Making a Dent in Auto Insurance Fraud:;Large Insurers, States Build Special Investigative Units

• Ronald J Panko
• October 2001
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By Ron Panko

Software programs may be the most important tool investigators have in their fight to detect auto insurance fraud, but insurers and law enforcement also have made commitments to boost the number and size of special investigative units on the job.

Not surprisingly, the two largest property/casualty insurers, State Farm and Allstate, have devoted considerable time and effort to their special investigative units in the past four or five years, and the companies are leading forces in the identification and prosecution of insurance fraud.

"We have done a good job of identifying fraudulent activity, especially in the northeastern part of the country, and we have gained a great deal of experience in our techniques to investigate and resolve these claims," said Gil Ferraro, a special investigative units consultant for State Farm, Bloomington, Ill. "We work with the regional SIU operations to develop procedures and implement the program." State Farm employs about 1,450 in its special investigative units across its 26 regions of the United States.

State Farm's Approach

State Farm's anti-fraud program has several components, Ferraro said. On the technical side, State Farm has learned to be immediately suspicious of certain types of claims. These include those on recently written policies, those with several claimants from the same accident visiting the same professionals and those that include accidents occurring on little-used roadways. He said the company wants its claims representatives to contact special investigative units when they see these red-flag scenarios.

The company uses a software product called InfoGlide for database searches in the northeastern United States. Developed by InfoGlide Corp., Austin, Texas, it is a competitor of NetMap for Claims, the software the Insurance Services Office Inc. offers to insurers to help search its ClaimSearch database. Ferraro said State Farm has been investigating organized claim fraud activity since before such software was available. The software products are "very expensive," running into six figures for an annual license, he said.

State Farm uses InfoGlide to search the ISO database and its own because it likes the way the software allows searches of files that are similar, but maybe not exactly the same. "The significance is that quite often you have entry errors, so that an address might appear as 4 Deer St. when it really is 14 Deer St., but it will have the same claimed loss and the same insured," said Ferraro.

As part of the anti-fraud program, Ferraro and his staff also work to spread anti-fraud awareness to other workers, including claims personnel, agents and underwriters, so that everyone is aware of the fraudulent loss indicators. They work with State Farm's corporate law staffers to develop legislative initiatives that are helpful not only to State Farm, but the industry as a whole. To inform the public and encourage it to report any suspicious activity, they work with State Farm's public affairs department. And Ferraro's group interfaces with law enforcement and the National Insurance Crime Bureau, a nonprofit, fraud-fighting organization based in Palos Hills, Ill., that is supported by about 1,000 property/casualty insurers.

In a recent case, a State Farm special investigative unit working out of New York City filed a declaratory relief action, which in effect asks the court to relieve it from the obligation to pay claims to what it believes is a fraud ring. At issue are claims in excess of $1 million. Ferraro said the special investigative unit identified a significant amount of staged-accident activity in the corridor from Philadelphia through New York and onto Long Island. There were 35 claim files. "We found numerous connections between vehicles and parties along with common criteria with respect to purchase of insurance policies and the accidents themselves," he said. As in many fraudulent cases, the claimants sought high personal injury protection payments and third-party liability in accidents with very slight property damage. "We're comfortable we have the information and evidence necessary to persuade the court," Ferraro said.

Allstate's Tactics

Four years ago, Allstate, Northbrook, Ill., centralized its fraud-fighting resources into a separate organization instead of having them report to regional field managers, and it narrowed its focus to detection, investigation, prosecution and deterrence of fraud, said Ed Moran, assistant vice president, claims department, and head of Allstate's SIU. About 630 people work with the SIU at locations throughout the country, about 100 more than four years earlier.

Among recent activity, Moran's investigators have won nearly $21 million since March in court judgments in Pennsylvania, New Jersey, California and Washington, and they are seeking more than $39 million in four lawsuits, one in conjunction with other carriers. (See "Allstate's War on Auto Fraud in the Courtroom," below.) Moran said the company publicizes the cases for its potential deterrence value. "In virtually every lawsuit we've filed, we've made it a point to seek as much publicity and shine as much light as possible on individuals stealing the public's money," he said.

