Numerous insurance fraud cases happen every year. Scammers make false statements and pretenses in an attempt to gain financial benefits. What are the worst insurance fraud scenarios? How are they discovered?
In this interview, Charles R. Gallagher, an attorney with Gallagher & Associates law firm, told Pissed Consumer what sort of insurance fraud cases are typical both for consumers and companies. Watch the video to learn more about types of insurance scams and uncover expert tips on how to choose an insurance company.
Below, you’ll find a brief outline of expert’s answers to top insurance fraud questions with key topics and cases:
- Insurance fraud law
- Types of insurance fraud
- How companies discover fraud
- Insurance claim practices
- Purchasing insurance through the agent
- Bad faith insurance claim
- Insurance Attorneys’ fees
- Insurance fraud charges
- When companies go against a consumer
- Organizations that regulate insurance claims
- Insurance tips from expert
When Did the Insurance Fraud Law Come Into Effect?
Charles: The root of all insurance is contract law, basically. So the insurance contract among an auto policy, homeowner's policy, health policy between an insured and insurer is the basis for the underlying coverage. Then under that policy, and then under statutes with the states, the various states, and some federal sections as well, would give rise to fraud.
In the event of clear fraud, misrepresentation, trying to make false statements, false pretenses to obtain money or to do things that are totally in a criminal enterprise, to obtain benefits that aren't justifiable under the insurance policy. So yes, the insurance fraud statutes are a more new basis. But the underlying basis, the root of all things, would be that contract law between the carrier and insured.
Types of Insurance Fraud With Consumers
Charles: So you might have an insured trying to kind of maximize coverage. Say, for example, you have a preexisting loss under a property policy for your home, for your car possibly. Something happened outside of a policy period or some other non-insured covered event. And you might try to go ahead and, quote, make a meal out of it.
So you have a covered event and a non-covered event prior to that. And you might try to go ahead and say, for example, a car, that many times back you backed into a guard post or some kind of fixed object, and your left rear tail light was shattered. And then say that you were rear-ended by some other driver in an insurance-covered event that really hit more of the right side of your car. Maybe you have someone trying to make a claim for the entire rear side of your car with full knowledge that only the right side was hit, not that left side.
That is definitely an insurance fraud scenario, where asking for coverage, where you know that that left side was not part of a covered insurance event, trying to get at benefits where you're not really entitled to them under the insurance policy in kind of the false pretense way. That would be one way that you might have someone trying to obtain more benefits than is appropriate in an insurance context.
You have cases that are more egregious. There was a case down in South Florida where some individuals had put food on the fryer. They were making some fried fish and decided to leave the house. Of all things, I don't know why you do that. But of course, they had an idea that they were going to set up a fire claim. And they decided to leave some food cooking and left the house. And well, what would happen after that? Certainly, a fire would occur.
So they set up a fire claim. A fire occurred at the house. And next thing you know they submit an 85-page inventory of contents and furnishings and the like that they want to have paid for under their insurance policy. So you have scenarios where there's a little bit of fudging where you have a real intentional act, where they're trying to make clear false statements to obtain true dollars, true large dollars. But those are kind of the short versions of those scenarios where consumers might try to gain the system like that.
How Do Companies Discover Insurance Fraud?
Charles: Someone trying to get one past the carrier is probably not a good idea. They're very good at rooting it out. They have adjusters that are really taught to catch these things. And they have at their disposal under insurance policies what are called post-loss obligations.
For example, they will ask people to give sworn statements and proof of loss, which is a document where they've got to sign under penalty of perjury that these are part of their items that are claimed as lost. They have to give examinations under oath, which are essentially depositions that are not part of a lawsuit.
Having to provide pictures, exhibit the property, exhibit the loss, all kinds of things that would allow a claims professional and adjuster to investigate and confirm this as a legitimate loss. Where they think there's something askew they have a department called SIU, special investigations unit. And those folks are pretty hardcore investigators that know how to sniff things out.
