Compliance Corner: Reporting Suspected Insurance Fraud

This edition of Compliance Corner is intended to provide some direction to insurance professionals when faced with a scenario of suspicious activity. Unfortunately, if you’ve been in the business, you’re not a stranger to the circumstance of ‘it appears that something is not right and it looks or feels like insurance fraud.’ The following provides guidance on internally handling the issue, what steps to consider when telling your entity’s perspective upon reporting to regulators (and possibly others), and what may happen thereafter.  

While the audience for Compliance Corner is no stranger to the look and feel of Insurance Fraud, my mind immediately went to the difficulties in taking first steps in gathering the evidence for reporting some of the most nuanced examples of insurance fraud that I’ve been involved in clients’ reports and investigations, as well as the most unfortunate and dramatic cases. Regrettably my experience parallels such stories that leave in their wake harmed consumers and businesses like this example of insurance fraud perpetrated by a trusted agent; we see the news stories of the most salacious. We are knowledgeable of how the insidious acts are not victimless; acts of insurance drive up insurance premiums for any insurance consumer. More data here from the FBI, and let’s not forget how the economy and insurance fraud are often found to be correlated. 

All of us who are consumers of insurance and who apply for insurance bear the consequences of insurance fraud through increased premiums and additional procedures. Thus, reporting suspected insurance fraud to allow a thoughtful investigation and prosecution by authorities is important.  

First, some background- What is insurance fraud

Fraud is a crime of deception for financial gain. Forty-eight states now have specific criminal laws for insurance crime. Insurance fraud can amount to a Federal Crime. 

Federal laws don’t address insurance fraud as a distinct offense, but the mail fraud and wire fraud statutes cover these offenses. That gives the federal government jurisdiction over insurance fraud that affects interstate commerce. Federal prosecutors consider insurance fraud a serious offense, but often, they don’t pursue these cases unless the evidence is airtight.

The penalties for federal crimes often include lengthy prison sentences and harsh fines.

Regulated entities have a duty to report suspected insurance fraud in every state in the country. Critical term is “suspected.” By the point of reporting the act or acts, the entity/ producer, individual reporting does not have to know that the act of fraud has been or is being committed. However, I do recommend that a mere hunch is not something to rely upon; it’s not worth your time, the regulator’s, and certainly causes concerns for the sustainability of the process. It’s not always simple to determine whether to report suspicious activity. Entities have immunity when reporting their suspicions, and as customary it’s important to seek legal/ regulatory counsel regarding this and other pieces.

What to do: 

  • Investigate internally like a Project Manager. Optimally, investigate at the direction of counsel as soon as it is detected that the action(s) are likely fraudulent. Document: The “paper” and/ or electronic trail includes any and everything that made you or caused you/ your colleagues to perceive that there was a suspicion at the beginning, communications, forms. Ensure that you gather what is applicable: internal and external: rules, guidelines*, best practices*, agreements, contracts, and more. 
    • *Handle with care and Handle with sensitivity Warning: This may go without saying, but if it’s not a document that you would normally share outside of the company or a need-to-know basis within your company, consult Counsel regarding the course to take on how to handle. Options I’ve taken with supporting documents that are confidential range from redactions to hand over and return to descriptions, etc.. Fraud investigations differ, as these can result in criminal investigations which include a whole other area of law and area of evidence. Again, talk with your lawyer. 
  • Create a circle of trust:

