Blatant Fraud Pushing Up The Cost of Car Insurance
By PETER KERR
Published: February 6, 1992
Some mornings, people in Lawrence, Mass., have awakened to see the top of a car jutting above the surface of the Merrimack River. On inspection, police divers have found that so many people dumped their cars into the river, to file false stolen-car claims, that the last car in the night before had fallen onto a stack of others and would not sink.
Lawrence is just one example of how auto insurance fraud has become increasingly widespread and blatant in many areas of the United States: Regulators and researchers say that fraud is now far more common and costly to the nation than the insurance industry estimates, and that the industry is doing relatively little to combat it. A Difference in Estimates
Critics say fraud has been an important force in pushing up the premiums Americans have to pay for auto insurance, from $40 billion to $100 billion since 1980, and that fraudulent claims — everything from reporting accidents that never happened, to exaggerated car damage to faked injuries — have been paid out with little challenge or investigation.
In Massachusetts, the insurance commissioner estimates that fraud and abuse account for as much as 40 percent of auto insurance claims, and a recent study shows that approximately 90 percent of injury claims in Lawrence involved either fraud or severe abuse.
The insurance industry has long estimated fraud at 10 percent of auto claims filed.
In New York, the Nassau County police have concluded that 50 to 60 percent of the hundreds of people who report their cars stolen from the Green Acres shopping mall in Valley Stream, L.I., have actually abandoned or destroyed them for the insurance money, Lieut. Lawrence Mulvey said. One out of four shoppers reporting cars stolen there is being arrested for fraud, he said, and as many as seven out of ten people who come to the nearby precinct with such reports — doctors, teachers, even a corrections officer — wind up being arrested themselves.
“Ordinary people come in and say things like, ‘Hey, they just stole my car while I was shopping at Macy’s’ — only problem is there’s no Macy’s there,” Lieutenant Mulvey said.
The insurance companies have rarely lost much money on fraud because, the critics say, they could often pass the costs on to the public in the form of higher premiums. The companies deny this.
“I would say that the insurance industry’s excitement quotient on pursuing fraud on a scale of one to ten is minus one,” said Tim Ryles, the insurance commissioner of Georgia and chairman of the antifraud committee of the National Association of Insurance Commissioners. “I think there is a lot of frenetic surface activity, but not a lot of activity to do anything about it.”
Major insurance companies bitterly dispute such criticism. They are increasing their attention to fraud, they say, but are limited by the costs of investigations and the threat of lawsuits if they refuse to pay legitimate claims promptly. They argue, too, that the prosecutors and law-enforcement agencies, often confronted with more pressing crimes of violence, lack real interest in fighting fraud. Only eight states have insurance departments with fraud bureaus.
Furthermore, the public cannot expect private insurance companies to solve the fraud problem, they say, when fraud seems accepted by so much of the public.
“The insurance industry is doing as much as it can,” said William Schroeder, a vice president of the Alliance of American Insurers, a trade association of 170 property and casualty companies. “We are already an industry under siege.” Lax Enforcement Tempts the Public
For whatever reason, the number of cases insurance companies referred to the industry agency that investigates fraud and assists law enforcement agencies, the Insurance Crime Prevention Institute, were less than one-fiftieth of 1 percent of the more than 50 million auto insurance claims filed in the United States in 1991. The institute investigated 1,616 cases and its investigations led to 770 arrests.
It may be that because so few cases are investigated or punishments handed out that many otherwise law-abiding citizens see car insurance policies as tickets to tax-free cash.
In Nassau County, for example, Wendell Augustine, a United Parcel Service truck mechanic from Rosedale, Queens, told police officers on Sept. 6, 1990, that someone had taken his 1984 Cadillac while he was at the movies. After Mr. Augustine failed to recall what movie he had seen, he admitted the attempted fraud. But he was dismissed from court with neither fine nor jail sentence, though most people are fined about $250.
In Philadelphia, Miami, New York City, Southern California and other areas, the police or local authorities say one of every five stolen car reports is false. Industry spokesmen say urban areas like these and eastern Massachusetts are higher than the rest of the nation.
But a new estimate by a consulting firm to insurance companies, the Quality Planning Corporation of Oakland, Calif., puts the cost of fraud at 27 percent of total dollars paid out nationally on all auto insurance claims.
The issue goes beyond the increases in the cost of insurance that has prompted consumer revolts across the country. It also raises questions, experts say, of how an industry that charges $400 billion a year in premiums is going to respond to rising evidence of fraud in many types of insurance. And it illustrates how the insurance system, designed to distribute risk, has evolved into a system that often diffuses ethical responsibility.