And I've had clients on both sides of the fence where they have been investigated by SIU or SIU's investigated folks that have been accused of wrongdoing. And one recently where a gentleman had decided to make some upgrades to an existing property loss and asked his vendor to expand the scope beyond the actual damage that was caused to the property by a covered loss.
His idea was that, in theory, pay a little extra himself, but hope for the insurance benefits to maybe cover some of those things themselves, and he would pay a little bit more. Well, the SIU folks thought he was trying to have the insurance pay for everything, and he wasn't going to pay for the overage. And of course, they swooped down on him and thought that was a criminal enterprise. So they are very good at rooting things out.
They have tools under the policy tools under their disposal to search these things out, which also is called an ISO claim search. And ISO is an insurance services organization, which is a repository of claims that are submitted. And they can see if someone is a serial insurance claim filer. See if someone submitted 10, 20, 30, 40 insurance claims over the course of a five, 10 year period.
If someone is submitting claims habitually, then they're going to be on their radar as someone who was probably primed for insurance fraud.
Someone submitting an insurance claim once every four or five years when there's a loss, probably not going to be an issue because things happen. But the ones that have large numbers of claims, they're going to be targeted for such scrutiny like that.
So carriers have those folks at their disposal, and they're very, very good at what they do, and they know what to look for. So not wise they think they can get one by on a carrier.
What Are Insurance Claims Practices?
Charles: So there is definitely an internal incentivization for carriers to not pay all claims. In fact, some carriers will actually reduce riding, unfortunately, these incentivization types of levels, where if people don't pay all claims or they have certain categories where they're able to deny certain claims, they get certain bonuses and remuneration.
And that actually rises to a level of what would be called insurance bad faith claims practices. Many states have that. Our state has that. And so where you have an insurance claim practice which is determined to be an ongoing kind of deceptive and bad faith nature, insurance carriers can be sued for amounts beyond what is just the policy limit, or beyond what is the amount of dispute in a punitive way, to penalize them for employing these practices which are known to be across the board.
So the policy of insurance is going to dictate what's a covered loss, what's appropriate to be paid, where they should be denied, where they should not be denied, where there should be a limitation of liability. And one of the most painful things you learn doing this kind of work is that that policy is very dry language and reading, but that's what dictates everything.
So everything is covered as a direct physical loss, then they limit certain things, and then they exclude certain things. And where a company deviates from that coverage or those limitations or those terms, that's where a company is going to get in trouble. And they try to assert maybe denials or exclusions which are not founded in the facts, or not founded under the actual loss itself.
You might have a carrier who likes to assert certain exclusions across the board. They always want to go ahead and assert a faulty workmanship exclusion when that might not be the case. You might have some other issue, a true covered loss, but they always assert a faulty workmanship exclusion on every one of their losses. And that could be a bad faith claim handling the issue.
Post-Claim Underwriting Issue
Charles: So another issue that is really kind of tricky as well is what's called post-claim underwriting. And this occurs a lot where a carrier will take your premiums when you sign up, your agent typically will be the person you sign up with, obviously. But you sign up for an insurance policy, you pay premiums, you apply with an application, but the underwriting is very thin.
They don't go ahead and ask the appropriate questions they need to. They don't do the full due diligence in terms of seeing whether or not your policy should be placed or not, or they should decline to go ahead and write a policy with you. You just take your premiums. And their mindset is, "We're not going to pay on every claim. Not every claim's going to generate a claim at all. So we're better off on a numbers game, volume-wise just going ahead and ensuring everybody." Right?
And so then when a claim comes in, then they're going to scrutinize whether or not, "Should we have actually insured you or not?" and ask the questions they should have asked at the time of actually underwriting the policy at the very, very inception.
