Life and Health Insurers’ Association (CLHIA) made a submission to the province last year expressing its objection to the practice of viaticals. The future of this “cottage industry” in Canada, specifically Ontario, remains undetermined.

As insurers seek to draw the line on healthcare costs, personal injury fraud is becoming a hot topic in investigation circles. A new study released by the Canadian Coalition Against Insurance Fraud is the first to quantify the impact these bogus claims have on the industry – putting the figure at around $500 million. Attendees at the recent Toronto Fraud Forum learned first hand how new techniques are being used to crack down on perpetrators. They also heard about a disturbing new development in life insurance that could lead the way to a new venue for fraud.