Massachusetts perhaps suggests the scope of the problem. A 1991 study of the bodily injury liability claims by automobile insurers in the state found that 46 percent of claims there in 1989 involved apparent fraud or “building up” of medical claims, up from 32 percent in 1986.
Lawrence, a municipality of 80,000 people with the worst reported auto theft rate in the state, was a focal point of the study. It found apparent fraud or abuse there in 88.5 percent of the bodily injury claims.
Accidents had not increased much in the 1980’s, but the number of bodily injury claims had grown fourfold in six years. Nearly one in ten cars in the city was reported stolen in 1990.
“It was so blatant the insurers should have seen a red flag,” said Mayor Kevin J. Sullivan of Lawrence. “But they were paying these claims without proper investigation and then billing all that to the motorists of the state. And criminals, lawyers, chiropractors and ordinary people saw no reason not to file claims.”
The Quality Planning Corporation, in estimating fraud at 27.3 percent of dollars paid out for auto claims nationwide, bases its conclusions on interviews with 120 government and private auto-fraud specialists and on accident reports, medical records and academic research. The company’s study says that out of every $100 that consumers pay in automobile insurance premiums, $2.20 goes to body shop overbilling; $2.15 to charges for damage that existed before accidents took place; $6.70 to faked thefts; $2 to staged accidents or fictional accidents, and $8.50 to exaggeration of soft-tissue injuries in third party claims.
Much of the rise in the cost of auto insurance can, certainly, be attributed to factors besides fraud, such as legitimate legal, medical and repair fees. But consumer advocates and others say that fraud is an element that can in part be controlled, and that the insurance companies have been slow to act. Some Programs Attack the Problem
The Massachusetts experience is also instructive on the matter of attacking the problem. An industry group newly formed to combat fraud has given the Lawrence police $480,000 to help investigate suspicious claims. The program, set up last year, has already resulted in a drop of 36 percent in reported thefts and 15 percent in reported accidents.
In California, some progress has been made as well, and law-enforcement authorities say some companies there, too, are helping. A 40-member ring operating outside illegal gambling parlors in the Los Angeles area was broken up last spring after it collected more that $50 million in phony claims for staged traffic accidents, according to prosecutors. Runners had been placed outside the gambling parlors to offer losers $1,000 each to use their identification and insurance policy numbers to file false accident claims.
Still, the ring was discovered only when a recruiter approached a poker-club security guard and the guard notified the police.
Daniel Finnegan and Gail Simpson, economists at Quality Planning, say in a forthcoming issue of Best Review, an industry publication, that claims filed by the California ring — 1,000 a year — went undetected by insurers because adjusters were overwhelmed by cases, undertrained to detect fraud and given little incentive to do so. By contrast, the ring had lawyers, doctors and professional criminals with years of experience in staging fake accidents on their side.
“The fraud game is like a showdown between the 49ers and the St. Mary’s Junior High School football team,” the two economists write. Adjusters nationally had less than seven hours on average to devote to any given claim; the average bodily injury adjuster has from 100 to 300 pending cases, and has little face-to-face contact with claimants.
Frank E. Doolittle, director of the fraud division of the Florida Insurance Department, said that among the insurance companies “there seems to be a philosophy that as long as they have the money to cover their losses, they shouldn’t refer a case to us.”
The companies deny that they can cover heavy fraud losses or that they can simply pass those costs along to consumers in higher premiums because, they say, their own competitors, and often state regulators, prevent this. Bribes Offered In New Jersey
In New Jersey, State Department of Insurance investigators recently visited 176 auto-body shops, posing as customers and insurance adjusters: 23 “customers” and 27 “adjusters” were offered bribes in exchange for helping the shops inflate insurance claims, the department said. Yet over the last three years, the department says it has not received one complaint from an insurance company in the state of a body shop offering an adjuster a bribe.
Spokesmen for the nation’s largest carriers of automobile insurance said they had greatly improved their capacity to stop fraud in recent years, particularly by enlarging their specially trained antifraud investigative units. For example, the nation’s second- largest auto insurer, Allstate, says that it plans to double the number of its antifraud units this year. And they insisted that corruption among adjusters was not, generally, a problem.
The Finnegan-Simpson article estimates, however, that the special investigative units at current staffing levels can only investigate about one-tenth of 1 percent, or 1 in 10,000 claims submitted.