    • In insurance and financial services, we are comfortable with locking down PPI, etc.. Handle this matter like it’s someone’s social security number. 
    • Involve your Special Investigations Unit and/ or Internal Investigations Unit, per your company’s processes to ensure that the appropriate subject matter expertise is involved. Many organizations have internal parties who have prior law enforcement. I’ve had the privilege to work with these parties who have the training to systematically investigate the most nuanced and heinous actions. We involve the subject matter experts in the business areas, IT systems, etc. to ensure that all documentation is 100% credible. Especially if your agency, brokerage, or company does not have an SIU, you may need to involve counsel that much earlier.  
    • But, be efficient, Cross-functional collaboration is essential. 
  • Data and no emotion, because fraud can be so mind-blowing and uncover fact patterns atypical to a professional setting, be consistent and sterile with your subject lines. I recommend labeling all communications as “Confidential to the group involved,” if you are not working under the direction of attorneys. These communications may wind up being used by the FBI, etc. to prosecute.   
    • Ensure all communications are labeled with sensitivity, as in we do not know what we do not know. Keep the subject line to just the name of the party, or the Claim file, or the policy number, etc.. In other words, this is not a time to inadvertently create a perception of bias by verbiage in the subject line or elsewhere.  
  • Touch base on how the information is being gathered. Discuss with your regulator on how they need the info. If you do not have a relationship with your DOI’s Fraud bureau or other area to whom you may be reporting this, gain a relationship now. You may have an internal Corporate Counsel through whom this would be communicated and/ or the Government Relations personnel may seek clarification of the info needed. Every state provides guidance within the Code of definition of Insurance Fraud and duty to report suspected insurance fraud. The details are to provide the info in a full package in order for the regulatory fraud arm to investigate and collaborate with their contacts in the law enforcement to take potential next steps. 
    • Every organization handles this differently, but I strongly recommend having one single point of contact with the regulator or any external parties. It will maintain efficiency and likely save hours of potential confusion. Just like the advice given for depositions, interrogatories, and regulatory exam questions, if you do not know the answer to the question, do not answer and say that you do not know. Find the answer. 
    • Each state has different needs and contacts within as it relates to the organization’s report and data.  
  • You’ve compiled, Reported, Submitted the Report and Documents. Now what? Upon reporting and furnishing the documentation, expect that there will be some follow up from the regulatory agency, possibly law enforcement directly, and others involved. 
  • If the report of the suspected fraud does not come to a point of fruition that you expected or wished, do not lose heart. It may not mean the end of the road for the purported actor(s) completely. You have started a file with the right parties. Maintain your records. Insurance regulators have many intent on fighting fraud; there are so many highly qualified professionals working to combat these acts. 
  • Stay in touch with the regulator about their needs for information.

This edition of Compliance Corner addressed some tips on processes for investigating suspected insurance fraud, aside from those involved in ongoing claims litigation. An 8th Circuit court refused

The following regarding the effect of fraud on an insurance claim. As is typical in an insurance policy, the homeowners policy in Neidenbach v. Amica Mutual Ins. Co., (No. 16-1400, 2016 WL 6775961, slip op. (8th Cir. Nov. 16, 2016)) had an anti-fraud provision. The 8th Circuit court refused to sever the claims that were untruthful from those that were truthful and rejected them all in this case. Essentially, an act of insurance fraud caused even the valid claim to be tossed.

About Kay Godfredsen

Hello, my name is Kay Fairchild Godfredsen, a proactive, solutions-oriented, and pragmatic legal strategist with 20+ years of experience and demonstrated success in providing legal support to senior management and employees at all levels of the company on legal issues, risks, processes, policies, and procedures. As a seasoned legal strategist, I specialize in deciphering intricate legal puzzles and transforming them into actionable strategies. With a keen eye for detail, I dissect convoluted issues and provide comprehensive solutions that drive compliance, mitigate risk, and fuel growth. My legal acumen is seamlessly integrated with a deep understanding of the business landscape. I thrive on collaborating with cross-functional teams to align legal frameworks with corporate objectives. Together, we navigate the evolving regulatory landscape to foster innovation while ensuring airtight legal protection. Specialties: Strategic Legal Guidance, Crisis Management, Complex Corporate Transactions, Contract Development & Negotiations, Risk Assessment & Mitigation, Employee Performance Management, Data-Driven Decision Making, Cross-Functional Collaboration, Critical Situation Handling

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