Small businesses should be wary of various insurance scams

Due to the nature of the insurance business, the opportunities for fraud are legion. Pay particular attention to insurance claims relating to autos, health, worker's compensation, and, workplace accidents.

Insurance is an industry based on the distribution of risk. You insure a piece of property, for example, your car, for a premium payment of $700 a year. If you suffer a loss of the use of that property due to an accident, your insurance company will make you whole, minus any deductible.

While insurance is a necessity to protect us against losses that can devastate us, workers' compensation, health, vehicle and other property insurance, and agent and underwriting duties provide the ideal circumstances for various types of fraud.

Agents and underwriters have opportunities to commit fraud

Agents and underwriters have endless opportunities to defraud both insureds and insurers.

The fraud: Premium frauds, settlement check diversions, false death claims, false statements and misrepresentations, and the creation of fictitious policies are but a few of The frauds committed by agents and underwriters. And while the most newsworthy might be going South with a huge premium instead of paying it over to the carrier, there are other, more subtle ways to defraud as well:

• Sliding is a term used to describe The fraudulent practice of agents packing policies with extra coverages unknown and unneeded by the insured, thus reaping larger commissions.
• Churning is a situation in which an agent convinces a customer that he can get additional coverage for free using the "build up" value in their original policy. The truth is that extra insurance can be very expensive.
• Twisting is where an agent replaces policies with new ones, thus earning the higher commission for first-year premiums.

The flaw: Insurance salesmen can be very persuasive, and their jargon very perplexing. Insurance frauds come about when buyers fail to understand what they're getting, or agree to buy something and sign a contract that has blank spaces, or tend to trust that the charming agent is looking out for their interests instead of his own.

The fix: Caution and vigilance is needed on the part of the buyer. If you don't understand it, don't buy it. If it's not spelled out in writing, don't buy it. If it sounds too good to be true . . .(say it out loud) it is!

Vehicle insurance schemes abound

There's an endless variety in vehicle insurance frauds and we all pay for them in the form of ever-increasing premiums.

The fraud: Here are but a few examples of vehicle insurance fraud:

• A body shop inflates the damage report to include the deductible and tells the customer he'll just accept what the insurance company pays -- no deductible necessary. Then the shop and the adjuster split the inflated portion.
• A Swoop & Squat is a scam where two cars pass the victim at a high rate of speed. The lead car cuts off the second car, which is usually full of people, causing that car to stop abruptly and the victim car to rear-end him. The victim almost always admits responsibility. The car he hit claims body damage plus a variety of personal injuries to the passengers.
• A car is "ditched" in the hope that it will be stolen, stripped in a chop shop, and disappear. It's reported stolen and a claim is filed with the insurance company.
• A body shop bills for new parts, but installs used parts. There may be collusion with the customer or the adjuster, or it may be just a solo rip-off.

The flaw: It's hard to tell if an accident is staged unless you are a trained observer or The fraudsters try it once too often.

As far as the switching of used parts when you're paying for new ones, unless you're a professional, you would not likely be able to tell if parts were genuine new or used from a junkyard.

The fix: Being a careful driver and a savvy consumer of auto services can help your insurance company keep your premiums down.

Property and casualty scams take many forms

Property and casualty scams have been around for ages and can succeed if business owners let their guard down. Claims for non-existent property, overstated losses and the old 'slip and falls' are all too common examples of property and casualty scams. 

The fraud: My car somehow caught fire and was a total loss. Did I mention that my priceless violin was in the back seat? Oh well, I'm insured for contents.

Jack made a big sale in the middle of the month and his inventory was reduced to almost nothing. But then there was that huge fire, and somehow those goods that were sold never got taken off the inventory records before the insurance claim was made.

Pepe sends his insurance guy a copy of the paperwork for a boat and buys substantial coverage for it. Sadly, he soon reports the vessel sank in quite deep water during a fishing trip.

A major hotel receives notice of a lawsuit from a person who claims to have slipped on water carelessly left on the lobby floor, causing her to fall and injure her back.

The flaw: Violin and inventory ashes don't make for good evidence of fraud. How can an insurance firm prove these items never existed?

A bill of sale and title to a boat won't float. How can an insurance firm prove the boat never existed when it allegedly sank in deep water?