Statistics from companies indicate that at least some do slightly better. Nationwide Insurance of Columbus, Ohio, which processed more than one million automobile insurance claims in 1990, said its special investigators unit handled 3,600 cases in that year, or 3.6 claims in 10,000. The investigations resulted in reduced payments on 2,700 claims, the denial of 620 claims, and referral of 101 claims to law enforcement officials. At USAA of San Antonio, the antifraud units handled about three of every 10,000 claims the company processed.
Sean Mooney, a spokesman for the Insurance Information Institute, an industry group, says many companies see pursuing fraud as prohibitively expensive, although they do operate data-base systems that they make available to the police. But other companies say antifraud programs can, in fact, pay for themselves and, when operated competently, do not result in the denial of claims to honest policyholders.
Nationwide, for one, estimates that the $4 million it spent on antifraud operations in 1990 yielded $16 million in savings from denied or reduced fraudulent claims.
The Robert Plan Corporation of Lynbrook, L.I., specializes in the difficult markets, insuring assigned-risk drivers in New York, New Jersey, Florida, Massachusetts and California. And it makes that business profitable, in large part by scrutinizing suspicious claims, said Brian Duffy, the president of the company’s California operation.
“Many companies say, ‘I’m going to have to spend so much money defending this, therefore I’m going to settle for $4,000 to $5,000,’ ” Mr. Duffy said. “Well, then you are going to get another one from the same lawyer the next week.”
Photo: The New York City Police Department’s Auto Crime Unit inspects auto parts yards in the city to check, by serial number, for evidence of fraudulent stolen car claims and for parts from stolen vehicles. One in four of the auto theft reports they investigate, they say, turns out to be fraudulent. Above, some of the unit’s officers at a parts yard in the Bronx. (Fred R. Conrad/The New York Times) (pg. D6) Graphs: “Increasing Deception” shows percentage of fraudulent claims filed and buildup (exagerated medical expenses) claims filed from ’86-’87, and ’89. (Source: Insurance Fraud Bureau of Massachusetts); “Rising Premiums” shows the change inpersonal and commercial auto insurance premiums compared with the consumer price index from 1980-1991. (Source: Insurance Information Institute) (pg. D6)
Feb 6 1992
QPC featured in New York Times Article on Auto Insurance Fraud
Blatant Fraud Pushing Up The Cost of Car Insurance
By PETER KERR
Published: February 6, 1992
Some mornings, people in Lawrence, Mass., have awakened to see the top of a car jutting above the surface of the Merrimack River. On inspection, police divers have found that so many people dumped their cars into the river, to file false stolen-car claims, that the last car in the night before had fallen onto a stack of others and would not sink.
Lawrence is just one example of how auto insurance fraud has become increasingly widespread and blatant in many areas of the United States: Regulators and researchers say that fraud is now far more common and costly to the nation than the insurance industry estimates, and that the industry is doing relatively little to combat it. A Difference in Estimates
Critics say fraud has been an important force in pushing up the premiums Americans have to pay for auto insurance, from $40 billion to $100 billion since 1980, and that fraudulent claims — everything from reporting accidents that never happened, to exaggerated car damage to faked injuries — have been paid out with little challenge or investigation.
In Massachusetts, the insurance commissioner estimates that fraud and abuse account for as much as 40 percent of auto insurance claims, and a recent study shows that approximately 90 percent of injury claims in Lawrence involved either fraud or severe abuse.
The insurance industry has long estimated fraud at 10 percent of auto claims filed.
In New York, the Nassau County police have concluded that 50 to 60 percent of the hundreds of people who report their cars stolen from the Green Acres shopping mall in Valley Stream, L.I., have actually abandoned or destroyed them for the insurance money, Lieut. Lawrence Mulvey said. One out of four shoppers reporting cars stolen there is being arrested for fraud, he said, and as many as seven out of ten people who come to the nearby precinct with such reports — doctors, teachers, even a corrections officer — wind up being arrested themselves.
“Ordinary people come in and say things like, ‘Hey, they just stole my car while I was shopping at Macy’s’ — only problem is there’s no Macy’s there,” Lieutenant Mulvey said.
The insurance companies have rarely lost much money on fraud because, the critics say, they could often pass the costs on to the public in the form of higher premiums. The companies deny this.
“I would say that the insurance industry’s excitement quotient on pursuing fraud on a scale of one to ten is minus one,” said Tim Ryles, the insurance commissioner of Georgia and chairman of the antifraud committee of the National Association of Insurance Commissioners. “I think there is a lot of frenetic surface activity, but not a lot of activity to do anything about it.”