A Case With An Underwriting Health Question
Charles: So one case comes to mind where we had a woman who was older, and she had a history of heart issues, and she was applying for a credit life policy on a car purchase. And she was really asked no qualifying health questions at all. And when it came to the point of there being any close call on that, the person who was inquiring the questions put words in her mouth, and said, "You're not going anywhere for a while. You're healthy. You're healthy as can be, aren't you?" And then that was a prompted kind of answer off her. And asking someone whether you're going to die soon or not, her answer was, "Sure, I'm feeling very healthy. Of course."
Well, in truth she had been diagnosed with some heart issues in the past, and that was a question that should have been asked of her under the underwriting questions, but it wasn't. So she bought the policy, paid for the policy.
Unfortunately, regrettably, died about six months later. And so what happens, the insurance company says, "Oh no, this should never have been placed. We're going to go ahead and refund you your premiums back, but we're going to rescind the policy, and you have no coverage. Not even the policy, we're going to go ahead and rescind the policy as if it never existed, because you never should have been covered."
So that's a perfect example of poor acting post-claim underwriting by an insurance carrier, where the acting is bad on their part, they shouldn't have done that. They should have said, "Sorry, we can't buy your policy. This is not a policy that fits you."
Fraud Scenarios With Insurance Agents
Charles: So you have it on both sides. You also have scenarios where you have insurance agents accepting premiums, but not passing it on to carriers and binding coverage. There are plenty of examples of that, unfortunately, where you have rogue agents or rogue employees with agents who don't accept the premiums.
They accept for their own purposes and their own pocket but don't pass them on. And people will think they're covered. And time for a claim, and the carrier says, "We have no record of you having a policy with us. We're sorry that you had a loss, but you're kind of out of luck." So you have fraud across the board on both a consumer side and a business side. And at the end of the day, humans are involved here, and you have no bad apples, unfortunately, on both sides. So yes, you do have scenarios where you might have a business element and carrier element committing fraud.
What You Should Know When Purchasing Insurance Through the Agent?
Charles: You want to do your own due diligence on anybody you use, whether it's an agent or whether it's an insurance carrier. And if it's an insurance carrier, you can go ahead and utilize rating services like A.M. Best, USNews.com, World Reports also will rate carriers as well. They actually use AM Best's as their rating barometer.
But look at rating services like Google or Yelp, or see who the agents are getting good reviews from locally, and to see if they've been tested by the consumer community and if they've done well before you just pick somebody out of a phone book with a random name.
See if they've been serving people well, and have got good reviews. And the Better Business Bureau is also good to see if they've gotten good reviews as well. But definitely do some background work on those folks and do your homework to see if they're providing good service.
What Is a Bad Faith Insurance Claim?
Charles: So it's a creature of the statute in most states here. It's a creature of statute. And when an insurance carrier denies a claim or delays payment, underpays a claim, makes misrepresentations in a claim, does anything that is unfair and deceptive in a way to an insured, the statutes here in Florida provide a cause of action that an insured can bring against a carrier.
And there are a couple of prerequisites here. One of those is you've got to go ahead and prevail on your coverage action. So say that you brought an action against them to be paid benefits under your policy. You gotta win that. But once you win that, you're allowed to go ahead and sue your carrier for bad faith. In a coverage action, all you can really obtain would be what your damages are to your home, to your car, or whatever that might be.
In bad faith cases, you're allowed to obtain punitive damages.
And that's a real deterrent in terms of an insurance carrier. They don't like those. That's a very, very chilling effect for insurance carriers, to go ahead and hit them for more than is owing in a certain case. So that's a way to make them peak up and get their attention, and ideally help resolve those cases early on because they don't want to have that punitive effect against them.
How Much Are Insurance Attorneys Fees?
Charles: Generally when you're suing an insurance carrier to obtain benefits on then, it's typically on a contingency basis or some kind of a contingency plus hybrid basis, where a client might need to go ahead and advance some kind of expenses for filing fees, those kinds of things, but the attorney's fees would be a contingency part of the recovery.