Un-witnessed slip and fall claims almost always end in a settlement. The cost of contesting the litigation is too high.

The fix: For expensive items, insurance firms should demand to see and touch the goods they're insuring, but this is often impractical. Unfortunately, these frauds are, like so many others, counted as a cost of doing business, and the public pays higher premiums to cover the false claims.

Life insurance fraud is rare

Some scams can be a life-and-death issue. especially when it comes to life insurance fraud.

The fraud: Murder for profit sounds movie script-ish, but it's done. It is assumed that many deaths termed accidental or suicides are actually murders for profit -- but nobody, of course, can prove how many get away with this.

And yes, a stranger can indeed insure your life -- not legally but it's certainly done. Phony death certificates are easily manufactured. It's illegal these days for a funeral home to mail certificates lest they fall into fraudster hands.

The flaw: Agents selling life contracts can be in collusion with The fraudster or perhaps just sloppy in documenting the veracity of the application. Small death claims are rarely contested, so if The fraudsters are not too greedy, they might just get away with false death claims.

The fix: Diligent follow-up of even minimally suspicious claims would catch the amateur fraudsters. Any offshore deaths should be considered suspicious. Computer programs can sometimes catch duplicated addresses or Social Security numbers when a crook becomes sloppy and reuses them.

Identifying and preventing workers' compensation fraud

Although only a small fraction of workers' compensation claims are fraudulent, the cases that do occur are expensive.

There are two basic types of workers' compensation fraud:

• Employer fraud (sometimes with agents)
• Employee fraud (sometimes with providers or attorneys)

Employer fraud. Employer fraud, also commonly called premium fraud, are those acts of fraud--including under-reporting payroll, misclassification of employees' duties, and experience modification evasion--committed by an employer, for the purpose of reducing premium liability.

Employee fraud. When you suspect you may be dealing with employee fraud, there is a long list of factors to consider as warning signs of possible employee workers' compensation fraud. Among them are the following:

• the injured worker has an unstable work history; i.e., an employee who often changes jobs
• the claimant has a history of reporting subjective injuries which may include workers' compensation or liability claims
• the claimant is consistently uncooperative
• the injured worker has been recently terminated, demoted, or passed over for a promotion
• the injured worker is in line for early retirement
• the injured worker is making excessive demands
• the injured worker calls soon after the injury and presses for a quick settlement of the case
• the injured worker moves out of state soon after the injury
• the injured worker changes his or her address to a post office box or receives mail via a friend or relative

You may not discriminate against a worker who has filed previous workers' compensation claims. However, when you have several behaviors present or you observe an emerging pattern, don't be afraid to investigate further for possible fraud or to forward your suspicions to the appropriate authority.

The workplace may have these factors present:

• the injured worker's workplace is experiencing labor difficulties
• the accident occurs just prior to job termination, layoff, after formal discipline of the employee, or near the end of the employee's probationary period

The injury situation may be described in one or more ways:

• the injured worker was not injured in the presence of witnesses
• the injury is a subjective one, like stress, emotional trauma, or is hard to prove, like back pain, headache, insomnia, etc.
• the accident is not promptly reported by the employee to the employer
• the employers' first notice of the injury is from an attorney or a medical clinic, and not from the injured worker
• physicians who have examined the injured worker have vastly differing opinions regarding the injured worker's disability
• there is no sound medical basis for the disability; all physicians' reports indicate a full recovery
• the injured worker is claiming disability exceeding that which is normally consistent with such an injury
• the accident occurs late Friday afternoon or shortly after the employee reports to work on Monday
• the claimant has the accident at an odd time, such as at lunch hour
• the accident occurs in an area where the injured employee would not normally be
• the task that caused the accident is not the type that the employee should be involved in; i.e., an office worker who is lifting heavy objects on a loading dock
• the details of the accident are vague or contradictory

The medical relationship can be described in one or more of the following ways:

• the claimant frequently changes physicians or medical providers
• the claimant changes physicians when a release for work has been issued
• a review of medical reports provides information that is inconsistent with the appearance or behavior of an injured person; i.e., a rehabilitation report describes the claimant as being muscular, with callused hands and grease under the fingernails
• the employer's first report of injury contrasts with the description of the accident set forth in the medical history
• the injured worker develops a pattern of missing physician's appointments

