How to Conduct Effective Insurance Fraud Investigations: Your Ultimate Guide
How to Conduct Effective Insurance Fraud Investigations: Your Ultimate Guide
To investigate insurance fraud effectively, you need to think outside the box.
In 2022, an insurance agent in Palm Springs, CA, was arrested on charges of elder abuse, grand theft, and identity theft. He targeted a wealthy older client, diverting over $75,000 from the victim's accounts over the course of years. The agent also pocketed clients' premium funds that were meant for the insurance company.
Insurance fraud schemes like this rob the economy of billions of dollars each year, costing the average US family between $400 and $700 annually. Factor in the human cost as a result of decreased quality of care and mortality, and that number is even higher.
Insurance fraud investigations take patience, diligence, and perseverance. Here is your ultimate guide to detecting, identifying, and investigating insurance fraud cases.
Ineffective insurance fraud investigations cost US citizens billions of dollars each year.
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Detecting insurance fraud is easier than it sounds. Once you know the red flags of fraud, it's easy to identify a scheme and investigate it.
One possible sign of insurance fraud is layering. This is the practice of using multiple cash equivalents such money orders from different banks or money services businesses to make payments on an insurance policy.
Structuring, or making multiple large cash deposits within a short period of time, is another sign. Many fraudsters know the threshold for reporting is $10,000 in one transaction. This usually leads them to make a number of deposits (often at different accounts or financial institutions) in smaller amounts.
Structuring can be obvious, such as depositing $9,900 each day or harder to spot, like two $5,000 transactions at two different banks on the same day.
These practices are red flags for money laundering, which can go hand-in-hand with insurance fraud. Fraudsters may use laundered money to purchase insurance products they can't really afford, which they will cash out later in a fraud scheme.
Fraudulent behavior falls into two categories. Hard insurance fraud refers to claims that are completely fabricated. The incident could be planned or made up entirely. For example, a fraudster might set their house on fire to collect insurance funds on their home and/or belongings.
Soft insurance fraud (AKA opportunistic fraud) occurs when someone has a legitimate claim but inflates the value to make a profit. For instance, the person might say that they broke their arm in a car accident when, in reality, they only suffered a small bruise.
Insurance fraud covers a wide range of schemes and crimes. Fraudsters file false claims for:
- Burglary and theft
- Vehicle damage
- Water damage
- Personal injury
- Loss of life
- Health care and prescription costs
From simply falsifying claims to engaging in mail fraud, identity theft, and forgery, fraudsters are always finding new ways to pull off their scams. Technology has made it easier to not only pull off fraud schemes, but also plan them with other criminals.
Insurance fraud is often pulled off by someone directly connected to the policy. This includes the policy holder or applicant and their beneficiaries.
However, insurance insiders such as brokers and agents, as well as gatekeepers such as lawyers and accountants, may be behind a scheme. They collude with the policy holder in exchange for a portion of the profits or victimize the policy holder for their own gain.
- A mechanic fabricating a bill for more repairs than the car required after an accident
- A doctor submitting improper medical coding to receive a higher payment than they are entitled to
- A private investigator not really doing the investigation on fraudulent behavior
- An attorney helping a claimant fabricate a story about how they hurt themselves on the job so they can receive worker's compensation
People are more likely to commit insurance fraud when times are tough for them financially. You can sometimes discover schemes motivated by need or greed by interviewing the alleged fraudster's friends or neighbors about their financial situation.
Investigating Insurance Fraud
When investigating insurance fraud, leave no stone unturned. Interviews provide a lot of key information, but evidence helps you piece together a narrative of the fraudulent behavior. Keep the following ideas in mind during your insurance fraud investigation.
In order to learn everything you can about the claimant, you need to see where and how they live. Good old-fashioned surveillance of their home or workplace can provide evidence.
For example, someone who has claimed compensation for a shoulder injury leaving their home with a tennis racket, that is possible evidence for insurance fraud.
While you are in the claimant's neighbourhood, canvass others in the community. Even if the neighbors don't know the person well, they may have observed their lifestyle. Ask about the insured person's financial situation, which can indicate if they are in need of quick money.
In property insurance fraud investigations, be sure to also ask neighbors if they have seen or heard anything out of the ordinary around the time of the claim. This can include moving trucks or more comings and goings than usual from the claimant's home. They can also help you determine whether or not the claimant is actually living in their home.
"Social media is an absolute gold mine" for insurance fraud investigations, according to Kelly Riddle, founder of private investigation company Kelmar Global.
Many people think that setting high privacy settings on their social media accounts makes everything they post impossible to access. On the contrary, social media platforms usually hand over user information if they receive a subpoena for it.
Fraudsters often slip up online and post information revealing their fraud. For instance, someone receiving worker's compensation for an injured foot may post a video of themselves playing soccer with their kids. Or, someone else may unintentionally expose their scheme, as is the case if friends and family tag the claimant in an incriminating post.
Fraudsters who are proud of their work may boast about it on social media, thinking they will never get caught. Make sure to search for alternate accounts as well as the claimant's main social media pages to find as much of this type of evidence as you can.
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Just because a claimant has included all of the relevant documents in their claim doesn't mean they aren't committing insurance fraud. In fact, fake documentation is a very common way to pull off a fraud. Signs of false documents include:
- An unusual number of receipts
- Falsified receipts
- Fake affidavits
- Photos or receipts used for more than one claim
When studying accompanying documentation during an insurance fraud investigation, use a keen eye to spot signs of editing. Inconsistent lighting in photos and fonts that don't match the rest of the document are some common examples. Be sure to also review the claimant's history to see if they have claimed loss of the same items before.
