The ‘Red Flag’ That Isn’t There

Starting from an early age, I was always interested in the subject of magic. I would watch the great magicians of the day, read books about Houdini and others, and haunt my local magic shop on Saturday afternoons. It wasn’t so much that I wanted to be a performing magician myself, it was that I couldn’t stand being fooled by anyone. All I really wanted to know was how they sawed the woman in half or how they made the coins appear out of thin air.

Once I figured these things out, I was happy. I never felt compelled, myself, to put a woman in a box and pick up a saw. As it turns out, this trait of wanting to find out the secrets behind the illusions was helpful in my subsequent career as an insurance fraud investigator. There are some analogies between the two.

One trick that magicians often rely upon is the tendency we all have to assume things. They very often use as props objects we are all familiar with, so that when we see the prop, we assume it is the genuine article. For instance, the magician pulls out an egg, and we subconsciously assume it is an actual egg, and not a hollow plastic shell, or he presents you with a deck of cards and we subconsciously assume that it is a genuine deck of cards and not a trick deck. Most people seeing a scarf or handkerchief might unwittingly assume it to be nothing more than that, instead of realizing that two scarves of the same color, stitched together on three sides, still looks like a single scarf, but makes a nice pouch in which to hide things (like a hollow, plastic egg).

Similarly, in the world of insurance claims, we are constantly being presented with something that looks like the genuine article, and thus, our tendency is to assume that it is. A report about injuries and treatment written on a doctor’s letterhead causes us to assume that there was an actual patient, that there was an injury, that there actually was some treatment and there actually was a doctor who was in some way involved with that report. In many cases, everything about a claim is just as much an illusion as Houdini’s old trick of vanishing an elephant. We see photos of banged-up cars, we hear stories of how the accident happened, and we see medical reports and bills. The usual reaction is to accept what we see at its face value.

The trouble with such assumptions is that while the majority of claims are just what they appear to be, the percentage of claims that are “illusions” is much greater than we might initially imagine. This point was brought home to me by two news articles I read recently.

One was about the city of Lawrence, Kan. initiating a crackdown on auto insurance fraud. Prosecutors there reported a 35 percent drop in reported auto accidents compared to the previous year. The other article reported that the average cost of an injury claim under New York’s no-fault system dropped over a 12-month period, with the average injury claim cost being $7,514, down from $8,518 in the previous year. This was also attributed to stronger regulations and enforcement by New York authorities.

These current news items reminded me of some other similar experiences I have observed over the years. The common denominator of those observations is that a significant percentage of “accidents” are not accidents at all … more than you might imagine.

Several years ago there was a large law enforcement agency that was having a very high rate of workers’ compensation claims. Word had spread amongst the employees that as one was getting near the 20-year retirement level, one would make more money by making a workers’ comp claim and “retiring” on that claim, than by the usual retirement program. A crackdown was imposed and surveillance was done on the most suspicious cases.

On two of the most egregious cases the claimants were arrested and videos of these claimants were shown at a press conference. The were seen engaging in activities completely inconsistent with their “disabilities.” Shortly after this public display, the workers’ comp claims volume of this agency dropped by half. They had numerous claimants call up to withdraw their claims.

In another instance some years back, a large automobile insurer in California filed a major lawsuit against a group of attorneys and doctors who were alleged to be involved in insurance fraud schemes. The filing of this lawsuit garnered a great deal of publicity at the time.

Within a short time after the publicity of filing this lawsuit, the volume of new claims to this insurance carrier dropped by a third. Were people all of a sudden becoming safer drivers? Obviously not. One could conclude that a significant percentage of the “accidents” they had been receiving as claims were not accidents at all, but were mere “illusions.” The conclusion one can reach from all these observations is that a significant percentage of claims volume may consist of accidents that were dreamed up by a perpetrator of fraud.

Anyone involved in dealing with or detecting fraudulent claims has encountered numerous lists of “red flag” indicators to watch for. Unfortunately, as this type of information gets disseminated in the industry the fraud perpetrators also learn about these “red flags” and seek to avoid presenting them. In essence, the efforts to educate people about detecting fraud also serves to “educate” the fraud perpetrators as to how to improve their “illusions”—the illusion of making a phony claim appear real.

But one of the most important “red flags” is the one you won’t see on any of the usual list of “red flags,” and that is the red flag of very few fraudulent claims being spotted or detected in your case load.

It is understood that all books of business are not the same. For instance, I know of some carriers who only insure organized churches, and the percentage of fraudulent claims in their case load is low by its very nature. But if one is writing non-standard auto coverage in Southern California and one’s volume of detected fraud is low, then that, in itself, is a red flag.

So, the point is to remember that the fraud perpetrators are, in their own way, illusionists. One major difference is that they make far more money in a year than Houdini did in his lifetime. If you have a book of business that is a likely target for their activities and you are only seeing a very low percentage of suspicious claims, then you should be alert to the likelihood that fraud is going undetected. Should you find this to be the case, it may be a good idea for you to review your fraud detection practices and update your list of “red flags.” Perhaps a random audit of your claims files would be a good idea, especially if conducted by an SIU professional who is alert to the most current “tricks” of the trade.

Perhaps someday fraud prevention will reach such heights that there simply won’t be any in a large book of non-standard auto business, or other high-risk lines. And perhaps someday there will be no more taxes, and politicians will be completely honest with us. But until that day arrives, remember to be alert for the fraud you don’t see, based on the percentage of fraud you do see in your claims volume.

Brad Balentine is the director of the Special Investigations Unit of David Morse and Associates. He has written numerous published articles and has been a featured speaker at Lloyd’s of London concerning the subject of insurance fraud. He is a licensed private investigator with over 20 years experience in the industry.