Insurance Insights ~ April 1998

Fraud Is a Crime

Billions of dollars are stolen each year by what many people consider a victimless crime. Most people do not even know it is happening. The crime is not usually front page news and the criminals are not attacking by hiding in alleys or on dark streets. Indeed, it is happening in automobile repair shops, insurance agencies, medical clinics, law offices, and even at the next-door neighbor's house. Often white-collar criminals, are the greatest perpetrators. Cheating on an insurance claim is fraud, and fraud is a crime.

The reasons behind insurance fraud are various and complex. Insurance fraud is generally tolerated by many people who think it is a victimless crime. In 1995 a study for the Insurance Research Council found that 24 percent of Americans felt it was totally acceptable to pad a claim to make up for premiums paid in previous years. Nearly 40 percent of residents in large cities found the practice acceptable, as did those in New York, New Jersey and Pennsylvania.

An earlier study found that 32 percent of Americans said it was acceptable to underestimate the miles they drive when applying for insurance coverage. Another 23 percent said it was OK to lie about where they garage their cars in order to lower auto premiums. Some people justify fraud because they feel the insurance premiums they pay are not fair or too high.

Insurance companies inadvertently promote fraud by paying suspicious claims rather than fighting them, reasoning it would be less expensive to pay a suspicious claim than to pay legal fees to fight them. Companies also resist fighting suspected claims for fear of "bad faith" lawsuits.

When the crime is compared to armed robbery, burglary, or drug trafficking, insurance fraud is safer and more profitable. Prison terms are lighter which means perpetrators have less to fear. Additionally, when doctors and lawyers are involved in fraud, they are more often regulated by their peers through professional societies, whose disciplinary systems all too often provide few remedies or penalties when members are caught or are suspected of defrauding.

Insurance fraud is more harmful to the insurance industry, each year, than any single natural disaster has been to date. It is the second largest white-collar crime, tax evasion being the first. The National Insurance Crime Bureau (NICB) estimates that property/casualty based insurance fraud costs are upwards of $20 billion each year. Just for comparison, the damage caused by Hurricane Andrew was about $17 billion. When you add the figures for life, health and specialty lines, the figure climbs toward $100 billion per year. According to NICB, 10 to 15 percent of all property/casualty insurance claims are fraudulent.

A specific issue on fraud, which is a concern of many business owners, is worker's compensation fraud. The workers comp portion of this crime hit figures near the $6 billion mark last year. Workers compensation fraud also costs businesses billions of dollars each year in higher premiums and hidden expenses, such as production delays, retraining costs, and equipment replacement costs.

Workers comp fraud also affects employees, the group most likely to abuse the workers compensation system. Employees feel the effects from fraud in the form of layoffs, wage or hiring freezes, cutbacks in work hours, and in extreme cases employer bankruptcy.

Common Indicators of Workers Compensation Fraud are:

• Injured worker is disgruntled or about to be fired or laid off.
• Injured worker is in seasonal work that is about to end.
• Injured worker takes more time off than the injury seems to be necessary.
• Injured worker is having financial difficulties.
• Accident occurs late Friday afternoon or when the worker comes back on Monday.
• Accident is not witnessed.
• Accident occurs just before a strike or near the end of a probationary period.
• Diagnosis is inconsistent with treatment.
• Injured worker has a history of short-term employment.
• An accident occurs in an area where injured employee would not normally be.

No one indicator determines that fraud exists. Even several indicators, while suggesting possible fraud, do not mean fraud has definitely occurred.

One of the best ways for businesses to control their workers compensation cost are to not only control the frequency of fraud claims, but all claims in general. A well-managed safety program, good housekeeping rules, managed care, and a zero tolerance for fraud should be a standard practice for all businesses.

Some tips to get a better handle on preventing fraud are:

• Pre-employment screening . Verify the information on job applications and check employee references. Potential employees who lie on applications may be more likely to commit fraud.
• Furnish an employee handbook that includes a written statement of company policy regarding fraud plus a separate statement concerning safety. Update these at least once a year.
• Let employees know that directly or indirectly, the money for injuries ultimately comes from you, the employer. These costs impact your bottom line, and the ability to compete in the marketplace.
• If an employee is leaving your firm, during the exit interview, have them sign a statement that they have not been injured while in your employ. This may help reduce exposure to future claims.
• Display fraud awareness and prevention posters in the workplace. Erie's fraud hotline number is on a number of posters as well as in the managed care kit.

If someone you know is committing insurance fraud on a home, car or business policy, you can report it to Erie's hotline number at 1-800-368-6696.

How Much Does The Car I Buy Affect My Insurance Bill?

This is the most common question a policyholder will ask their insurance agent. The answer is...very much.

Each insurance company will set rates for each manufactured make and model vehicle. These rates are based on a number of elements including the repair and labor costs, as well as injury, collision and theft loss experience.

Should you purchase a vehicle that has a less than stellar record when it comes to passenger safety and collision, you can expect your insurance rates to reflect this. Insurance companies have a greater risk insuring vehicles with a poor history of passenger injuries, collision and theft losses. The greater the risk, the higher the premium will be. Some companies may opt not to insure a certain type of vehicle because of its safety performance.

Our office recommends that you contact your agent prior to your purchase of a vehicle. By providing the year, make, model, and vehicle identification number (if available), we can advise you of the insurance rates for the auto(s) you are considering. We can explain the reasons why the vehicle is rated the way it is. The auto manufacturers are working to improve vehicles and make them more safe. Some features which help lower the premium are passive anti-theft devices, airbags, and four wheel anti-lock brakes.

Purchasing a vehicle is clearly a personal preference, but vehicle safety should play a part in your decision. Keep in mind that a vehicle with a good safety record is more likely to protect you and your passengers.

As a professional insurance agent, your safety matters to us. We strongly recommend that you examine the safety record of a vehicle before making the purchase. For more information, you may contact the following:

• US Department of Transportation -- publishes the results of full-front crash tests. 800/424-9393 or http://www.nhtsa.dot.gov.
• Insurance Institute for Highway Safety -- publishes lists of recent model cars on the basis of occupant deaths per registered vehicle. Also provides information on children and airbags. 703/247-1500 or http://www.hwysafety.org.
• Highway Loss Data Institute -- publishes insurance injury, collision, and theft loss results for recent model passenger vehicles. 703/247-1500 or http://www.carsafety.org.
  

INSURANCE INSIGHTS is an electronic newsletter published monthly by G. C. Weimer Associates, Inc. Information contained herein is accurate to the best of our knowledge and belief as of 4/1/98. If you have a topic of interest for a future issue, e-mail us at info@gcwinsure.com.

|| Home || About GCW || Why GCW || Our Services || Performance Standards || People || Links ||

To contact G.C. Weimer Insurance Agencies, e-mail info@gcwinsure.com (please read this first).