Major insurance companies bitterly dispute such criticism. They are increasing their attention to fraud, they say, but are limited by the costs of investigations and the threat of lawsuits if they refuse to pay legitimate claims promptly. They argue, too, that the prosecutors and law-enforcement agencies, often confronted with more pressing crimes of violence, lack real interest in fighting fraud. Only eight states have insurance departments with fraud bureaus.
Furthermore, the public cannot expect private insurance companies to solve the fraud problem, they say, when fraud seems accepted by so much of the public.
“The insurance industry is doing as much as it can,” said William Schroeder, a vice president of the Alliance of American Insurers, a trade association of 170 property and casualty companies. “We are already an industry under siege.” Lax Enforcement Tempts the Public
For whatever reason, the number of cases insurance companies referred to the industry agency that investigates fraud and assists law enforcement agencies, the Insurance Crime Prevention Institute, were less than one-fiftieth of 1 percent of the more than 50 million auto insurance claims filed in the United States in 1991. The institute investigated 1,616 cases and its investigations led to 770 arrests.
It may be that because so few cases are investigated or punishments handed out that many otherwise law-abiding citizens see car insurance policies as tickets to tax-free cash.
In Nassau County, for example, Wendell Augustine, a United Parcel Service truck mechanic from Rosedale, Queens, told police officers on Sept. 6, 1990, that someone had taken his 1984 Cadillac while he was at the movies. After Mr. Augustine failed to recall what movie he had seen, he admitted the attempted fraud. But he was dismissed from court with neither fine nor jail sentence, though most people are fined about $250.
In Philadelphia, Miami, New York City, Southern California and other areas, the police or local authorities say one of every five stolen car reports is false. Industry spokesmen say urban areas like these and eastern Massachusetts are higher than the rest of the nation.
But a new estimate by a consulting firm to insurance companies, the Quality Planning Corporation of Oakland, Calif., puts the cost of fraud at 27 percent of total dollars paid out nationally on all auto insurance claims.
The issue goes beyond the increases in the cost of insurance that has prompted consumer revolts across the country. It also raises questions, experts say, of how an industry that charges $400 billion a year in premiums is going to respond to rising evidence of fraud in many types of insurance. And it illustrates how the insurance system, designed to distribute risk, has evolved into a system that often diffuses ethical responsibility.
Massachusetts perhaps suggests the scope of the problem. A 1991 study of the bodily injury liability claims by automobile insurers in the state found that 46 percent of claims there in 1989 involved apparent fraud or “building up” of medical claims, up from 32 percent in 1986.
Lawrence, a municipality of 80,000 people with the worst reported auto theft rate in the state, was a focal point of the study. It found apparent fraud or abuse there in 88.5 percent of the bodily injury claims.
Accidents had not increased much in the 1980’s, but the number of bodily injury claims had grown fourfold in six years. Nearly one in ten cars in the city was reported stolen in 1990.
“It was so blatant the insurers should have seen a red flag,” said Mayor Kevin J. Sullivan of Lawrence. “But they were paying these claims without proper investigation and then billing all that to the motorists of the state. And criminals, lawyers, chiropractors and ordinary people saw no reason not to file claims.”
The Quality Planning Corporation, in estimating fraud at 27.3 percent of dollars paid out for auto claims nationwide, bases its conclusions on interviews with 120 government and private auto-fraud specialists and on accident reports, medical records and academic research. The company’s study says that out of every $100 that consumers pay in automobile insurance premiums, $2.20 goes to body shop overbilling; $2.15 to charges for damage that existed before accidents took place; $6.70 to faked thefts; $2 to staged accidents or fictional accidents, and $8.50 to exaggeration of soft-tissue injuries in third party claims.
Much of the rise in the cost of auto insurance can, certainly, be attributed to factors besides fraud, such as legitimate legal, medical and repair fees. But consumer advocates and others say that fraud is an element that can in part be controlled, and that the insurance companies have been slow to act. Some Programs Attack the Problem
The Massachusetts experience is also instructive on the matter of attacking the problem. An industry group newly formed to combat fraud has given the Lawrence police $480,000 to help investigate suspicious claims. The program, set up last year, has already resulted in a drop of 36 percent in reported thefts and 15 percent in reported accidents.