The claim itself, or the claimant's attorney, may act in these ways:

• the injured worker's attorney requests that all checks and correspondence be sent to the attorney's office
• the claimant's attorney is known for handling suspicious claims
• the attorney lien or representation letter is dated the day of the reported accident
• the same doctor/lawyer combination previously known to handle the same kind of injury is handling this claim
• the claimant is unusually familiar with workers' compensation claims-handling procedures and laws
• the claimant's attorney complains to the carrier's CEO at the home office to press for payment
• the claimant initially wants to settle with the insurer, but later retains an attorney and files increasingly subjective complaints
• the claimant's attorney threatens further legal action unless a quick settlement is made
• there is a high number of applications from a specific firm
• the claimant's attorney inquires about a settlement or buyout early in the life of the claim
• the claimant writes unsolicited statements about how much better he/she is, but treatment continues and the claimant doesn't return to work

Outside activities can sound the alarm of fraud:

• there are tips from fellow employees, friends, or relatives suggesting that the injured worker is either working or is active in sports
• the injured worker's rehabilitation report shows evidence of other activity
• the injured worker is in a trade that would make it possible to otherwise work while collecting compensation
• the injured worker is exaggerating an injury in order to get time off to work on personal interests; i.e., the injured worker is remodeling or building a home concurrently with the injury
• the injured worker is in a seasonal business that would make it attractive to be "injured" during the off-season; i.e., occupations in fields such as roofing, landscaping, plumbing, farming, masonry, etc.
• the injured worker leaves different daytime and evening telephone numbers
• the injured worker is never home when called or is always "sleeping and can't be disturbed" (especially during work hours)
• return calls to the claimant's residence have strange or unexpected background noises that indicate it may not be a residence
• the claimant has several other family members also receiving workers' compensation benefits or other "social insurance" benefits, such as unemployment

Fraudulent workers' compensation claims cut into your business's productivity, and can send your workers' compensation premiums sky-high. By being sensitive to the possibility that any claim might be fraudulent, you reduce your risk that a fraudulent claim, however rare, gets by undetected.

Health insurance frauds can be committed by employees, agents, or providers

Fraud in our health care system is rampant, and negatively impacts the availability, cost, and quality of health care for those who truly need it.

The fraud:

The main categories of health care fraud that concern small businesses include:

• Employee health insurance frauds. The major frauds here are false workers' compensation claims. Bogus group insurance claims will rarely benefit the employee, as most are paid to the provider directly, not the claimant.
• Agent health insurance frauds. Insurance agents can defraud their company and benefit themselves by, for example, creating fictitious groups, putting otherwise ineligible people on a health policy and charging them a fee in addition to the premiums.
• Provider health fraud. Providers account for the major portion of health insurance fraud in the U.S. It's estimated that 10 percent of the roughly $3 trillion cost of health care per year can be attributed to fraudulent claims. Below are a few examples:
  • Pharmacists can profit from a myriad of frauds such as shorting the number of tablets prescribed, substituting cheaper drugs but billing the insurer for the most expensive, filling false prescriptions in collusion with providers or provider staff, and splitting the take from illegal sales.
  • Physicians and labs can mis-code (upcode) diagnoses and treatments, bill for treatment not rendered, create fictional patients, and divert payments to themselves.
  • Kickbacks are another type of provider fraud. Payments for referrals (sometimes called "bird dog fees") or accepting payments from vendors of supplies to select them as a preferred source are examples.
  • Hospitals and nursing homes are no exception when it comes to insurance billing frauds, especially when it comes to Medicare and Medicaid cases.

  These scams are the most relevant for small businesses. For more in-depth information you might check out the Medicare and the Federal Trade Commission websites.

  The flaw: Much of healthcare fraud is institutional greed. In the case of Medicare and Medicaid, it's often justified as a strategy to offset severe losses due to payments lagging months or even years.

  The fix: Regular auditing by insurers can catch much physician fraud, but The fix for institutional fraud would be mending the broken payment system. Hospitals and nursing homes need cash flow to survive and when the government's single-payer system clogs up, the creditors must borrow funds to meet payroll and operating expenses. They attempt to overbill to recoup these unnecessary extra costs forced on them by the slow-pay policy of the states and the federal government. However, there is, of course, no justification for fraud.