Insurers who submit documents to regulators and insureds are not subject to a fraud alert. This includes submissions of fraudulent activity, estimates of loss by insurers, or misrepresentations of coverage by insurers to policyholders.

It is an extraordinary public policy success story that fraud laws have been widely enacted. The widespread enactment of fraud laws is an important public policy success story.

Questions about the effects of antifraud activities and regulatory processes on the insurer-insured relationship seem to have been overlooked. For example, is the new antifraud system biased against policyholders who file claims? Are insurance regulators able to seamlessly transition from a civil regulatory function into a criminal investigation agency? Is it possible for insurance regulators to exercise independent judgment when enforcing criminal laws against fraudulent conduct, given the close relationship between regulators and insurers? These issues will be addressed in a future commentary.

The Insurance Contract and the Claims Process

An insurance contract is more than a sale contract for used cars. The rules that govern insurance do not rest in caveat emptor. Instead, an insurance policy is a contract made in the best faith. The Arizona Supreme Court stated that an insurance contract isn't a commercial contract. It is implicit in the agreement, and the relationship, the insurer's obligation of fair play with its insured. 3

Fair play is essential because insurance policies are also contracts of adhesion. Insurance companies write the policy, and policyholders must "adhere" to it when they purchase insurance. For example, the policy may require that the insured meet the following requirements to file claims.

• Notify the claimant promptly
• Submit satisfactory evidence of loss
• Give formal, recorded statements regarding the loss
• As often as necessary, submit to oath-taking examinations
• Collaborate with your insurer
• All conditions must be met

However, the insured does not have the contractual right to demand that an adjuster give sworn statements on how she assesses the loss or requires that claims personnel submit to examinations under oath. Further, insurance companies hold the money and engage in claims adjusting every day while the insured is a beginner adds to the problem.

An appraisal clause in an insurance policy implicitly acknowledges that claims handling is an inexact undertaking. It also includes a way to resolve disputes overvalue. Appraisal clauses indicate that the outcome of claims is usually negotiated between the party, which is reinforced by claims vocabulary. Claims are "adjusted" from "estimates." This view is supported by claims vocabulary. 4

In describing loss amounts, it is common to use "estimate." It doesn't matter who is making the estimate; the numbers should be considered as such. Additionally, when comparing the estimates of insured and policyholders, it is not uncommon for them to differ. An example of this is a case where I was an expert. The insurer's estimate was $0.0, while the policyholders were more than $105,000. The appraisal clause was invoked by the insured, and an award of $15.730.00 was made. The award was statistically 15,730 times the estimate of the company and 6.7 times that of the policyholder.

Insist on the Fraud Statutes in the Claims Process

Insurer-insured disputes were traditionally resolved by civil law and procedures. However, with the introduction of fraud statutes, criminal laws have become part of the regulatory equation. According to the NAIC's IFPMA definition, fraudulent insurance acts are:

With intent to defraud [emphasis added], a person who knowingly commits or conceals any material information about one or more of these acts or omissions.

A laundry list of offenses follows the definition. This is a strict definition of rules of contract construction. To emphasize that knowledge and intent must be present, I added: "and."

Let's say an adjuster is looking to get ahead by changing the law. Here's an example of what I observed. While the appraisal clause can resolve disputes about loss amount, it cannot be used to settle coverage disputes. An appraiser's view may lead to an insurer losing control of the claim and increase the likelihood that the insured will achieve a better outcome. To avoid appraisal, an adjuster might argue that there is no evidence that there was a loss even though evidence to the contrary. This would preclude the use of the appraisal clause and change the nature of the dispute so that a fraud accusation against a policyholder seems more plausible. Conversely, an insurer may accuse an insured of fraud for claiming a loss. This can chill an insured's desire to pursue the claim even if there is no fraudulent intent.