When filing a claim, the insured party must:
- Give prompt notice of their loss
- Protect the property from further damage, including not abandoning it
- Separate any damaged property from undamaged property
- Create an inventory of damaged items
- Complete relevant forms (i.e. proof of loss form)
- Cooperate fully with the insurance fraud investigation
Not following the rules of filing an insurance claim is not definitive proof of fraudulent behavior but it may be a warning sign. Failure to comply with any of these rules can indicate that the subject is trying to hide details of their claim. Going over this checklist should be the first step of your insurance fraud investigation.
Property insurance fraud investigations require a deeper dive into the claimant's lifestyle. People sometimes try to claim loss of items that they never owned or items that are a newer or better model than what they actually lost.
Figuring out whether or not the claim is fraudulent takes careful investigation. First, determine if the subject could realistically afford the items they are claiming. A quick look around their home combined with a neighborhood canvass should give you an idea of the claimant's financial situation.
Next, if the claim includes hobby items like musical instruments, tools, or guns, determine if the claimant's lifestyle seems to fit with that. Do they have similar or related items in the house? Are there photos of them doing the hobby?
Finding proof of ownership of an item is easier than you might think. Here are some documents you can ask the claimant to provide when investigating insurance fraud:
- Receipts or proof of purchase for the items
- Owner's or instruction manuals for the items
- Credit card statements showing purchase of the items
- Photos containing the items
If you can't secure any of the documents above, a good alternative is a signed sworn statement by friends or family members stating that they observed the lost items in the claimant's home. You can also attempt to validate the purchase of the items directly with stores.
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1. Follow the Law
If you want your findings to hold up in court, you must make sure your insurance fraud investigation is conducted legally.
One major factor to consider is privacy. Know your state laws related to filming or recording a subject or witness without their consent. Breaking the law will render the evidence unusable.
Avoid using pretext, such as "friending" your subject on Facebook, when investigating insurance fraud. Collecting information about the subject through deceptive means may be easy but it can also be illegal. Check your state's laws on pretext investigations and when in doubt, conduct your insurance fraud investigation in an honest and open manner.
2. Conduct an Initial Assessment
Before you start your insurance fraud investigation, figure out the who, what, where, when and how of the case. Starting out with as many details as possible will make the insurance fraud investigation go more smoothly. Secure as much evidence as you can right away before a suspect has a chance to dispose of or delete it.
3. Plan the Investigation Well
When investigating insurance fraud, planning is essential. If you fail to plan properly, you may miss important details or fail to comply with various regulations, such as reporting to FinCEN (USA) or FINTRAC (Canada).
Before you start the investigation, think about questions like:
- Who should be interviewed?
- In what order should you conduct those interviews?
- What supporting documents do you need to collect?
- Are there any other allegations against the subject?
- Which entities need to be informed of the investigation and how should it be done?
Documenting everything you need to do throughout the insurance fraud investigation from the start will keep you on track.
4. Perform Great Interviews
Interviews are a crucial part of any investigation. In insurance cases, they are critical to finding out the "how" and "why" of the fraudulent behavior.
Start by ensuring that you control the interview process. Choose a distraction-free location where the subject is comfortable.
Rather than using a script, create an interview outline. It will feel more natural, which invites the interviewee to open up to you. Whether you are talking with the accused or another interviewee, build rapport. Start the interview with small talk and easy questions, which will help them warm up to you.
When crafting interview questions, make them open-ended. For instance, ask "What happened to your car?" when investigating an auto insurance claim, rather than "Did you run your car into a tree on October 23?" and "Was there someone else in the car with you at that time?" Open-ended questions encourage the interviewee to share more information and can help uncover related evidence.
5. Understand Evidence
Every insurance fraud investigator should know the difference between fact, inference and opinion. A fact is a piece of data that is objectively true, an inference is an assumption you make based off a fact, and an opinion is a subjective belief you hold. When compiling your investigation report, be sure to only include facts as evidence.
Evidence must be relevant, authentic, concrete, and specific. When dealing with physical evidence, always keep it secure. Never mark up original documents with notes. Always keep a clean copy of documents for your files.
Understanding how to collect and analyze evidence properly ensures no important data slips through the cracks, which could make or break your investigation.
6. Report the Findings
The final step of an insurance fraud investigation is reporting your findings. A thorough report demonstrates that the investigation was fair, detailed and lawful.
A good investigation report should include the following items:
- Your understanding of the allegation (who, what, where, when, how)
- The steps taken in the investigation
- Copies of documents and other material evidence
- A list of interviewees
- A summary of interviews
- A conclusion as to whether the allegation was substantiated or not
Write your report in objective language, avoiding judgemental or inflammatory adjectives when describing details of the case. Use as many direct quotations as possible from interviewees or documents. Only include facts, not opinions or inferences, in your report.
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Insurance fraud is responsible for over $80 million in losses each year. Not only does this put money into the hands of criminals, but it also makes services more expensive and limits the range of products insurance companies can offer.
Strong, thorough insurance fraud investigations can change that. By both improving your detection methods and focusing on prevention, your team can save your organization and the economy millions each year. Use the advice in this guide for a successful insurance fraud investigation from start to finish.