For example, in Florida here, typically on an accident-type case or an insurance-type case, if there's going to be a consenting to liability it would be a third of the recovery. If you have an insurance carrier denying liability, it would be 40% of the recovery would be the fee, if there's a prevailing at the end of the day. If there's no prevailing by the case, then the claimant would not be paying at all. So it's the whole adage of if they win. The attorney gets fees out of that.
Now on the other end, if you're defending somebody in terms of the SIU investigation, or if you're defending somebody in terms of the wrongful claim by a carrier, that's going to be something of either an hourly rate type thing with a retainer, more a flat rate fixed fee. Or even criminal attorneys typically charge a kind of a flat rate fixed via the outset to defend somebody over the course of the case.
So that would definitely be a pay-to-play scenario because they're not going to be winnings at the end of the day to secure somebody's freedom from a fraud charge or being incriminated by that. So those will be different scenarios.
What Is the Charge for Insurance Fraud?
Charles: So scenarios where you have a rogue employee working with an agent and skimming money or taking money, or you have a rogue agent itself taking money, skimming money without securing policies over time, that's bad stuff. That's really, really scary.
Also, scenarios where you have someone that are contriving lawsuits. You have a very frequent number of folks on these windshield lawsuits, where they contrive these accidents, and it's a small enough number that the carriers don't want to contest them and defend them so much. They'll payout across the board. And it's a sweet spot they've established.
Or these contrived accidents where they will sandwich in folks, and again, get in accidents over and over and over again. And what you're looking for is an insurance carrier who will not deal with this on a dollars and cents basis, and say, "Look, yeah, my defense cost is going to be blank dollars to go ahead and set a precedent, as opposed to paying people to go ahead and just go away and leave us alone."
Those folks are the ones that will penalize them and have them brought before criminal charges and the like. So you're talking about really kind of ongoing criminal enterprises of people that will use a system to be their income, unfortunately. But there are those folks out there who use this as a primary source of income.
It's not going to be those folks that are trying to typically get that left tail light covered, or in a fire loss maybe get a better TV than they had before. Those typically don't get an eye on criminal prosecution or SIU investigators. And candidly, they might get paid those things, they might not get the coverage.
But for the ones where there's an ongoing habitual and overtime kind of thing, yes, they will go ahead and get the eye of law enforcement and they'll get policies rescinded, and they'll be on the radar of carriers, and not be able to get insurance from other people too. So yes, you'll have implications that are not good for consumers and not good for those folks across the board.
When Do Insurance Companies Go Against a Specific Consumer?
Charles: So what will happen typically is you might have an insurance company bring a lawsuit against an insured under what's called a declaratory judgment action. And they might file a lawsuit against their insured, and ask the court to declare that the acts and omissions of that insured were indeed fraudulent based upon those scenarios. And that might be asking the court to invalidate the insurance policy, to void the policy, those kinds of things.
That finding serves as a predicate for the insurance carrier turning that over to the state attorney, or law enforcement generally, which is another bad implication where, when law enforcement gets involved, their arm and their eyes are a lot more prying than a civil lawsuit, clearly. So if someone with a gun and a badge is asking questions as opposed to a civil attorney in deposition, that's a whole different scope. And they have a different set of implications.
So the ones that we've seen where there are negative implications are where you have, again, someone who intentionally set fire to their home, and next thing you know there's an 80-page inventory of claimed issues, claim contents. And cases where I've been involved with, and I've been taking an examination under oath, of these homeowners who have claimed these things.
One individual had claimed for a two-adult, two-child family, claimed $500 worth of soap in the house, $500 of toothpaste in the house, $500 worth of deodorant in the house. So I would sit with them in the examination under oath and just ask them, "So how many tubes of toothpaste did you have in the house? Just curious. I'm just trying to add up how much $500 of toothpaste can be."
And of course, they get very defensive and they get very hostile. So, "How much did you pay for toothpaste? Is it $5 a tube or $2 a tube? What did you have? How do we get to $500 for toothpaste?" And of course, they get really defensive. And, "I don't know, it was $500 worth." "How many bars of soap did you have to yield $500 of soap?"