An insurer's ability and power to abuse its fraud capabilities are further enhanced by the contractual tools it has to uncover voluminous details regarding a claimant's alleged losses. Additionally, policyholders are often accused of concealing material facts. An adjuster can pursue concerns over concealment through sworn statements and examinations under oath.

When attention is focused on adjuster concealment, the adjuster's increased discretion to use fraud statutes during claim negotiation becomes even more critical. What happens if an adjuster working on a property loss uses a computer program for estimating personal and real property damage but doesn't disclose this fact to the insured? What if natural disasters (e.g., hurricanes) have significantly raised labor and material costs, but the insurer doesn't update its computerized database to reflect this increase? Would the insured be able to claim that the insurer didn't disclose this information to them? In this situation, an insurer might force the insured into bargaining blindly and accept underpayment. However, since the insured does not have the means to file a lawsuit against the insurer to prove that it conceals the fraud, the deception could go undiscovered. Over-reporting by an insured could lead to fraud charges. However, underpayments by an insurer are more likely to be discovered and punished. This behavior violates the principle of utmost goodness and faith.

Subsections A and C of this Section do not apply to statements made with Actual Malice. [Some statutes substitute "in faith" for "actual malice."

Italicized language in Section A might suggest that the standard to determine whether particular conduct should be reported or not is whether it is "suspicious." Unfortunately, the 2003 publication of the NAIC Antifraud Task Force, "Guidelines to Industry Reporting Suspicious Claims Or Activity to State Fraud Bureaus," skips over the knowledge- and intent requirements of Model Fraud Law.

The statute requires that you "know" or "reasonably believe" there is a fraudulent insurance act to trigger immunity and reporting. "Mere suspicion" refers to "The imagination or apprehension that something is wrong, based on little or no evidence, and without definite proof." Thus, people who appear to have a lot of knowledge about insurance claims or make detailed inquiries about them before buying a policy are some of the indicators that insurance fraud is present.

Therefore, dilettante claims examiners may believe that an ex-regulator who is more knowledgeable about insurance claims than the claimants, or a consumer advocate who makes complex inquiries about coverage, should be reported as suspects. Thus, one might conclude that to avoid suspicion, one must act foolishly and naively by carefully reviewing the extensive list of "red flags."

Knowing or having a reasonable belief that someone has committed or is about insurance fraud implies that the suspect has been investigated sufficiently thoroughly to be able to believe that the suspect has acted with intent to defraud. A Pennsylvania court found that immunity from reporting fraud was possible because of good faith.

We believe that an insurance company must first conduct a thorough investigation before accusing an insured of fraud.

Bradley v. General Accident Ins. Co., 778 A.2d 707 (Pa. Super. 2001. Regulators may pay attention to this opinion.

Conclusion

Fraud laws have influenced the traditional civil laws that regulate insurance. This has made it possible to combat criminal activity. There are many reasons to embrace this development. 

1See NAIC Model Laws Regulations and Guidelines (NAIC: Kansas City Mo., 2006), 680-1 to 680-26. This includes the model law, state adoptions, and legislative history. In addition, data for the Insurance Information Institute (III) are available at www.iii.org/media/facts/stats.

2The following organizations are dedicated to fighting insurance fraud wholly or partially: National Insurance Crime Bureau, Association of Certified Fraud Examiners, and the Coalition Against Insurance Fraud. The NAIC, NICB, and National Criminal Information Center maintain databases. Individual companies, regulators, and other law enforcement agencies also have access to them. All of these agencies may receive reports on fraudulent acts. See the NAIC's State Insurance Department Antifraud Resources Report 2005-2006 (NAIC February 2006) for statistics on antifraud resources.

Personal Insurance: Underwriting and Marketing Practices, 1st Edition, contains a lengthy list. Appendix 3A. (Malvern Pa., American Institute of Chartered Property-casualty Underwriters/Insurance Institute of America 2005). Also, check out the ACFE and NICB websites. You can download the NAIC publication from the NAIC.