In addition, Moran's group is involved in the legislative arena and training. Moran said his group has been "working very hard to try to get some saner rules out of the New York Legislature" that address the problem of personal injury protection (PIP) coverages, primarily in reducing the amount of time a claimant has to file a claim. At the behest of Allstate, Illinois in early August deemed it a crime to solicit people to participate in staged auto accidents. The practice, known as "running" and practiced by "runners," is now illegal in most states, Moran said.

Allstate maintains an anti-fraud training facility for its adjusters, Moran said.

Allstate uses ISO's database, but like State Farm, it does not use the NetMap for Claims software package that ISO offers. Instead, it uses Brio, another software program, as its data-mining tool for ISO's database as well as for its own database, which records about 6 million claims.

"There are other software packages out there that allow you to slice things even finer," Moran said. "We're exploring these, but we haven't decided yet on one. The question is whether they can work with the volume of data we'll throw at it."

Long Arm of the Law

As far as cooperation from law enforcement, State Farm's Ferraro commended insurance departments in New York and New Jersey for the resources they have allocated to their fraud bureaus. "They do a very good job of interfacing with the industry, and they take action themselves, or they pass on information to other agencies for resolution or investigation," he said.

Moran said New Jersey has "come a long way" in the last couple of years after decades of being "pretty lax," he said. Its laws required insurers to take all comers and to provide high levels of coverage, and they encouraged insurers to push claims quickly through the system. "So there was opportunity for people to abuse the system," he said. New Jersey created a fraud bureau in 1998 and reformed its system, in part by placing limits on medical treatments per accident allowed under the PIP element of its no-fault auto insurance system.

In a May 2001 report, the Washington, D.C.-based Coalition Against Insurance Fraud said the largest fraud bureaus are in California, New York, New Jersey and Florida. Ten states do not have fraud bureaus-Alabama, Illinois, Indiana, Maine, Michigan, Oregon, Vermont, West Virginia, Wisconsin and Wyoming. (See "State Insurance Fraud Bureau Budgets-2000," page 66.) Twenty-five state fraud bureaus have police powers; 13 have civil fining authority. States allocated more than $100 million to their fraud bureaus last year, led by New Jersey ($25.8 million) and California ($22.3 million), though the coalition did not have data from New York.

More states need to create insurance fraud bureaus, pass claims fraud laws, increase penalties and create new civil penalties so that carriers can get back money paid in fraudulent claims, Ferraro said.

Despite the promise of technology and the growth of special investigative units, insurance fraud is still a multibillion-dollar problem in the United States. According to the NICB and the Chartered Property Casualty Underwriters Society, which have joined forces to fight it, fraud is the second-most costly white-collar crime in the United States. Property/casualty insurance fraud accounts for at least $20 billion in losses, more than the cost of Hurricane Andrew each year, the two organizations reported on their joint Web site, www.stopinsurancecheats.com.

Allstate's War on Auto Fraud in the Courtroom

Judgments for Allstate

--Allstate vs. Ozga, Pennsylvania. Judgment of $2,470,528 recorded June 22, 2001.

--Allstate vs. Allied Trauma & Health, New Jersey. Judgment of $7.3 million recorded March 28, 2001

--Allstate vs. Hisham Mulheldin, et al., California. Judgment of $8.3 million recorded in June 2001 after a full trial in March 2001.

--Allstate vs. Hugh Nguyen, et al., Washington. Judgment of $2.7 million to be recorded in August 2001.

Pending Lawsuits

--Allstate vs. Fordham, New York. Allstate and a few other carriers sue for $36 million.

--Allstate vs. Beck Chiropractic, North Carolina. Allstate sues medical provider for $2.5 million.

--Allstate vs. Advantage Medical Diagnostics, Florida. Allstate sues for alleged brokering of medical services for $500,000.

--Allstate vs. Family Chiropractic, Florida. Allstate sues network of clinics for allegedly billing for services not rendered.

Source: Allstate