And another case I had, was… The best way I can describe these people, they were gypsies that committed insurance fraud across the country. And on the ISO claim search, there was this one antique train set that had been stolen six times. They had submitted claims to six different insurance carriers, and it had been flagged on the ISO claims six different times.
And this gentleman, when he knew he was caught, and he knew ... I was sitting next to the vice-president of the insurance company at a deposition, and I knew he was caught, what was his reaction? What did he do? He faked a heart attack during that event, because what else could he do? He was cooked.
He faked a heart attack, and then he fired his attorney on the spot. He went ahead and turned to the attorney. The attorney told him after he realized he was faking a heart attack and he got back up, he says, "You have to answer their questions. You're required to answer the questions. You can't answer the questions."
And so when he had to account for the fact that this was going to be the sixth time that was stolen, and the attorney told him, "You can't answer the questions," he yelled and screamed and cursed his attorney and fired him right there. And so people like that who have ... and that case was turned over to law enforcement, and there was a prosecution of that case, and he did have some ... he wasn't incarcerated.
He was able to ease, actually, at the end of the day. But his policy was rescinded and he was no longer assured by that company. Probably wouldn't be able to get insurance thereafter. It didn’t follow applying for insurance with anybody else. But people that go ahead and do it habitually and are truly gaining the system as a matter of their employment, so to speak, those are the worst cases, the ones that think they can do this for their income. Those are by far the worst.
Who Regulates Insurance Claims?
Charles: So I think the one that would be federal oversight of everybody would be the FTC, but more in terms of advertising probably, on how they advertise what they're providing. So that's going to be kind of for all carriers nationwide. Now, more often than not these are going to be contracts entered into within folks within the state. So you're probably going to have the state having oversight over each individual policy.
So for us in our state, our division is called the Division of Business and Professional Regulation, DBPR. So you're going to have these individual state organizations that have control over the departments. Other departments, other states have departments of insurance… Actually, I'm sorry, ours is the Department of Financial Services.
So we have a Department in Florida which has purview and oversight over all insurance matters. And they're going to regulate insurance companies. They're going to regulate insurance claims. In the event of claims handling issues or misconduct, that department has purview as oversight over those carriers. You're going to have that for all 50 states, they'll have different names, different reaches.
But yes, it will be a state-by-state issue more likely than not. And we'll have other divisions within each state that would also govern advertising, that would govern the way in which they solicit clients, the way they solicit carriers, their insureds, things of that nature.
Banking regulators might even have some involvement with that, how they become involved with their customers as well. So you're going to have, more likely than not, a lot of state-run or state-based government organizations that have the most oversight over insurance carriers in the States.
Insurance Tips From Expert
Charles: You want to choose a career that's been around, that's well-capitalized. A low premium is not only the best thing. Somebody who's a not well-funded carrier, who's got a low premium, they may not be around in the event of a lot of losses, of a hurricane, a catastrophe.
So I would check AM Best is one of the leading, or the leading, insurance rating service, USNews, Words reports also have a nice profile of all insurance carriers on how they rate them. Take a look at how they're rated. They have A+, A++ ratings on those things. And see how they are rated.
But capitalizing on the carriers is a good thing, how their claims are graded if they have a good claims history if they are well regarded by their customers if they have good recommendations by their customers. So just do a little bit of research on those sites of those portals and see what they say.
And truly, one of the adages of, you know, you pay a little bit more, maybe, in premium, and then you'll have a good outcome. One of the carriers, one carrier out there will return some of your premium each year if you don't have claims. There are a whole lot of nice elements of carriers that exist if you do a little bit of homework. So do some homework on that, and don't just pick the lowest premium per month for your needs.
Insurance fraud is not a good idea. It is a deceptive practice that will sooner or later be exposed by an insurance company and bring consequences. We don’t recommend consumers do it because it can lead to a criminal act. We thank Charles R. Gallagher for sharing his expertise with us and for exposing typical insurance fraud cases.
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