Media coverage on the high cost of fraudulent claims to insurers and insureds alike has been extensive. But the fight against fraud is also costly, and more so if punitive damages are awarded as a result of mistakes in the claims investigation process.
Most types of insurance require that insureds submit financial documentation in support of their applications and claims. While it is not new that documents are altered, forged or simply fabricated to support claims, the use of electronic tools has increased the temptation and the opportunity to do so. Adjusters are the first line of defense, identifying red flags and inconsistencies in financial documentation can help recognize fraud, while avoiding punitive damages for bad faith.
Requesting and reviewing financial documentation
Requesting documentation that is both within the scope of a claim and comprehensive can be complicated. More so, understanding what you are looking at when you receive the documentation can, at times, be even more complicated. Advantage: Fraudster.
A good first step for requesting documentation is to utilize the no cost tools offered by your forensic accountant, and the custom templates that they offer. But this still leaves the review, and here, red flag identification is crucial.
In the case of an employed individual, document manipulation can be easy. Whether it is changing the dates or numbers on tax returns and notices of assessment, the amounts or signatures on cheques, or creating pay statements that never existed, manipulations can easily go undetected without a trained eye.
A simple and common example is cheque manipulation. When photocopied and modified, often the fraudster will not modify the magnetic ink character recognition (MICR) line — the printed numbers on the bottom of a cheque, which provides details about the bank account and the cheque amount. This is a clear sign of intentional misrepresentation or fraud, and easily identifiable. But identification requires the adjuster to be better trained in reading the documents than the insured.
Education and training are key to identifying all schemes, including inflation of wages or the creation of phantom employers. The latter attempts to show that the insured was employed at the date of loss when in fact they were not. The following is a partial list of red flags, which may indicate these types of fraud:
• Discrepancies between the employer and employee regarding job details, start and end dates, wages, or method of payment;
• discrepancies in reported wages to other entities, such as CRA or WSIB;
• dates on cheques paid to the insured are out of sequence with the cheque number;
• business search shows familial relationship between employee and employer;
• employer’s business cannot be easily located;
• employer is hard to reach or is uncooperative; and
• suspicious documents, such as copies showing evidence of erasures or other changes.
For a self-employed insured, the volume of documentation can be significantly larger, as is the potential for greater fraudulent behaviour. Whether a property or auto claim, a common starting point for documentation review is the financial statements. These provide high-level information about the current state of the business, but can also hide the truth as it relates to a claim, even if they are accurate.
For example, an insured may claim that his business revenue declined as a result of fire, which is supported by the average sales in the prior year. However, monthly financial statements may show that the business has seasonal trends, and that the sales decrease is unrelated to the fire. An inexperienced investigator may not think to look, or know what to look for, beyond the annual financial statements. Again, education is key to battling fraud.
Some additional red flags for self-employed claims include:
• Certain business expenses supposedly continue when the person is reportedly not working;
• hidden income or business interests surface;
• a new related business is started by the insured, or the insured’s family;
• wages paid to family or friends com mence or increase;
• inventory records show damaged/stolen items were obsolete; and
• altered or incomplete documentation and date discrepancies.
Red flags require an understanding both of the nature of the business as well as the individual documents being reviewed. Without one, the story is clouded.
Document modifications may not always be clear, and so inconsistencies in the documentation and story are another important way of identifying fraud. For example, a garbage disposal business owner states that his injuries have restricted his marketing activities resulting in declining revenue. However, an examination of the financial statements shows that following the accident, the business purchased two new trucks and container bins. The purchase of these fixed assets may or may not be inconsistent with the claim of declining revenue, but identification of this inconsistency is required to prompt further investigation.
In some cases there may be reasons for apparent inconsistencies, which should be investigated objectively, and accepted if they are logical and supported by documents. For example, real estate agents may continue to receive income following an accident although they are not working. This often relates to sales prior to the accident for which commissions are received months later.
The examples and red flags provided above for both employed and self-employed insureds are not comprehensive. However, they do show that if insureds have more knowledge and understanding of their financial documentation than the adjusters, it will be difficult to identify intentional misrepresentation, fraud and inconsistencies. But identification of suspected fraud is just the first step.
Steps to avoid punitive damages
A key to avoiding punitive damages for bad faith claims is maintaining objectivity, and this starts with the implementation of early-stage fraud identification and investigation policies, which may include:
• Claims-handling protocols for the fraud identification process;
• an investigation methodology that allows for a comprehensive review while staying within the scope of the claim;
• procedures which enable an adjuster to reconsider a position based on new evidence;
• consistent review of files by colleagues, supervisors or claims committees; and,
• steps to take after an error in an investigation.
For example, an adjuster who unilaterally presses an insured to provide documents that are not clearly relevant to the claim, such as for a period not directly related to the loss, may expose themselves to punitive damages. Appearing to be on a “fishing expedition” is clearly not objective. In all situations, requests for documentation should be reasonable and justifiable.
A well-developed investigation policy allows and encourages adjusters to reconsider their position based on the most current information. Combine this with a well-educated adjusting team and an understanding of when to use experts, and the opportunity for fraudsters to profit or costs to escalate from punitive damage is minimized.
Michael Sigsworth and Darrell Sherman are founding principals at ADS Forensics.