A Brief Introduction to the Complexity of Insurance Fraud

Insurance fraud. It is an ugly business, but an increasingly profitable one. In fact, the California Department of Insurance estimates that insurance fraud costs Californians over $15 billion each year.¹ Insurance fraud includes a range of activities designed to generate illicit proceeds, from false claims activity to premium fraud and insider fraud.

False claims activity includes illegitimate claims for payment, padding legitimate claims for additional proceeds, and presenting misleading information or omitting material information from the insurer.² Premium fraud involves lying about the information the insurer uses to determine rates, such as the experience and risks associated with employee work.³ Insider fraud occurs when an insurance professional abuses the system.

Cases can be as simple as a single incident claim. An example of a common auto fraud case is a motorist who is uninsured or let an insurance policy lapse, suffers an accident, takes out an insurance policy, and then provides the insurance company false information about the date of the accident in order to obtain coverage. Another common example is a worker who suffered an injury off the job and then claims that the injury occurred on the job to obtain worker’s compensation coverage.

Fraud isn‘t limited to individuals, though. It can also involve complex organized rings where multiple members generate significant proceeds over years at a time. One common form is the staged accident ring. A former financial crimes manager for a United Kingdom insurer discussed organized auto fraud as “the most organized and costly” of insurance fraud schemes.⁴ The Federal Bureau of Investigation’s description of the most likely perpetrators provides insight into the way these schemes can be structured, referring to, “dishonest policyholders, insurance industry insiders (i.e., agents, brokers, company execs), and loosely organized networks of crooked medical professionals and attorneys who use their knowledge to bypass anti-fraud measures put in place by insurance companies.”⁵ A typical example involves purchasing, registering, and insuring a car, then crashing the car and submitting damage or medical claims, along with false statements about how the damage or injuries occurred. After collecting the insurance proceeds, the claim may be repeated by obtaining a policy with a different insurance company and submitting new claims regarding the damage.

California ranked among the four states with the highest per capita rates of organized fraud activity in the United States.⁶ A review of major headlines from Los Angeles alone reveals the arrest of 44 people in 1999,⁷ 20 people in 2006, ⁸ and 42 people in 2008 for organized ring activity.⁹ Such organized insurance fraud can involve funding for transnational crime and other nefarious organizations.

The current director of the Financial Crimes Enforcement Network (FinCEN) cited sophisticated fraud among other activities that fund transnational organized crime in her testimony before Congress in 2012 and stated, “one thing has become increasingly and unmistakably clear: Money is what motivates, and it is what empowers these groups.”¹⁰ Industry experts identified an alleged Armenian organized auto ring in Florida, an alleged Russian organized auto ring in New York, as well as an alleged Mafia organized auto ring in Italy.¹¹
Terror financing is also an emerging concern. The recent Northern California Fraud Investigators Association Conference featured a presentation on terrorist groups using organized insurance fraud for funding. The intergovernmental Financial Action Task Force recognized insurance fraud in its 2015 report, “Emerging Terrorist Financing Risks,” and cited an alleged organized auto fraud ring out of Spain funding West African terror organizations and the Islamic State.¹²

Though combating insurance fraud is a challenging endeavor, there are tools currently in place. California funds specialized units to ensure the resources necessary to identify, investigate, and prosecute these complex schemes.¹³ Additionally, mandatory reporting ensures that groups of suspicious claims can be tracked and investigated.
Insurers are required to report suspected fraud to the California Department of Insurance if they reasonably believe that fraud is occurring.¹⁴ The reporting requirement applies even if the insurance company decides that it will be cheaper to settle and pay the fraudulent claim rather than incur the cost of investigating and litigating a denial. These claims may be investigated individually and also used in claims databases to identify patterns of claims. Such databases help to expose organized schemes that mask activity through numerous small claims to multiple insurers in order to evade detection.

This article discusses only a select few of the many schemes of insurance fraud that occur. Given the large losses to the public and the potential use of those illegitimate proceeds to fund other criminal activities, law enforcement must keep up to date with insurance fraud offenses.

[1] Advisory Task Force on Insurance Fraud, “Reducing Insurance Fraud in California”
California Department of Insurance (May 2008) available at, http://www.insurance.ca.gov/0300-fraud/upload/FraudReport.pdf.
[2]Cal. Pen. Code §§ 550 (a) & (b).
[3]Cal. Ins. Code § 11760.
[4]Steve Barkhuizen, “Transnational crime gangs make fraud a global epidemic” Coalition Against Insurance Fraud (June 2014), available at http://www.insurancefraud.org/article.htm?RecID=3350#.V1Bj9_Z0xFo.
[5]Federal Bureau of Investigation, “Investigating Insurance Fraud: A $30-Billion-a-Year Racket” (Jan. 2012) available at, https://www.fbi.gov/news/stories/2012/january/insurance_013112.
[6]The other States were Michigan, Florida, and Nevada. Andrea McClain, “Organized Group Activity in Insurance Fraud: 2008-June 2012” National Insurance Crime Bureau Analytics Data Forecast Report (Dec. 2012) available at, https://www.nicb.org/newsroom/news-releases/organized-crime-and-insurance-fraud.
[7]Julie Ha, “44 Arrested in Statewide Auto Insurance Scam” LA Times (Aug. 1999) http://articles.latimes.com/1999/aug/11/local/me-64702
[8]Claims Journal “Twenty Arrested in Los Angeles for Alleged Insurance Fraud” (June 2006) http://www.claimsjournal.com/news/west/2006/06/23/69769.htm
[9]Los Angeles Police Department News Release “Major Fraud Ring Exposed” (Mar. 2008) http://www.lapdonline.org/south_bureau_news/news_view/37761
[10]Testimony before the U.S. House of Representatives Subcommittee on Crime, Terrorism, and Homeland Security, Committee on the Judiciary, Jennifer Shasky, Chief, Asset Forfeiture and Money Laundering Section, U.S. Department of Justice, February 8, 2012, available at, http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg72786/html/CHRG-112hhrg72786.htm.
[11] Barkhuizen (June 2014)
[12]FATF Report, “Emerging Terrorist Financing Risks,” Financial Action Task Force (Oct. 2015) available at, http://www.fatf-gafi.org/media/fatf/documents/reports/Emerging-Terrorist-Financing-Risks.pdf.
[13]Cal. Ins. Code § 1874.8
[14]Cal. Ins. Code § 1872.4(a)