In California, some progress has been made as well, and law-enforcement authorities say some companies there, too, are helping. A 40-member ring operating outside illegal gambling parlors in the Los Angeles area was broken up last spring after it collected more that $50 million in phony claims for staged traffic accidents, according to prosecutors. Runners had been placed outside the gambling parlors to offer losers $1,000 each to use their identification and insurance policy numbers to file false accident claims.
Still, the ring was discovered only when a recruiter approached a poker-club security guard and the guard notified the police.
Daniel Finnegan and Gail Simpson, economists at Quality Planning, say in a forthcoming issue of Best Review, an industry publication, that claims filed by the California ring — 1,000 a year — went undetected by insurers because adjusters were overwhelmed by cases, undertrained to detect fraud and given little incentive to do so. By contrast, the ring had lawyers, doctors and professional criminals with years of experience in staging fake accidents on their side.
“The fraud game is like a showdown between the 49ers and the St. Mary’s Junior High School football team,” the two economists write. Adjusters nationally had less than seven hours on average to devote to any given claim; the average bodily injury adjuster has from 100 to 300 pending cases, and has little face-to-face contact with claimants.
Frank E. Doolittle, director of the fraud division of the Florida Insurance Department, said that among the insurance companies “there seems to be a philosophy that as long as they have the money to cover their losses, they shouldn’t refer a case to us.”
The companies deny that they can cover heavy fraud losses or that they can simply pass those costs along to consumers in higher premiums because, they say, their own competitors, and often state regulators, prevent this. Bribes Offered In New Jersey
In New Jersey, State Department of Insurance investigators recently visited 176 auto-body shops, posing as customers and insurance adjusters: 23 “customers” and 27 “adjusters” were offered bribes in exchange for helping the shops inflate insurance claims, the department said. Yet over the last three years, the department says it has not received one complaint from an insurance company in the state of a body shop offering an adjuster a bribe.
Spokesmen for the nation’s largest carriers of automobile insurance said they had greatly improved their capacity to stop fraud in recent years, particularly by enlarging their specially trained antifraud investigative units. For example, the nation’s second- largest auto insurer, Allstate, says that it plans to double the number of its antifraud units this year. And they insisted that corruption among adjusters was not, generally, a problem.
The Finnegan-Simpson article estimates, however, that the special investigative units at current staffing levels can only investigate about one-tenth of 1 percent, or 1 in 10,000 claims submitted.
Statistics from companies indicate that at least some do slightly better. Nationwide Insurance of Columbus, Ohio, which processed more than one million automobile insurance claims in 1990, said its special investigators unit handled 3,600 cases in that year, or 3.6 claims in 10,000. The investigations resulted in reduced payments on 2,700 claims, the denial of 620 claims, and referral of 101 claims to law enforcement officials. At USAA of San Antonio, the antifraud units handled about three of every 10,000 claims the company processed.
Sean Mooney, a spokesman for the Insurance Information Institute, an industry group, says many companies see pursuing fraud as prohibitively expensive, although they do operate data-base systems that they make available to the police. But other companies say antifraud programs can, in fact, pay for themselves and, when operated competently, do not result in the denial of claims to honest policyholders.
Nationwide, for one, estimates that the $4 million it spent on antifraud operations in 1990 yielded $16 million in savings from denied or reduced fraudulent claims.
The Robert Plan Corporation of Lynbrook, L.I., specializes in the difficult markets, insuring assigned-risk drivers in New York, New Jersey, Florida, Massachusetts and California. And it makes that business profitable, in large part by scrutinizing suspicious claims, said Brian Duffy, the president of the company’s California operation.
“Many companies say, ‘I’m going to have to spend so much money defending this, therefore I’m going to settle for $4,000 to $5,000,’ ” Mr. Duffy said. “Well, then you are going to get another one from the same lawyer the next week.”
Photo: The New York City Police Department’s Auto Crime Unit inspects auto parts yards in the city to check, by serial number, for evidence of fraudulent stolen car claims and for parts from stolen vehicles. One in four of the auto theft reports they investigate, they say, turns out to be fraudulent. Above, some of the unit’s officers at a parts yard in the Bronx. (Fred R. Conrad/The New York Times) (pg. D6) Graphs: “Increasing Deception” shows percentage of fraudulent claims filed and buildup (exagerated medical expenses) claims filed from ’86-’87, and ’89. (Source: Insurance Fraud Bureau of Massachusetts); “Rising Premiums” shows the change inpersonal and commercial auto insurance premiums compared with the consumer price index from 1980-1991. (Source: Insurance Information Institute) (pg. D6)
By Daniel • Work