Welcome to the first edition of iFRAUD, a column about insights into fighting fraud in the insurance industry. This column is dedicated to those waging the insurance fraud battle. Over the next year, I want to provide informative, practical material that will cross over all lines of insurance but will still be useful for those outside the industry. I invite your comments, suggestions, and column ideas. You can reach me at: email@example.com. Now let's talk about "zero-loss" insurance frauds.
Losing money without losing money
A zero-loss fraud is one in which a claim is submitted by an insured, the claim is denied, and no claim dollars are paid out, but there's suspicion that the claimant fraudulently attempted to obtain insurance benefits. Simply put, the insurance company suffers zero loss because they haven't paid a suspected fraudulent claim. However, it's not necessary for insurance companies to pay a suspected fraudulent claim to suffer a loss.
When claims are submitted to an insurance company, examiners may be required to spend a significant amount of money evaluating the validity of the claim. This may include an Independent Medical Exam (IME), Functional Capacities Exam (FCE), and obtaining medical records and other public documents. Interviews, investigation and surveillance may also be required to gather additional information about the claim or to corroborate or invalidate statements made by the claimant. Even though no claims dollars are paid out, there are expenses associated with investigating a fraudulent claim and these is an actual loss to the insurance company.
Consider this hypothetical example: Rusty Nale submits a worker's compensation claim stating that he was injured while working at his construction job. Rusty submits the normal forms and medical evidence in support of his claim. The claims examiner reviews all the documentation but there are several red flags. The medical records are inconclusive and don't support either Rusty's reported injury or his inability to return to work for his employer. So the claims examiner requests an Independent Medical Examination (IME) to get an unbiased medical opinion of Rusty's condition. While continuing to evaluate his claim, the examiner calls Rusty several times to get additional information but is unable to reach him during normal business hours. The examiner requests an investigation to assist in the evaluation of the claim, and surveillance is conducted over an extended period of time.
During the surveillance, the investigator follows Rusty to another construction site and determines that he's working full time for another construction company near his residence. The worker's comp carrier subsequently interviews Rusty about his claim. Rusty greatly exaggerates his condition and signs a statement denying that he's able to work. Based on the results of the IME exam, the surveillance investigation, employment information obtained from the construction company and Rusty's signed statement, the examiner denies his claim. No worker's comp benefits are paid to Rusty but the costs associated with investigating his claim exceed $10,000. Because the claim was submitted in a mandatory fraud reporting state, Rusty is referred to a law enforcement agency for prosecution consideration.
Getting a zero-loss fraud prosecuted can be difficult, because prosecutors in many jurisdictions consider money spent on the investigation of a suspicious claim to be part of the company's cost of doing business. That is coupled with the fact that some state insurance departments won't accept a referral for prosecution unless the suspected fraud exceeds a minimum fraud loss threshold. In those jurisdictions, if the carriers' actual fraud loss is zero because no claims dollars were ever paid out, it's unlikely that the agency is going to accept the case for prosecution consideration, no matter how much it actually cost the insurance company to investigate the fraudulent claim. Despite these hurdles, not all jurisdictions are the same and there are steps investigators can take to improve their chances of getting a zero-loss fraud case accepted and prosecuted.