Insurance fraud: The Insider Job

The irony of the situation should not escape you as the reader of an insurance journal. Insurers continually lament about the cost of internal fraud through insureds, yet as an industry we are quick to turn the blind eye to possible exposures in our own ranks. No industry is safe from fraud, where there is money to be made, it can be safely assumed that someone has worked out a scheme to illegally avail themselves from the cash pool – whether that might be the petty-cash or the offshore tax-sheltered account.

Internal fraud is, by its nature, a dweller of dark places, not unlike Lord Denning’s allegorical “Blind man in a dark room looking for a black hat which isn’t there”. And, given its’ propensity to be hushed up, it often escapes proper monitoring. Naturally the true cost of internal fraud, and its impact on the economy and financial performance of companies is lost in this polite “let’s pretend it’s not there if we can’t see it” approach.

Insurers are often denounced for “playing the game” with consumer driven fraud, which is further frustrated by the leniency of conviction sentences meted out. As such, I am continually amazed at the winging and gutless approach taken by some insurers to their own homebred fraudsters. For instance, why is there no study in industry of the impact of internal fraud on premium? We know that internal, computer-driven fraud accounts for at least eleven times as much as bank theft as well as armed robbery, and insurance operators are just as exposed to the “cash risk” of the banking and retail sectors. How are the crooked underwriters, brokers and adjusters being dealt with in general?

The cover up

The first rule appears to be that the entire distasteful matter should be hushed up lest the company’s management is seen as lax in their operational practices. The second rule seems to be that no bad reference will be given when the culprit tries for another job in the industry for — as a human resource vice president once told me, “one can’t go around ruining people’s careers on a whim”. My response, at least in mind, was “well then, why even fire the individual in the first place?”

Over the last six years Underwriters Fraud Control (UFC) has been called on to investigate numerous allegations of company internal fraud, and surprisingly, found that approximately 87% of these reviews proved that the suspect was innocent and sometimes a victim themselves.

What motivates such unfounded charges in the first place? In my experience, it is usually some form of internal politics, petty jealousy or simply a ruse to cover the tracks of the accuser’s own wrongdoing.

With this in mind, we never set out to prove fraud but to prove innocence: if fraud is there, it will show itself soon enough, as even the most “cunning” of fraudulent schemes are not really complex when reduced to their basics.

Cases in point

In truth, we have seen it all in the last few years: there was the company that settled out of court with an accuser motivated by personal ambition who, seeking to ruin another’s career, was eventually undone and forced to collect a fat settlement with a “no admission of ‘liability” stipulation. There is the case of a U.S. company which, basing a decision solely on innuendo, fired a senior claims person and then, when sued for wrongful dismissal, hired UFC to find cause — we couldn’t. There was also the claims manager who, with twelve personal claims of a dubious nature, received a promotion and the branch manager, having aided one of his adjusters to defraud the company of several million of dollars, received the accolade of being named the “Employee of the Year”.

Essentially, internal fraud falls into two distinct categories: the “one-time” unsophisticated hit where, for example, an adjuster might write a cheque to a relative or two, or the more complex schemes involving adjusters, vendors, lawyers, medical practitioners, health care professionals or a combination thereof. While the thought of such schemes usually causes forensic accountants to go into paroxysms of fee-induced delight, the real key to uncovering these schemes is close file examination, careful interviewing and clear and speedy communication in delivering the outcome of an investigation.

Fraud actions

What is an insurer best advised to do when internal fraud is suspected? My suggestions are fourfold.

Firstly, limit the involvement of parties not necessary to the process, thus reducing the potential of “internal politics” disrupting the investigation as well as the potential of information leaks.

Secondly, report the loss as soon as you have reasonable suspicion to your bond insurers and LISTEN to their advice. At the same time, retain senior counsel of appropriate experience to protect privilege and your own rights of recovery.

Thirdly, do NOT balk at bringing charges once the fraud has been admitted or taken to a sufficient level of proof. Again, do not trade off a promise of no prosecution for an admission.

Finally, once the claim has been settled and the courts have done their work, do not be afraid to let the industry know that yes, we did get defrauded, but we have recovered the loss, persecuted the guilty party and closed the “gap” that enabled the fraud to take place in the first instance. In such a manner, it is my sincere belief that your company will earn the respect of others. It will also provide viable notice to employees and consumers alike that you are vigilant and aggressive in the pursuit of fraud.